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VIDEOWill Greece Repeat Argentina's 2001 Fiasco?
By
James Kostohryz
Feb 10, 2010 1:40 pm
Here are nine striking similarities between the two.
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Will the Argentine experience be repeated in Greece?
There are various striking similarities between the Argentine situation and the current Greek ordeal:
1. Hard currency regime where officials had no control of monetary policy.
Leading up to the crisis Argentina was operating under a “hard currency” monetary regime (a currency board that guaranteed convertibility from pesos to dollars on a 1:1 ratio) that had been adopted a decade earlier. This monetary regime was essentially inflexible and implied that for most intents and purposes Argentine authorities had virtually no control over monetary policy (interest rates, monetary aggregates, etc.). Similarly, Greece adopted the Euro approximately a decade ago, surrendering all control of monetary policy.
2. Ingrained culture of fiscal indiscipline.
Prior to adoption of the hard currency regime, Argentina had been a nation characterized, from its very inception at independence, by its fiscal indiscipline. Historically, chronic deficit spending and debt accumulation was followed by monetary expansion to pay off the deficits and debt, resulting in massive episodes of inflation and devaluation of the currency. The Greek culture of fiscal indiscipline, prior to the inception of the euro, is virtually identical to that of Argentina.
3. Fiscal indiscipline wasn’t sufficiently reigned in after submitting to inflexible monetary regime. Because debt couldn’t be paid for by printing money and devaluing the currency, the new currency regime required strict fiscal discipline. This didn’t occur and the national debt of Argentina skyrocketed during the decade leading up to the crisis. Ditto for Greece.
4. Currency overvaluation.
Adoption of the hard currency regime initially spurred massive inflows of foreign direct investment and hot money inflows. This excess liquidity (which monetary authorities couldn’tcontrol) increased currency in circulation. Furthermore, as alluded to above, government spending grew at an extremely rapid pace, and this pro-cyclical deficit spending contributed greatly to demand-side economic overheating. Consequently, internal inflation grew at a rate far greater than that of Argentina’s trading partners. Over time, this situation produced a massive real exchange rate (REER) overvaluation of the currency in purchasing power parity (PPP) terms. This, in turn, reduced the nation’s trade competitiveness, producing massive and structural current account deficits. This situation experienced in Argentina in the decade leading up to their crisis is virtually identical to the Greek situation leading up to the current crisis.
5. Monetary astringency.
Due to unsustainable fiscal policies and an unsustainable current account situation, foreign direct investment and hot money inflows suddenly waned and/or reversed. The outflows through the trade account coupled with hot money outflows necessarily (due to the currency regime in place) produced a contraction in the money supply (astringency), triggering a spike in interest rates and a deep recession. Government officials had no way to counteract this contraction in the monetary supply and spike in interest rates. This situation experienced by Argentina is currently being faced in Greece.
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