For most of 2001, Argentina attempted to negotiate, cut and borrow its way out of trouble. But its economy had stalled and its debts just kept ballooning. On December 21, at the end of a day of riots that left several dead in the sticky heat of the southern hemisphere summer, the president, Fernando de la Rua, trapped in the Pink Palace by baying crowds outside, made his exit from the roof in a helicopter.
A fortnight of total turmoil followed in which there were five different presidents - one of whom broadcast his resignation from his sitting room surrounded by friends out of fear he was about to be lynched (by fellow politicians, not the population). In his fleeting tenure, that president announced that Argentina would no longer pay its debts. And on January 6, the fifth president pulled the peso out of a ten year-long peg to the dollar and the economy went into free fall.
The situation in Greece over recent months has been strikingly similar. If you lived through what happened to Argentina, you can’t help getting a sense of deja vu when watching the frantic but possibly futile efforts to save a smaller, but perhaps much more strategically important sinking ship. Other European countries with much at stake have managed to keep Greece from self-combusting so far. But one has to wonder if Europe’s bailouts and austerity measures are not just postponing the inevitable.
These are obviously entirely different countries and regions with their own particular problems. But there are direct parallels in terms of what led to Argentina’s collapse a decade ago and what’s happening in Europe now.
In the 1990s, Argentina enjoyed a decade of relative stability by pegging its previously volatile currency to the dollar. Hyperinflation, with prices rising in the time between a shopper putting an item in their supermarket trolley and reaching the till, became a thing of the past. The historically shaky pesos the population earned could be instantly converted into rock solid dollars, one-for-one, making the Argentines instantly rich and confident. They lived it up – building swanky homes, eating in glitzy restaurants and swanning round Latin America on regular holidays and shopping trips. They were known in the shops of neighbouring Chile, Brazil and Uruguay for their constant refrain : “Dame dos !” (which roughly translates : “I’ll take two of those”). Argentina’s middle class thrived and those poorer faced less hardship than those in neighbouring countries.
At the same time, of course, the dollar peg had done nothing to control corruption or tax evasion which continued to be as rampant as ever. And by the second half of the 90s, this peg had made Argentina unfeasibly expensive and unable to compete with its neighbours. Production had ground to a near halt because it was cheaper to buy almost everything abroad. Argentina was even sending its own orange juice to Brazil to be put into cartons for lack of functioning factories. Unemployment was soaring and the government had borrowed ever larger amounts to keep afloat.
Throughout 2001, Argentina adopted austerity measures, cut state salaries and pensions, borrowed more and more just to pay off the interest on its debts and attempted to negotiate with its creditors in wealthier countries for its debt to be restructured.
What the men in suits could not negotiate was the growing anger and fear of a population that couldn’t face more austerity, who feared for their savings and began yanking dollars out of the bank. The December riots broke out after the government imposed a ‘corralito’ (literally ‘a little corral’) on bank accounts, allowing each account holder to withdraw only 250 pesos a week.
At this point, the International Monetary Fund withheld a promised bailout, and weeks later Argentina stopped paying its debts. The default was the biggest yet in history – 132 billion dollars.
Much as amongst the Greeks today, there was huge resentment at being told what to do by those with the money. Four out of five Argentines, according to most polls at the time, wanted the country to default rather than face years of yet more bailouts and austerity.
So did Argentina do the right thing ?
The immediate effect of Argentina’s default was shocking. The country became an international pariah and even now, ten years on, it is unable to borrow on international markets. And the population went through a period of deep suffering.
The peso fell to a quarter of a dollar and unemployment jumped over twenty percent. People who had lost their savings and their income literally had no cash and were forced to start bartering. Bankers and politicians were hounded out of restaurants by angry crowds. The standard of living of the vast majority slumped overnight.
An army of the poorest appeared on the previously clean streets of the centre of Buenos Aires, rooting through the rubbish for anything to sell or eat.
The middle classes saw their quality of life slip away. My neighbour in our elegant block of flats in the smart district of Palermo wept at the humiliation of no longer being able to afford to dye her hair. Piece by piece, she and her sick husband had to sell their furniture to pay for his medication. Their phone line was cut off. They could no longer afford to have a newspaper delivered.
But many argue that this suffering also set the country free.
Overnight, Argentina had become competitive again. And within two years, the economy was one of the fastest growing in the region (in 2010 it reached 9.2 percent) thanks in large part to its natural resources and a global commodities boom.
The alternative might have been years and years of cuts and austerity imposed by the country’s creditors as it continued borrowing to pay off its crippling debts.
The IMF itself concluded in a kind of post mortem on Argentina, published in 2003, that it should not have kept on bailing the country out.
On this basis, there is a camp of economists who believe Greece should take the same route.
Greece too has lived a decade of apparent economic security during which earning and spending euros rather than drachmas brought an illusion of wealth and stability and a tendency to live beyond one’s means (the overspend on the Olympic Games comes to mind).
Similarly, Greece has gone through a long and painful process over the last year of begging for bailouts and imposing cuts, a process which some argue has just made things worse. And the Greeks too are resentful of having to take orders from their richer neighbours.
So would a sharp shock rather than an agonisingly long process of cuts without any guarantee of recovery free Greece in the same way it did Argentina ?
A default would lead to a similar immediate collapse in living standards and prospects for the Greeks. Greece’s financial difficulties now dwarf those of Argentina – its debt is over 150 percent of its GDP whereas Argentina’s was around 55 percent. And it would be unlikely to see a bounce back anywhere near as fast.
Greece, a much smaller country with a service-based economy and no produce to sell in massive quantities to countries like China, could only hope to make significant money from an influx of tourists were it to return to the drachma. It could hardly hope for a sudden increase in trade with its European neighbours because Europe (unlike South America ten years ago) is stagnating. Also, unlike Argentina, Greece would be losing the protection of a regional monetary union. The very idea of Greece leaving the euro, as Germany’s Angela Merkel has said, could lead to the end of Europe.
Ten years ago, Argentina was isolated. Nobody felt a stake in that country except its creditors. What happens to Greece, by contrast, will have repercussions for everyone. So those making the decisions in Greece are being forced so far to listen to Europe, not to the Greek people.
However appealing the Argentine option is for some, it is important to note that Argentina’s drastic action had serious downsides. Economically, the country recovered fast. But politically and socially, the crisis changed the country permanently. Having been the beacon of hope in a region with some of the world’s worst social inequality, Argentina’s middle class was decimated and society split into an elite few and the struggling masses. Brains drained away to anywhere they could earn a better living.
Argentina’s rapid growth is seen by many as being more a matter of luck (helped by a global commodities boom) than strategy. And some economists are concerned that the economy is overheating and figures are being fiddled. Growth is predicted to slow dramatically in coming years and economic stability is far from guaranteed.
Argentina’s crisis fuelled the rise of a radical left across Latin America, which defines itself through resentment and rejection of the more powerful United States and of capitalism in general. But that left-wing revolution has yet to find a stable, long term economic alternative. Argentina can’t promise that for Greece.