Greek talks haunted by Ar­gentina ghosts

The China Post - - COMMENTARY - BY DANIEL MEROLLA

With Greece in dan­ger of tum­bling into the eco­nomic abyss it faces the haunting mem­ory of Ar­gentina in 2001, when the South Amer­i­can coun­try de­faulted on nearly US$100 bil­lion and was plunged into a cri­sis it is still bat­tling back from.

Like Greece, Ar­gentina had been liv­ing be­yond its means for years, dat­ing back at least to the coun­try’s 1976 to 1983 dic­ta­tor­ship, when the junta jacked up mil­i­tary spend­ing.

The debt con­tin­ued to spi­ral in the 1990s as Ar­gentina bor­rowed to fund a novel in­fla­tion-fight­ing pro­gram in which the gov­ern­ment pegged the value of the peso to the dol­lar, hold­ing US$1 in re­serve for ev­ery peso in cir­cu­la­tion.

The so-called con­vert­ibil­ity plan suc­cess­fully reined in the hy­per­in­fla­tion that had dogged Ar­gentina for 40 years.

But it left the coun­try’s books badly over­stretched by 1999, when the shock­waves of the world fi­nan­cial cri­sis plunged Ar­gentina into re­ces­sion.

To re­spond to the de­mands of the In­ter­na­tional Mon­e­tary Fund, the Ar­gen­tine gov­ern­ment en­acted aus­ter­ity mea­sures and tax hikes.

But that pro­voked a se­ries of gen­eral strikes.

As warn­ings of an im­mi­nent cri­sis spi­ralled, Ar­gen­tines with­drew US$22 bil­lion from their banks in less than three months.

In De­cem­ber 2001, in a bid to stop the run on banks, econ­omy min­is­ter Domingo Cavallo, ar­chi­tect of the con­vert­ibil­ity plan, or­dered nearly US$70 bil­lion in bank de­posits frozen.

For a 90-day pe­riod, peo­ple were barred from with­draw­ing more than 250 pe­sos (then worth US$250) a day.

That sparked ri­ots and a gov­ern­ment crack­down that left 33 peo­ple dead.

Loot­ers trashed su­per­mar­kets and tens of thou­sands of Ar­gen­tines vented their wrath by bang­ing pots and pans in the street — the so-called cacero­lazo protests.

On Dec. 19, 2001, Pres­i­dent Fer­nando de la Rua de­creed a state of siege. A day later, as thou­sands of an­gry protesters massed out­side the pres­i­den­tial palace, he re­signed and left aboard a he­li­copter.

On Dec. 23, in­terim pres­i­dent Adolfo Ro­driguez Saa an­nounced a mora­to­rium on pay­ments of Ar­gentina’s nearly US$100 bil­lion debt.

But the cri­sis soon turned the pres­i­dency into a re­volv­ing door, churn­ing through five politi­cians in just two weeks.

By the time the car­nage ended, the econ­omy had shrunk by one­fifth, in­fla­tion had soared and the peso had been de­val­ued by 70 per­cent.

‘Trau­matic ex­its never good’

The Ar­gen­tine econ­omy re­turned painfully to growth at the end of 2002, but lasted far longer.

Ar­gentina reached deals with most of its cred­i­tors in 2005 and 2010 to re­struc­ture its debt, con­vinc­ing in­vestors to take losses of up to 70 per­cent on the face value of their bonds.

But two Amer­i­can hedge funds that had bought up de­faulted Ar­gen­tine debt for pen­nies on the dol­lar, bil­lion­aire spec­u­la­tor Paul Singer’s NML Cap­i­tal and Aure­lius Cap­i­tal Man­age­ment, sued Ar­gentina in the U.S. courts for full pay­ment and won.

U. S. fed­eral judge Thomas Griesa also blocked banks from pro­cess­ing Ar­gentina’s pay­ments on its re­struc­tured debt, forc­ing the coun­try into a new — though less dam­ag­ing — de­fault last July.

Griesa later ex­tended his rul­ing to other hold­out cred­i­tors, putting Ar­gentina on the hook for a to­tal of US$7 bil­lion.

Greece will at least be spared that part of Ar­gentina’s tra­vails. The Ar­gen­tine ex­pe­ri­ence led to the ad­di­tion of ma­jor­ity clauses to debt con­tracts, so that in­vestors must ac­cept restruc­tur­ing deals if they are ap­proved by more than 50 per­cent of cred­i­tors.

the hang­over

Since 2001, Ar­gentina has is­sued no bonds on the in­ter­na­tional debt mar­ket.

“We’ll make do with the means we’ve got,” said economist Aldo Fer­rer of the so-called Plan Phoenix, the pro­gram to get the Ar­gen­tine econ­omy to rise from the ashes.

In some ways, that.

A ma­jor agri­cul­tural ex­porter, Ar­gentina got a boost from the com­modi­ties boom of the 2000s.

The cri­sis was fol­lowed by a decade of eight-per­cent av­er­age an­nual growth — though high in­fla­tion, a weak peso and eco­nomic un­cer­tainty still linger.

Ex­cept for its small neigh­bor Uruguay, which has strong trade ties with Ar­gentina, the fall­out of Ar­gentina’s cri­sis was rel­a­tively lim­ited.

That won’t be the case if Greece de­faults, said eco­nomic an­a­lyst Juan Pablo Ron­deros of con­sul­tancy Abe­ceb.com.

“A Greek de­fault would have more painful con­se­quences and a def­i­nite im­pact on the eu­ro­zone,” he said.

“These trau­matic ex­its are never good.”

it has done just

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