Greece seems to be following in Argentina’s footsteps, after it missed its critical debt payment on June 30, shut down its banks and imposed capital controls a day earlier.
The South American nation is still battling with its creditors over its 2001 default on a US$100 billion sovereign debt – the largest in history. It then plunged into crisis. Argentina implemented severe foreign currency controls to tackle haemorrhaging foreign reserves. Today, it is locked out of international financial markets and suffers from 40 per cent inflation.
Similarly, cash-starved Greece had to repay €1.6 billion (HK$13.8 billion) to the International Monetary Fund by June 30 or default. The euro zone is thus experiencing an existential crisis – the Greek default threatens its membership in the union.
Both Athens and Buenos Aires suffer from the same economic symptoms, namely, an overvalued currency, skyrocketing unemployment rates and unreliable statistics. Yet, Greece could learn from Argentina and step back from the abyss.
First, living beyond one’s means is unsustainable. For decades, Argentina turned a blind eye to its public deficit. Creditors are now putting pressure on both nations to cut public spending. Like Argentina, Greece had to adopt austerity measures, laying off of tens of thousands of public workers and making concessions on pension spending. These measures sparked massive protests in both countries.
Another lesson is that denial is counterproductive. Argentina is Latin America’s third-largest economy with US$33 billion in reserves. Although it could repay its debt, President Cristina Fernández de Kirchner refuses to play by the rules. Last month, she said her government would not pay back its bondholders – coined “vulture funds” – who did not accept the terms under which the debt was renegotiated.
In addition, the Argentine case shows that turning to new lenders, such as China or Russia, could be an option. Argentina also demonstrates that a country can overcome defaulting on a sovereign debt. From 2003 to 2007, it grew by 8 per cent a year, and unemployment decreased from 20 per cent to 8 per cent.
Even so, there are differences. When Argentina defaulted, its deficit was 3.2 per cent of its gross domestic product; it is 7.8 per cent for Greece. Argentina also boasts the world’s second-biggest shale gas reserves. Greece cannot rely on natural resources.
Finally, when Argentina abandoned the one-to-one peg with the dollar in 2002, it did not disrupt people’s lives. But quitting the euro would bring Greece an unprecedented recession.
This piece was published in South China Morning Post on July 1, 2015. Link here.
The PDF version is available here.
