Greece has missed its latest payment to the International Monetary Fund, and expectations for a broader default are rising rapidly. In some ways, its situation parallels that of Argentina in 2001, when politicians pled for more time even as investors fled. But in other ways, Argentina is a poor precedent for Greece, whose situation is unique.
- Unsustainable currencies. On the eve of its crisis, Argentina’s peso was still pegged at one-to-one with the dollar. Devaluation was the only way to make the country’s debts -- at least those denominated in pesos -- manageable, and it also helped to jumpstart economic growth by spurring exports. Greece is part of an unsustainable currency regime, too. As a small country, it receives little consideration when the European Central Bank makes monetary policy; with a depression in full swing while bigger countries grow, the euro is too strong for its economy.
- Fiscal profligacy aided by lenders. Both Argentina and Greece entered crises after booms lasting many years. During these booms, neither country saved for a rainy day by running large fiscal surpluses and lowering its debt burden, in part because of the difficulty of collecting taxes. Nevertheless, international investors continued to lend to both countries, in Argentina as part of the commodity-driven craze for Latin American bond issuance in the 1990s and in Greece with the expectation that the European Union would act as a backstop.
- Capital controls. When Argentina devalued its currency, bank deposits in dollars were immediately converted into pesos, destroying a huge amount of wealth for the country’s middle class. The inability to withdraw dollars did lasting damage to the trust between Argentina’s people and its government. In Greece, banks stayed closed on June 29 and limited automatic teller withdrawals as the European Central Bank refused to provide further liquidity. In both countries, the prospect of default led to a rush on hard currency. (Today, with the reserves of Argentina’s central bank dwindling, restrictions on sending hard currency out of the country are in effect once more.
- Redistribution via crisis. In Argentina and now in Greece, inequality in wealth and incomes has grown as a result of the crisis. Wealthy Argentines brought funds from abroad to snap up property at home after the devaluation of the peso, while poorer Argentines suffered from joblessness and the erosion of social supports. In Greece, cuts to pensions, entitlements, and jobs in the public sector have kept employment above 25 percent and increased the poverty rate. Though Greece’s economic growth may appear to be on trend even after its crisis, the composition of that growth has changed drastically.
- Debt burden. At less than 70 percent of gross domestic product, Argentina’s public debt on the eve of its crisis was much lower than Greece’s, which now stands at 170 percent of the economy. With a smaller mountain to climb, Argentina was able to recover quickly and grow every year from 2003 through 2007.
- Timing of reforms. When Argentina entered its crisis, the country had just pushed through many of the reforms that the IMF and European Union are now demanding of Greece: privatization of state assets, loosening of regulations in the labor market, and restructuring of the tax system.
- Domestic versus regional politics. One of Argentina’s greatest problems in the 1990s was the ability of its provinces to spend wildly while counting on the federal government for financing. Today, as seen from Brussels and Frankfurt, Greece has adopted the role of those provinces within the euro area.
- Role of democracy. Argentina’s collapse precipitated the abdication of a president and a chaotic interregnum of four more leaders within two weeks. In Greece, the democratic process has chugged along normally throughout its crisis, with the referendum on July 5 as its latest manifestation.