Burning bondholders did not save Argentinians from pain, writes TOM HENNIGANin São Paulo
FOR ANYONE who followed Argentina’s inexorable slide towards its record debt default of December 2001, the events this week in Athens will only deepen the suspicion that history is preparing a repeat.
The chaos both inside cabinet and out on the street in Athens eerily resembles the months leading up to Argentina’s own messy endgame, which was accompanied by the same background music of wild swings in the markets as bad news follows good which followed bad.
In Argentina, the country’s always fragile social contract broke down under the strains of the 2001 crisis. Then as now, there was no shortage of local and foreign demands for cuts to the country’s bloated and inefficient public sector as a prerequisite for saving the currency (for the euro today read Argentina’s disastrous peg to the US dollar).
But then as now, those supposed to shoulder the burden were unsurprisingly reluctant to do so in order that reckless foreign creditors be repaid by a country where insiders and their companies treated taxes as a something of concern only for the little people.
In Argentina, the irreconcilable demands of foreign creditors and domestic voters, and the taboo against exiting a ruinous currency arrangement, produced political paralysis and the country drifted onto the rocks. Protests turned to riots, deaths and the president fleeing office in a helicopter.
Shortly afterwards, congress cheered and chanted “Argentina! Argentina!” when his replacement announced a moratorium on debt repayments. Burning the bondholders though did not stave off the pain. No longer able to cover its deficits with foreign borrowings, Argentina underwent an immediate experiment in autarky.
Being forced to live hand to mouth meant a brutal 10 per cent contraction for an economy battered by four years of recession. More than 20 per cent of the population found themselves jobless and half fell below the poverty line.
The peso had to abandon its link with the dollar and immediately plunged in value. Local savings accounts, even those in dollars, were forcibly converted into the new weak peso.
Many middle-class families who kept their savings in the bank suddenly found themselves much poorer, while those who had squirrelled dollars away in Miami or under the mattress became wealthier.
Argentina has since clawed its way out of the hole, but it still bears the scars.
There are of course differences in the two cases, at least one being major enough that it might point to a different outcome. After all, no one thought that by breaking its peg to the dollar, Argentina would threaten the US economy or the greenback’s very survival.
Washington washed its hands of its Latin ally back then, but Berlin might yet calculate it cannot quite afford to do the same with Greece.