Lessons From Argentina’s Default

The New York Times

From Alan Cibils is the chair of the political economy department at the Universidad Nacional de General Sarmiento in Buenos Aires.

As an economist who lived through the Argentine crisis nearly a decade ago, I am distressed by the trouble in the euro zone because it has many of the same ingredients that led to the Argentine debacle.

The International Monetary Fund's mistaken prescriptions (yet again) and the European Central Bank’s intransigence leave Greece no option but to default and exit the euro zone. A brief recap of the Argentine experience may shed some light on where Greece is inevitably headed.

The Argentine crisis was the consequence of a decade of I.M.F.- and World Bank-sponsored free market economic reforms, which included pegging the peso to the U.S. dollar on a 1 to 1 exchange rate. This all but eliminated the ability to conduct independent monetary policy -- much like the euro arrangement today. All barriers to trade and financial flows were removed, and all state enterprises were privatized. The 1994 privatization of its social security system alone explains Argentina's explosive debt accumulation between 1994 and 2001 and the resulting default.

Argentina's policy framework proved too restrictive when a recession set in during the last quarter of 1998. When external sources of funding dried up, Argentina turned to the I.M.F., which recommended the same austerity policies currently being promoted for Greece (and Ireland, Portugal and Spain). The I.M.F.-promoted spending cuts only deepened the Argentine recession, as any introductory macroeconomics student would have predicted. By 2001, the recession had turned into a depression, making accumulated debt impossible to service and resulting in enormous capital flight, a run on deposits and the largest sovereign default in history.

After the default and the January 2002 devaluation, Argentina's economy continued to contract for only one more quarter. By the second quarter of 2002, Argentina's economy began to grow and did not stop until 2009, when the global financial crisis made its impact felt there. The doom and gloom predictions of what would happen after default never materialized. Furthermore, after defaulting, Argentina no longer needed to access international capital markets, eliminating their stronghold on Argentine economic policy.

Greece (and Ireland, Portugal and Spain) should learn lessons from Argentina's experience. First, the I.M.F. still promotes policies that inevitably make matters worse, demonstrating an inability to learn from past mistakes. Second, default can be a solution, since it can end an unsustainable situation, frees up fiscal resources for more productive use and eliminates the need for access to bond markets. And third, regaining control of the national currency and the ability to conduct independent monetary and fiscal policies are essential for economic recovery.

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http://www.nytimes.com/roomfordebate/2011/06/19/draft-the-imf-greece-and-the-argentina-option/lessons-from-argentinas-default