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Can bankrupt Greece take lessons from Argentinian default?

In late 2001, faced with an astronomical public debt, Argentina announced that it would default. Standing at a similar crossroads, can Athens follow in the footsteps of Buenos Aires?


In December 2001, Argentina announced that it could no longer honour its debts and the country went into default.

Ten years later, Greece finds itself facing the same situation. If it defaults, it will be the second country to go bankrupt since the start of the millennium.

Eurozone governments have stressed that an “Argentine scenario” for Greece is out of the question. On Sunday, French European Affairs Minister Jean Leonetti told France Info radio that Greece would “avoid default because it is in the interests of both the Greek state and the Greek people.”

But going into default, as the Argentinian case shows, is not necessarily a killer blow. In fact, the Argentinian economy rebounded after refusal to pay its creditors.

The decision “was probably the best thing the country could have done at the time,” said Christine Rifflart, an expert on Latin American economics at the Paris-based OFCE think tank.

What Greece has in common with Argentina

Back in 2001, Argentina was staring into much the same abyss as Athens is now, having accrued a colossal debt of some $132 billion. The country was surviving a hand-to-mouth existence on a drip feed from the International Monetary Fund.

And like in Greece, Argentina was forced to instigate severe austerity measures in order to continue to receive international aid.

Buenos Aires could not support its economy by printing more money, and ready cash was becoming more scarce because of capital flight resulting from the fact that the Peso was pegged at the time to the US dollar.

The crisis sparked violent social unrest as well as growing poverty.

Into the abyss

“It was the end of the established Argentinian economic model, a model that had been lauded by the IMF,” said Rifflart.

Once Argentina had decided to default, it decided in early 2002, after a period of ten years, to detach its currency from the US dollar.

Argentina’s economy went into meltdown. Watching the value of their currency collapse, Argentinians sought desperately to change their pesos for dollars, pushing the government to intervene.

As part of the government intervention, despite the currency’s collapse, bank accounts were converted from dollars into pesos with equal parity.

“A large section of Argentina, and particularly the middle classes, had their savings wiped out,” said Rifflart.

Argentina’s return to growth

And the default didn’t just affect savers. “The entire economy suffered a violent shock,” Rifflart said.

The GDP was down 5% in a year, unemployment rose from 15% in early 2001 to 24% at the end of 2002, with inflation running at 40% by the end of the same year.

“The country’s middle class had been effectively destroyed,” said Rifflart.

But after a year of increasingly precarious economic situation, the Argentinian economy started to pick up. “From 2003 unemployment started to go down [reaching a level of 10% in 2005],” she said. “The default had allowed the Argentinian government to create significant room for manoeuvre in the country's budget.”

From 2002 to 2004, Buenos Aires negotiated with its creditors – essentially pension funds as well as US and European banks – to restructure its debts. It was eventually able to bin some 60% of these debts. At the same time, exports started going up.

Rifflart explained: “The devaluation of the peso made Argentinian companies much more competitive on the international scene.”

Argentina’s experience might be food for thought for Athens – but not if other European countries have anything to do with it.

“Unlike Greece, the Argentinian default did not endanger an entire region’s economic stability,” said Rifflart.

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