MacroPolis

It should come as no surprise that in a the country where a large part of the political establishment is comfortable with the notion that some sort of conspiracy drove the country to bankruptcy, the same key players should spend the last few days in a hopeless debate on the recent developments in Argentina.

Much of this can be traced back to a September 2012 comment by SYRIZA leader Alexis Tsipras during a parliamentary debate with the then Finance Minister Yannis Stournaras, when the opposition leader said: “If only we’d become [like] Argentina.”

The context to his statement is important, though. Stournaras often used the argument in interviews and debates that had Greece not gone into a troika program, the country would have become like any of a number of distressed nations, from Argentina, to Arab Spring Egypt or civil war-torn Syria. In one of those debates Tsipras responded with the argument that given what Greece had gone through in the previous four years, Argentina’s course would have been more dignified and, therefore, preferable.

With Argentina forced by a court ruling to default last week, the Greek government, which has been left with few convincing arguments to support the policies imposed by the troika, grabbed the opportunity to corner SYRIZA. The main opposition party, which probably regrets the moment Tsipras made his Argentina, hit back and accused the coalition of celebrating another country’s difficulties.

A rather complicated story was reduced to cheap shots and ignorant remarks that further exposed the low calibre some of those who participated in the “Argentinology” debate – some members of the media included.

To properly debate Argentina, the narrative needs to start in April 1991when the South American country pegged the peso to the US dollar via a currency board in an attempt to curb hyperinflation which had averaged more than 300 percent in the previous decade. The notion of convertibility is that there will be no more local currency in circulation than the central bank has reserves (dollars in this case) so it can convert them one for one. This heavily restricts the money supply. The money press was essentially switched off and Argentina went from having an average inflation in 1990 of over 2,000 percent to just 3.4 percent in 1995.

The country was growing between 6 and 10 percent each year with a small blip in 1995 due to the Mexican crisis. Led by the economy minister Domingo Cavallo, the father of the US dollar convertibility, Argentina followed the policies that the International Monetary Fund has been long advocating: Extensive privatizations, deregulating the economy and adopting liberal market policies. Throughout the 1990s Argentina was considered the poster child of international organisations, including the IMF.

This masked the economy’s underlying problems: Corruption was ripe, the fiscal deficits were willingly financed by repeated issues of debt and - most importantly – while pegged to a runaway dollar Argentina was becoming increasingly uncompetitive. It was effectively in a currency that it did not control and which did not reflect the country’s macroeconomic fundamentals.

The first major cracks appeared in 1998 after the Russian crisis and even more so after Brazil 1999 announced in January that its currency would no longer be pegged to the US dollar. Brazil allowed the real to devalue, severely harming Argentina’s exports since its South American neighbour represented 30 percent of Buenos Aires’s trade flows.

Combined with other shocks that effectively dried up the flow of capital to emerging markets, Argentina fell into a vicious cycle of recession, widening fiscal deficits and spiking country risk. The spread on the country’s debt shot up from 300 to 1500 basis points following the Russian default, feeding the same doom loop.

In December 2000, Argentina turned formally to the IMF and the precautionary line became a program of 14 billion dollars over a three-year period. The country’s debt went from 41 percent of GDP in 1998 to 51 percent by the end of 2000.

After the resignation of two economy ministers in the first three months of 2001 when they failed to meet the IMF program’s fiscal conditions, President Fernando de la Rua (elected in October 1999) asked Cavallo to return to the Economy Ministry post he left in 1996 in a desperate move to reverse the country’s fortunes.  

The change in the country’s circumstances meant the convertibility scheme came into question but the authorities, especially the system’s founder – Cavallo, were determined to keep it alive at all costs. One strong argument was that after ten years in the scheme, businesses and individuals had taken out loans in dollars. Abandoning the peg and devaluing the peso would effectively drive a large portion of the population and the economy to bankruptcy. There was no easy way out.

At the same time, the country risk remained high. This made the financing of the deficit and the refinancing of existing debt increasingly pricy.

In spite of Cavallo’s repeated attempts, revenues were falling short, fiscal targets were not met and confidence would not return even after a June 2011 “megaswap” of existing bonds with new ones that would extend interest and principal repayments into the future.

After the swap, country risks almost doubled to 2000 basis points and Cavallo realised that he could not borrow from the markets. Instead, he introduced the zero deficit rule, which included cuts of 13 percent in government salaries and pensions.

In spite of the obvious risks, the IMF approved an 8-billion-dollar augmentation of the Argentinean programme in August 2001. In September, it disbursed 5 billion to replenish the central bank’s foreign exchange reserves. There was a hint that 3 billion would be used for a debt restructuring which all players had understood by that point could not be avoided.

In November, the Argentinean government announced a plan for a debt restructuring that would save it 4 billion dollars annually in interest payments. S&P put Argentina on a Selective Default rating.

By mid-November the amount of reserves the IMF had provided the central bank with just a couple of months had disappeared as Argentine businesses and individuals were converting pesos to dollars and sending them abroad.

Between November28 and 30, there as a bank run, forcing the government to introduce restrictions on withdrawals and transfers of money abroad - the infamous “corralito.”

Two days later, the IMF recalled its Argentina mission and on December 5^th announces that it could not make the final 2001 disbursement of 1.24 billion dollars, thereby pulling the plug on the program and the country.

By December 20 the country has descended into chaos, with mass protests and riots that forced the de la Rua government to resign. After four interim presidents in two weeks and ongoing protests, Argentina announced on January 6 the abandonment of convertibility. Cut off from international markets and without support from the IMF, Buenos Aires was forced to officially default on its debt. The economy plummeted by close to 11 percent in 2002.

Unemployment went from 15 to 22.5 percent. By the end of 2002 just under 60 percent of Argentineans lived below the poverty line, almost double the figure of 2000. By July 2002, the peso had collapsed to 26 cents per peso from parity just a few months ago. Inflation in 2002 closed at 41 percent.

In 2005 the Argentinean government offered the first debt restructuring of 82 billion dollars of debt defaulted upon in 2002. It led to 76 percent of bonds being exchanged and brought out of default.

At the end of 2005, Argentina announced that it would pay the IMF in full, making a single payment of just under10 billion dollars.

The debt exchange process was reopened in 2010 for the debt that was not exchanged in the previous round. The new pick-up only left a small portion of 7 percent of holdouts who refused to exchange, part of which brings us to the current events.

Argentina is not a role model by any stretch. At the same time, it is not the villain that suits the narrative of some in Greece.

The run-ups to the two countries crises have plenty in common: The causes, the experiences of an IMF-driven program and, most strikingly, the refusal of key players to restructure an unsustainable debt burden, which in the case of Argentina ended up in a messy default and subsequent restructuring. In Greece’s case, the restructuring was kicked far enough down the road to limit the damage to banks in the rest of the eurozone. Effectively, though, the end result is the same.

Greece also had to deal with holdouts in its own debt exchange. It did so by introducing Collective Agreement Clauses (CACs) in its domestic law bonds, and is still paying in bonds issued under foreign law, whose holders refused to participate in the exchange. The country’s reputation after introducing the retroactive CACs is so severely damaged that even now it has regained market access, Greece has issued English law bonds.

These are the facts. The rest is the narrative of the prejudiced and ignorant.

*Yiannis has contributed extensively over the last two years to the debate around the Greek crisis and the events in Cyprus through his blog The Prodigal Greek, which earned him a place in the esteemed group of Emergency Specialist bloggers, according to FT Alphaville. If you appreciate strong views and economic charts look out for Yiannis in The Agora. Follow Yiannis: @YiannisMouzakis