Sunday, November 23, 2014

From Argentina to Athens?

NEWPORT BEACH – Let me set the scene: an increasingly discredited economic policy approach gives rise to growing domestic social and political opposition, street protests and violence, disagreements among official creditors, and mounting concerns among private creditors about a disorderly default. In the midst of all of this, national leaders commit to more of the same harsh austerity measures that they have been unable to implement for two years. Official creditors express skepticism, in private and public, but hold their collective nose and get ready to disburse yet another tranche of money into what they fear is a bottomless pit.

Sound familiar? It should, but not just because it encapsulates Greece today. It is also what Argentina faced in 2001. Unless Europe reflects on key lessons from that experience, the parallels that extend to Greece may also end up including a financial meltdown, a deep output collapse, and social and political turmoil.

I remember 2001 well. I was serving on PIMCO’s Emerging Market desk, where we were closely following developments in Argentina. In August of that year, the country was again begging the International Monetary Fund for more money in order to avoid a default. The authorities were willing to enter into yet another set of commitments knowing that they had consistently over-promised and under-delivered, and that the country had failed to make any progress on restoring growth, halting its competitiveness decline, and containing the rise in debt.

A blame game broke out over who was responsible for “losing” Argentina. Official creditors, led by the IMF, pointed to the Argentine government’s repeated policy failures. The government countered that official creditors were nickel-and-diming the country, rather than providing the financial cushion needed to restore confidence and re-engage private capital. Neither side seemed willing to acknowledge what was obvious to many: the country’s economic and financial framework gave it little chance of addressing the dual problem of too little growth and too much debt.

Not surprisingly, Argentine citizens were becoming increasingly fed up with the whole lot, caring little about distinctions between the government and official creditors. They had lost trust in an approach that continued to sell austerity as the price of stability, even as virtually every economic and financial indicator had worsened in the meantime, with scant hope of a brighter future.

Then there were Argentina’s neighbors – particularly fellow members of Mercosur, the regional political and economic agreement – which feared a tidal wave of contagion. Having experienced technical dislocations in their financial markets, they were urging Argentina to get its act together – while also building stronger defenses in case it did not. Meanwhile, Argentina complained that other Mercosur countries’ policies were magnifying its economic challenges.

To understand much of what is happening today in Europe, one need only replace Argentina with Greece, and Mercosur with the eurozone. Of course, Greece is a more advanced economy than Argentina. It is part of a far stronger regional arrangement than Mercosur, with vastly greater financial resources and better-developed economic and institutional underpinnings. Yet the similarities are strong enough to ask whether Europe can learn from Argentina’s experience a decade ago.

After the Argentine parliament approved yet another new austerity package, the IMF agreed to release its financing tranche. But it was too late to save a discredited approach, further undermining the Fund’s standing.

Indeed, rather than engendering confidence, Argentine citizens withdrew their bank deposits over the next few months. Capital flight accelerated. The government again failed to deliver on its policy commitments. Most important of all, social and political pressures mounted, reaching a tipping point.

Argentina defaulted in December 2001, closed its banks, and experienced the mother of all “economic sudden stops.” The country was forced to dismantle its economic framework in a highly disorganized manner, staging a messy, unplanned transition to a new currency in the midst of capital controls and domestic-asset confiscation.

Greece’s future will resemble that of Argentina if its government and official creditors (namely, the European Central Bank, the European Union, and the IMF) fail to internalize some of Argentina’s lessons and do not undertake an urgent mid-course correction.

Specifically, they should take four steps. First, they should stop repeating the claim that there is no “Plan B.” Telling people that there is no alternative to a discredited policy merely pushes them either to resist an approach that does not work, or to opt for mayhem. Recent official remarks heard in Greece (“We must show that Greeks, when they are called on to choose between the bad and the worst, choose the bad to avoid the worst”) do little to engender hope.

Second, Greece and its foreign interlocutors must recognize that Plan B, while not easy, has become critically necessary. It entails much deeper economic and debt restructuring, as well as institutional changes so that Greece can gain greater policy flexibility, improve competitiveness, and promote investment. All of this inevitably involves short-term risks, but it also promises brighter prospects for growth, employment, and the restoration of financial soundness.

Third, Greece’s official creditors should be more attentive to the expected return on their assistance. Every euro disbursed to Greece under the current approach is diluted in many ways. Rather than a general approach implying multiple “leakages,” official creditors would do better to target the country’s key needs more directly. Moreover, given Europe’s worries about its banking system, interventions should be coupled with greater pressure on banks to raise capital and improve asset quality.

