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reflections

Feb 11, 2015 | 00:14 GMT

6 mins read

Greece and Argentina, Similar But Not the Same

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Greece will enter another crucial stage of its economic crisis when it begins formal negotiations over its debt payments in a Feb. 11 eurozone meeting and a Feb. 12 EU Council summit. While Greece and its lenders have expressed desire to reach an agreement, their positions remain distant and there is a real possibility that Greece defaults on its debt and leaves the euro as a result. A Greek default would send a massive shock throughout the European Union, but it would not be a completely unprecedented event. Many Greeks know about Argentina's default and devaluation in 2002 and wonder whether Greece could go down the same path. While the two cases have several points in common, they also have crucial differences that raise important questions.

Like present-day Greece, pre-default Argentina was unable to apply monetary policy. In the early 1990s, the Argentine government introduced a currency peg between the peso and the dollar to fight hyperinflation. The measure proved successful in the short run — inflation disappeared almost immediately — but it took away Argentina's ability to cope with economic crises by manipulating its currency. As a result, when Argentina began to suffer the effects of the financial crises of the late 1990s, the only option Buenos Aires had left was to apply fiscal policy — in other words, austerity. 

Like Greece, Argentina was pressured by its lenders to introduce severe spending cuts in exchange for bailouts. Like Athens, Buenos Aires would periodically receive visits by unpopular foreign inspectors who would scrutinize the country's books as a precondition for continuing the loan programs. Like Greece, the Argentine economy quickly contracted while unemployment skyrocketed. And just like Greece, the Argentine government that applied the unpopular austerity eventually fell in a context of massive social unrest and extreme political fragility. 

It is no surprise that Argentina's story appeals to many Greeks, especially the ruling Syriza party. The Argentine default is a reminder that debt is essentially a contract, and contracts can be broken if they become too costly for one of the parties. More important, the Argentine case highlights the fact that there is life after a default. Between 2003 and 2007, the Argentine economy grew by an annual average of roughly 8 percent, while unemployment plummeted from around 20 percent to about 8 percent. Life was certainly not easy for Argentina — the country became isolated from financial markets, and inflation quickly became a problem again. But Argentina's default and devaluation temporarily defused an extremely complex social, political and economic situation.

As striking as it is, the comparison between Greece and Argentina has concrete limits. To begin with, Argentina had a currency peg, but it never abandoned its national currency like Greece did when it adopted the euro. Many Argentines held bank deposits in dollars and staged massive protests, some of which turned violent, when the country converted accounts to pesos using an official exchange rate, but for most Argentines, life stayed relatively normal. They still received their salaries in pesos and purchased goods using the currency. In Greece's case, leaving the euro would require a return to the drachma, a logistical and political nightmare for Athens. Leaving the euro would also lead to extended capital controls and a problematic conversion of savings into drachmas, a move that would trigger high levels of social unrest.

A second major distinction is that Argentina was able to benefit from a positive external environment. The Argentine devaluation coincided with an international commodity boom. China and other emerging markets were growing fast and demand for Argentina's agricultural and mineral products was strong. The global economic climate has since changed. Now Greece would be returning to the drachma at a time when many of its economic partners, including European consumers and Russian tourists, are in crisis despite low oil prices and the European Central Bank's quantitative easing program freeing up a large amount of cash in European markets.

Argentina also found a key ally in Hugo Chavez's Venezuela — the Bolivarian leader became one of Buenos Aires' main benefactors. Exact numbers are difficult to establish, but between 2003 and 2008, Venezuela is believed to have bought some $5.6 billion in Argentine debt, a notable figure at a time when there were not many investors interested in purchasing Argentina's bonds. This raises an interesting question for Greece: In a post-default scenario, would Athens be able to find its own Chavez? In recent days, Athens has made an effort to show Europe that it has strong ties with Russia, but while Moscow is certainly interested in keeping close ties with Athens — if only to exacerbate the European Union's political fragmentation — it's not a given that Russia could become the sponsor Greece would need.

Russia is interesting for another reason, too: In the early 2000s, Argentina was self-sufficient in terms of energy. Greece is not. One of the few advantages Greece receives from having a strong currency is the ability to pay for energy in euros. A return to the drachma would make energy imports more expensive, making a potential alignment with Russia even more crucial for Greece. This need is probably the main reason behind Athens' flirtations with Moscow.

Finally, a crucial factor in a potential post-euro scenario is whether Greece turns to protectionism. After Argentina defaulted and devalued its currency, it introduced high import tariffs to protect national industries and placed heavy tax rates on agricultural exports to take advantage of the growing demand for commodities. Both measures generated massive revenue for Buenos Aires and allowed the government to fund a long list of social programs and subsidies.

Like Argentina, Syriza is promising more public spending and subsidies for low-income households, programs for which it doesn't have the money. Argentina's policies generated frictions with Brazil, its main partner in Mercosur, but the fallout would be greater in Greece's case. Imposing trade tariffs would violate the founding principle of the European Union, forcing it to expel Greece.

Even though Syriza used Argentina's case as an example during the electoral campaign, and many Greeks are aware of the country's history, Athens has considerably less room for action than Buenos Aires did. Many of Buenos Aires' moves since 2001 have been ill conceived and poorly executed, but unlike Greece, Argentina was a fully sovereign country when it made them. Greeks elected Syriza to fix the country's debt problem without leaving the eurozone and the European Union. Greece's main problem is that it will be extremely hard for Athens to achieve both goals simultaneously.

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