Fears of a Greek insolvency and the country’s unprecedented exit from the eurozone have overtaken both international media and the notepads of E.U. leaders during last week’s summit in Brussels. The government in Athens, burdened for years with immense public debts and growing liabilities toward its international creditors, was unable to reach a compromise with other eurozone countries concerning a proposed austerity package the country would have to introduce in exchange for keeping the financial lifeline in place.
On Friday, Alexis Tsipras, Greece’s Prime Minister and leader of the leftist Syriza party, announced he would put the decision on accepting further austerity instruments to a public referendum, to be held on July 5.
Fearing an internal rebellion within his party, Tsipras has turned to his own citizens; however, many Greeks appear to be losing patience as the government introduces limits on ATM cash withdrawals and shuts down banks amid concerns about an uncontrollable capital outflow.
The country’s financial fate seemed to be signed and sealed on Tuesday morning, when Greek Finance Minister Yanis Varoufakis announced the country would not pay its outstanding €1.6 billion loan tranche to the International Monetary Fund.
Although catastrophic and largely unpredictable, the scenario of a (now very much likely) Greek bankruptcy is far from a novelty in the international community — especially for followers of Latin American affairs.
Global media and analysts are already drawing comparisons between the current crisis in Athens and the disastrous financial crash of Argentine economy in 2001.
And even though there are significant differences between the two bailout cases, ranging from public violence and social unrest following a political crisis in Buenos Aires’ Casa Rosada to the mere fact of Greece being bound by European treaties, it is worthwhile for European experts to devote some attention to the lessons drawn from the Corallito.
According to numerous experts in the field of comparative political economy — including Arturo C. Porzecanski at American University in Washington, D.C. and Guillermo Nielsen, Argentina’s former Finance Secretary and the country’s chief negotiator during talks with IMF — the future that Greece now faces could be “similar to the outcome of the Argentine crisis, but much worse.”
Recession and revolving doors
Let’s start from the very beginning, though.
The Argentine crisis had its roots in an everything-but-reasonable strategy of covering its public debt, dating back to the 1976-1983 military dictatorship. Overspending on defense, combined with an extensive state apparatus, led to a largely unsustainable economy.
However, this imbalanced policy did not vanish during the country’s transition to democracy. In order to fight spiraling inflation, as well as to promote Argentine exports globally, the government of President Carlos Menem introduced a so-called convertibility plan, pegging the Argentine peso to the U.S. dollar and holding $1 in reserve for every peso in circulation.
Despite an initial burst of public support (as Argentines began, for instance, to make Florida their favorite summer holiday spot), the move quickly overstretched the balance sheets of the Casa Rosada.
Paired with a crisis in Russia and southeast Asian markets that broke out in late 1990s, it plunged Argentina into a profound abyss of recession, with an imminent risk of insolvency. Public deficit skyrocketed, as did unemployment, followed by waves of civil unrest.
Although in both cases it was the IMF that came to rescue national budgets with loan tranches, the stories of both countries, in regard to their relationship with the Fund, have followed a rather different path.
With Buenos Aires, the IMF demanded that severe austerity measures and cuts in public spending be introduced, despite a deepening recession. Those conditions were met with strong resistance from the Argentine public, who took to the streets to manifest their disapproval of their government’s submissiveness toward global financial institutions.
As a result of violent clashes with police forces, 33 people died across the country. The economic downturn also triggered an unprecedented political crisis, which came to be called the “revolving-door crisis” — Argentina saw a shocking five different presidents hold office in the span of merely two weeks.
Nonetheless, the government of Néstor Kirchner, who took over the unwanted seat at Casa Rosada — thus giving rise to what has become the era of Kirchnerismo in Argentine politics — managed to reverse the downward trend and returned the country on the path of economic growth.
Previously, interim president Adolfo Rodríguez Saa announced a moratorium on bailing out over 60 percent of Argentine debt, amounting to a total of nearly 100 billon dollars. By 2002, when the economy started to rebound, largely due to an international commodity boom, the peso has lost more than 70 percent of its value and the country’s economy shrunk by some 20 percent.
Even when the initial carnage was over, it left some dangerous consequences, as not all the creditors agreed to restructure Buenos Aires’ debt. In fact, two American hedge funds brought cases in U.S. courts demanding full debt repayment, and won.
The case for Greece
The trend-reversing scenario, however, is not going to be that straightforward in Greece, where a simple bailout will not suffice.
This is mostly due to the fact that the government in Athens is bound by common European Union treaties, including that of a currency union. Therefore, in order to introduce devaluation, as in Argentina, Greece would have to leave the eurozone and print its own currency (in other words, return to its native Drahma) — a move that is unprecedented in the history of the E.U. Athens would also be unable to have its own version of convertibility, as Greek savings are denominated in euros.
Then there’s the political factor — Greece is part of a supranational community of states, united in a common currency as well as by means of political ties. A potential Grexit would not only strengthen the case in traditionally euro-skeptical power centers, such as the United Kingdom, but could also push Greece into the orbit of Russian influence.
Alexis Tsipras has left the choice to the Greeks themselves. Whichever path they decide to follow, consequences might be irreversible.
Despite a booming decade following the Argentinazo, Argentina still has not returned onto the international bond market, having issued no bonds since 2001. For Greece, however, the outcome could be much worse. Considering its dependence on imports for basic necessities (gasoline and pharmaceuticals, to name a few), revolving any doors, even the governmental ones, might not be enough to prevent a real Greek tragedy.