Finally, the integrity and credibility of the ECB and IMF require much greater protection. Europe’s opportunism undermines the future effectiveness of these two key institutions at a time when they will be needed not only to stabilize Greece, but also to prevent liquidity problems from turning into solvency crises in other European countries and elsewhere, as well as to limit global contagion.

Greece need not continue to follow Argentina’s miserable example of ten years ago. Yet, unless Greek and European officials reflect on that example and adapt accordingly, Greece will be driven down the same dangerous dead-end path.

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    1. CommentedRichard Gorton

      A possible ejection of Greece from the EU will not stop sovereign debt contagion from spreading through the EU. Ambrose Evans Pritchard writes an insightful article Just As Greece Complies At Last, Europe Pulls The Plug

      Soon fears of debt contagion will arise again as they did in July 2011 where investors feared that a debt union had formed. Fears that the world central banks credit will no longer stimulate and liquefy financial assets will cause investors to derisk out of stocks and delever out of commodities and sell the world major currencies as well as the emerging market currencies.

      With trust fleeting credit will turn bad, and interest rates on all types debt will rise. Soon there will be money good, and no sustainable level of debt.

      Bible prophecy of Revelation 13:3-4, foretells that out of financial armageddon, that is a credit bust and financial system collapse, sovereign leaders will arise from regional framework agreements to replace sovereign nations. Lacking any money good, people will place their trust and faith in the word, will and way of these leaders. The people will give their allegiance to the diktat of the new sovereigns, who will meet in summits, waive national sovereignty, and establish a Federal Europe, with the ECB or the Bundesbank empowered as the EU’s bank, appoint monetary cardinals as stakeholders to manage the factors of production and provide credit as necessary; and appoint a EU wide technocratic government featuring fiscal commissioners who oversee structural reforms and manage government spending, and impose austerity measures for regional security and stability.

      Fiat money and credit will soon die, putting capitalism in the grave. Diktat will serve as both credit and currency in the new economy of regional global governance.

    2. CommentedPaul A. Myers

      "...official creditors would do better to target the country’s key needs more directly." A plan of economic assistance separate and distinct from the bond transactions should be the strategic goal of the European Union. Get Greece stable and then growing.
      The refinancing and inevitable write-down of the sovereign debt should be done to reduce near-term uncertainty while conveying the message that over the next couple of years Greece's debt is going to be "marked down" to something sustainable.
      The European politicians should go to the European public and say they're rebuilding a customer and that there will be lots of work coming to those participating in the rebuilding. Then go announce some contracts, start pouring some concrete. Dangle some contracts in front of those Dutch, German, and French contractors. Don't any of these politicians know how to play the game?

    3. CommentedZsolt Hermann

      There are some great differencies between Argentina's situation in 2001 and Greece's situation in 2012 or even in 2011.

      The most important difference is that although people like to discuss Greece separately like some freak case, Greece's problems, and indeed the whole Eurozone problem (that is not hinged on Greece alone) is also only a part of the whole picture.

      In 2001 there was no global crisis, or at least we did not know we were on the way towards one and most markets were performing quite well, so Argentina was at least superficially an isolated case.

      Today in the global crisis, within this closed, interdependent global network there are no isolated cases, neither in their causes nor in their impacts.

      Even if it is easy to point to the Greek nation as the primary cause of their plight it is unfair and untrue, they were led to this situartion by their stronger fellow countries in Europe as until things were going well Greece was good as it was, buying products and taking loans. Now suddenly the Greek people would need to become Germans, because that way they would be more useful, or less of a problem for the main players.

      It does not work like this in an interdependent network.

      Any association, union has to based on the total understanding, consideration of all the strength, weaknesses, special characters and behaviour of all the participants, and only on such a mutually responsible foundation can a sustainable structure be built.

      The system has to be honest and transparent so each element understands its obligations, resposibilities to the others and knows exactly the consequences of any malfunction.

      In a global, integral system any false practice, cheating leads to imminent collapse that affects each and every parts of the system.

      Since today all 7 billion people are part of this interconnected system we can realize our responsibilities, and the weight of any plan or decision.

      The laws of integral systems dictate that any time I introduce a negative influence into the system that negative influence returns to me as a boomerang with multiple force. We can see these laws in action each day reading the new about the global crisis.

      Thus either we learn wisely about our new conditions, the laws we have to adapt to, or we learn about them through the suffering the unsolvable global crisis causes to all of us.

      Separating seemingly isolated parts of the global crisis as if there was local or regional solution for them is a great mistake which delays any true solution significantly.