Lessons of Argentina crisis ignored in handling of Greece

For a vision of how the Greek debt meltdown is going to end, look no further than the International Monetary Fund's post mortem into a similar crisis that came to a head almost exactly a decade ago - Lessons From The Crisis In Argentina.

Substitute the word Greece for Argentina in the IMF's analysis of eight years ago, and you'd have a near perfect account of the present crisis. Photo: AFP

By Jeremy Warner

11:14PM BST 04 Jul 2011

The policy review document was originally published in October 2003 and signed off by a then relatively unknown IMF official called Tim Geithner, now the US Treasury Secretary no less.

Strangely enough, he seems entirely to have forgotten about this eight-year-old tome, whose candid and illuminating account of Argentina's descent into economic and fiscal chaos, and the not inconsiderable role the IMF played in the process, provides an object lesson in how not to proceed.

There's no application of its lessons to Greece and the rest of the troubled eurozone periphery; worse, in blind disregard for its own analysis, the IMF is making exactly the same mistakes all over again.

On Karl Marx's famous dictum that history always repeats itself, once as tragedy, second as farce, Argentina provides a case study in where Greece is heading, which is out of the single currency, into default and a brutally imposed re-engagement with harsh economic realities.

It's still remotely possible that notions of "European solidarity" might avert this process through a system of indefinite fiscal transfers, but to believe that Germans are ready to subsidise Greeks on a more or less permanent basis requires something of a leap of faith.

 

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The parallels with Argentina are so strikingly exact as to bear repeating at length. Substitute the word Greece for Argentina in the IMF's analysis, and euro for currency board, and you'd have a near perfect account of the present crisis, all written nearly eight years ago.

Here's what happened in Argentina. In the hope of eliminating hyper-inflation and years of currency turmoil, Argentina adopted a "currency board regime", which pegged the peso to the dollar.

Policy credibility depends crucially on the idea that a currency board is hard to escape, so the effect is much like being part of a single currency. To begin with, it worked just as the doctor ordered. Inflation was tamed and Argentina was widely hailed as a model for successful economic reform.

Beneath the surface, however, nothing much had changed. Corruption and tax evasion was still rife, the government routinely hid the true size of the budget deficit with heavy off-balance sheet spending, there was little if any progress in labour market and other forms of structural reform, and behind the candy floss of debt-fuelled, consumer-led growth there was progressive loss of competitiveness.

Tying yourself to someone else's monetary policy is always high risk, but for a small economy such as Argentina to be joined to the mighty US is a bit like trying to ride a whale. As the Federal Reserve tightened policy to choke off the overheating of the dot.com boom, Argentina plunged into deep recession, made even worse when Brazil, its largest export market, devalued.

As the IMF put it: "Once the downturn had started, the currency board arrangement limited the authorities' ability to prevent a tightening of monetary policy and the public debt dynamics, which were exacerbated by the protracted slump, ruled out loosening fiscal policy…

"The currency board arrangement remained viable as long as there was sufficient political will to subordinate fiscal policy to maintaining the peg… At some point during the 1990s, Argentina slipped back into a 'fiscally dominant' regime, ultimately dooming the currency board arrangement."

Yet this moment of realisation was preceded by a prolonged period of denial, both by the Argentine government and the IMF, which in almost every detail mirrors events in Greece today. There were repeated IMF bail-outs, and successive rounds of ever deeper austerity measures. There were riots ("cacerolazo", or banging of pots and pans), yet more austerity, and as the flight of capital escalated, there were capital controls.

There was even a "voluntary" debt forgiveness initiative very similar to the "rollover" proposed for private holders of Greek sovereign debt today. None of it worked.

The IMF concluded its post mortem by saying that when "debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring".

So how come the IMF has failed to follow its own advice with Greece, and contrary to what it did with Argentina, foregone the bail-outs and organised as orderly an exit and default as remains possible?

The best answer to this question is that the IMF has become no more than a tool of the eurozone policy-making elite. The failed solutions of Dominique Strauss-Kahn are maintained through the seamless succession of Christine Lagarde and sustained by the EU's dominant share of the IMF vote.

A Greek exit, they fear, might finish off the European project altogether. Greece must accept penury and fiscal enslavement in selfless pursuit of the greater good.

From his current berth at the US Treasury, Tim Geithner seems to agree that to allow Greece to go the same way as Argentina might be to trigger a second global credit crunch. There's a systemic dimension which was absent from the Argentine crisis, where the only casualties from the redenomination of dollar debt as devalued pesos were the Argentines themselves and their external creditors.

He should reread his own report. Argentina only began its long march back to economic salvation after President Fernando de la Rúa had to be quite literally helicoptered out of office, with the rioters at his door. There's every chance Greeks will eventually demand a similar solution.