BUENOS AIRES, Sept 28 (Reuters) – As Europe tries to stem Greece’s slide towards a debt default, veterans of Argentina’s financial meltdown a decade ago still recall with pain how fast their worst-case scenario became a reality.
On a Sunday in January 2002, with Argentina already deep in crisis, Jorge Remes Lenicov had just been named Argentina’s economy minister when he took an unexpected call from the country’s president.
The order? To rush out an announcement that Argentina was dumping the dollar peg of its currency, the cornerstone of its «economic miracle» of the previous decade.
«‘Jorge, people can’t wait any longer, you have to speak now,'» Remes recalls being told by then-president Eduardo Duhalde, himself only days in the job after the crisis claimed four leaders in just under two weeks.
A string of officials preceding Remes had already limited cash withdrawals to $250 a week, carried out sporadic shutdowns of banks and financial markets, and declared the world’s biggest-ever debt default.
To keep the financial system from collapsing, Remes announced the devaluation and, later, a deeply unpopular plan to freeze billions of dollars in bank deposits. The scars from that crisis still linger today.
There are important differences between Argentina in 2002 and Greece in 2011.
Unlike Argentina, Greece has international backing in the form of the euro zone, the single currency area that includes powerful economies such as Germany and France.
European policymakers say Greece will not be kicked out of the euro zone and forced to return to the drachma currency, although they do express frustration with the pace of Greece’s belt-tightening to qualify for its rescue aid.
German leader Angela Merkel insists that a Greek default will not be allowed either, saying it would undermine confidence in the euro zone as a whole, even if financial markets now accept some losses on Greek debt as inevitable.
And unlike Greece, Argentina was unable to rely on the International Monetary Fund, which pulled the plug on aid when it was most needed.
Nonetheless, U.S. Treasury Secretary Timothy Geithner last weekend, in his bluntest warnings to date on the euro zone crisis, raised the prospect of runs on banks if Europe does not get a better grip on the crisis in the euro zone.
Some prominent economists have argued that Greece would be better off quitting the euro zone and charting its own path out of economic crisis.
«A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets that abandoned their currency pegs,» Nouriel Roubini, who foresaw the U.S. financial crisis, wrote in the Financial Times last week.
Argentina’s descent into devaluation and default has some parallels with Greece that go beyond the violent street protests that marked both crises.
Both countries had a set exchange rate, fiscal deficits, heavy debts, high unemployment and were in recession.
Argentina’s financial system was in a precarious state after bank deposits shrank more than 20 percent in 2001.
Some Greeks are sending money out of the country, which explains at least some of a fall of more than 10 percent in deposits held at the country’s banks so far this year.
Business and household deposit balances have shrunk by 50.3 billion euros, or 21.2 percent since the start of 2010 and totaled 187 billion euros in July, based on central bank data.
But to date, there are no signs of the panic that engulfed Argentina where savers, in the run-up to the devaluation, searched for cash machines that still offered dollars.
The lessons of those chaotic months are sobering ones for any government considering worst-case scenarios to cope with financial crisis.
As Argentines rushed to open accounts under the names of relatives to skirt limits on bank withdrawals, the government tightened controls, empowered the central bank to keep banks afloat and had it seize shares in the country’s biggest private bank, Banco Galicia, as collateral for bailout loans.
«We always thought that if the banks collapsed, we wouldn’t be able to leave the recession behind. Because if a bank goes down, not only does this break up the payments chain, it also leaves deposit-holders in the lurch,» Remes told Reuters.
«Not one bank went bust,» he added proudly.
‘HATEFUL’
Keeping the banks alive through shock treatment had its costs. Against a backdrop of angry demonstrations and political tensions between Congress and the Supreme Court, the government extended limits on cash withdrawals and banned bank transfers altogether to keep the system from capsizing.
Although some deposits were freed up for certain purposes, Remes had to tell hundreds of thousands of Argentines they could not touch their $16 billion in savings for another one to two years.
Demonstrations turned more violent and banks were forced to protect themselves behind sheet metal.
«This was a very, very difficult decision because people felt they had dollars and that those dollars were theirs, and they were right … but we were convinced if we didn’t do this, the situation would have been worse,» Remes said.
«The corralito was hateful,» he added, referring to the ban on withdrawals. «But I had no other option, none at all.»
Remes resigned as economy minister in late April 2002.
In Greece, there has been no talk of imposing controls or limits on capital flows, which would break European Union rules. To cover their funding gap, Greek banks have increased their reliance on the European Central Bank by putting up collateral, mainly government bonds.
To reassure depositors, a special fund to support bank capital will have 30 billion euros in firepower once euro zone parliaments ratify the new role of their broader euro zone rescue fund in coming weeks.
Some economists, like Roubini, point to Argentina’s striking economic rebound since 2003 as proof that, with time, the decision to walk away from its debt was the right one, although the biggest boon for Latin America’s No. 3 economy came from soaring prices for its grains exports.
But behind the strong economic growth and job creation lurks an inflation rate privately estimated at nearly 25 percent a year. Rather than a byproduct of the crisis, Argentina’s high inflation is linked to the current government’s high growth economic model as well as loose fiscal and monetary policies.
Ten years after the crisis, Argentine banks have not returned to making many long-term loans, focusing instead on short-term consumer credit and hurting growth prospects.
Still plagued by lawsuits stemming from its default, Argentina has been kept off global debt markets, financing itself with central bank reserves and loans from the state pensions system, which it nationalized in 2008.
Domingo Cavallo — who returned as economy minister for a second stint as Argentina’s crisis built up from March to December 2001 and who opposed default and devaluation — warned Greece against following the Argentine example.
«This alternative would be terrible, because the Greeks would take euros out of the banks and send them abroad. They would prefer to have euro bills instead of deposits, and we know that is very traumatic,» Cavallo told Reuters.
«Argentina completely lost international and domestic credit,» Cavallo said. «From every perspective, this ‘solution’ that some are recommending to Greece … had a very high cost for the country and for its people.» (Additional reporting by George Georgiopoulos in Athens; Editing by William Schomberg).
* Origins of Greek, Argentine crises strikingly similar
* Roubini favors Greek devaluation, EU leaders do not
By Guido Nejamkis and Hilary Burke
reuters.com
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