How similar are the Greeks situation to the Argentina of 2001?

In 2001, Argentina suffered a severe economic crisis which saw GDP drop and unemployment reach 18%. The crisis originated back in 1989, when democracy was re-established (after a military dictatorship) and a new currency was created – Austral. This new currency needed loans, of which the state couldn’t pay the interest on, this destabilised the currency and saw inflation (already high at between 10-20%) give into hyperinflation. Inflation topped 5,000% for the year, real wages almost halved and riots spread throughout the country. Hyperinflation struck once again in 1990 so the government decided to fix the currency against the American dollar and provided dollars at banks for converting if requested (which required a high amount of dollar reserves). This couldn’t sort all their problems out though; they still had high amounts of debt, dollars moving out of the country due to cheap imports and high unemployment.

In the next decade Argentina continued to borrow far beyond their means and faced massive corruption issues as the rich could easily avoid taxes with little difficulty. In 1999, Argentina officially entered a recession as their GDP dropped by 4%, which lasted a miserable three years before collapse.  Argentina’s debt to GDP ratio exceeded 50%, so the government embarked on tightening fiscal policy with around $2 billion in spending cuts and $2 billion in tax increases, so that it could comply with the international bodies that were lending it money (IMF, World bank etc).  But they couldn’t keep up with the targets and by the end of 2001, the IMF froze loan payments and demanded a further 10% cut in the federal budget. Then as an increasing amount of people started to withdraw money and move it abroad, the government decided to freeze bank accounts, with only a limited amount allowed to be taken out. This is when the riots really began to start, with the public visibly outraged at having their money restricted and increasingly poor living conditions. The government fell apart, declaring a “state of emergency” with the president fleeing the country, and a newly formed government having to make the difficult decision to default on their debt, which equalled $132 billion (a new record at the time).

http://news.bbc.co.uk/1/hi/business/1721103.stm

So how similar is this to Greece’s situation, where they are faced with high amounts of debt and questions of whether they will default. There is an eerie similarity between Greece and the Argentina of 2001, both suffering deep recessions, public riots and having to agree to stimulus packages they simply cannot afford to pay back. In the previous paragraph, I explained that for a while Argentina managed to fix their inflation problem by fixing their currency to the Dollar, and in essence that is exactly what Greece did when they joined the Euro, leading to temporary better times for the country. Both countries eventually suffered from these fixed exchange rates, as it meant they couldn’t export their goods very effectively, which created a situation of importing far more than they were exporting and a reliance on foreign loans to survive.  The difference is that whereas Argentina managed to rebound thanks to a commodity boom which saw it reverse the trade balance into a surplus (exporting more than importing), Greece doesn’t produce enough goods to rebound in a similar way.

Arguably this shows how Greece has come to be in the position they are, by surrendering all monetary powers to the Euro and relying too heavily on cheap loans to cover up the market deficiencies in Greece. Greece hasn’t produced enough over the last decade to cover the costs of their imports and high standard of living, and instead have used the Euro to buy cut-price loans to induce growth. By joining the Euro, Greece can no longer change the value of their currency anymore as they cannot just print more money; they belong to a larger monetary state where they have to abide by rules. This is a useful tactic that the UK and USA for example have used to help try and stimulate growth. But Greece knew this when they joined the Euro and instead should have instated tighter fiscal regulation. Criticism should also go the international organisations which continued to provide Greece with money, despite knowing it was country with a poor history for fiscal discipline that couldn’t possibly pay the money back. So Greece do not have a lot of options right now apart from implementing tighter fiscal policies, which seems too little too late.

So Greece is faced with the same issue that Argentina had all those years back, do they dare default on their debt? Greece would have to drop out of the Euro, which would cause massive unrest to Greece and the rest of the Euro. They would have to start again with a new currency which would be of so low value against the rest of the market, that any imports would become very expensive. There would be the problem that they don’t have a new currency waiting in their banks, they would need to print notes and coins which would take time and money that Greece don’t have. A default would also mean a complete lack of faith their market for foreign investors, and they would lose any help from the international organisations that are currently loaning them billions of Euros. But there could be some positives; the money they are being loaned from other countries is just saddling them with more debt which they can’t afford, the new low valued currency would boost exports as they would become cheaper in the foreign markets (though Greece don’t export enough to rely on this strategy) and it could help Greece to just accept their situation and look to the future instead (aka getting the bad stuff out of the way sooner rather than later).

But there could be a vital difference between Greece and Argentina. Both countries followed a similar path to recession (fixed exchange rate and reliance on debt) but the difference between the two is that Greece lives in a world far more connected that the one Argentina lived in. Greece is part of the Euro, which would face massive repercussions from a Greek default, giving them motivation to help Greece out much more effectively than the IMF did with Argentina. A Greek default would also affect America and China heavily, with a big share of their exports to the Euro region, while the big multinationals of the world are heavily linked in different countries of the world. If Greece can hang onto one difference from the Argentina of 2001, it is that if they are forced to default, it could have a much bigger impact on the world than Argentina did, which gives an added incentive to the rest of the world to react.

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