The austerity measures that the European Commission, the European Central Bank and the International Monetary Fund are demanding from debt-burdened Greece are the same mistaken policy prescriptions that pushed Argentina into default and economic collapse a decade ago, former Argentine Economy Minister Roberto Lavagna said.
«The IMF is wrong, but it’s going to do the same thing as in Argentina,» Lavagna, who served as Argentina’s top economic policymaker from 2002 to 2005, said in an interview. «Greece is going to end up in default and leaving the euro.»
He also said if the troika doesn’t handle the Greek situation well, the crisis will spread to Portugal, Spain, Italy and maybe even France.
Greece is tottering on the brink of default as it struggles to pay EUR350 billion ($477 billion) in debts. The troika, and especially Germany within the E.U., are demanding sharp cuts to Greece’s budget deficit before the group extends further financial aid.
Argentina holds the unenviable position of presiding over the world’s biggest sovereign default as a result of not making payments on about $100 billion in late 2001.
Lavagna inherited an economy in ruins when he took office. Adding to the chaos was Argentina’s abrupt exit from a currency board that pegged the peso to the U.S. dollar at a 1:1 ratio. Given that the U.S. currency was then at one of its strongest moments, that arrangement trapped Argentina in a competitive bind — a scenario many see repeated in Greece with its growth constrained by membership in the euro.
The initial and disruptive effect of the peso’s exit from the dollar peg, which left peso-based borrowers across Argentina unable to pay their dollar debts, also offers a cautionary tale about how a Greek euro departure may play out.
In 2002, the year following Argentina’s default and devaluation, gross domestic product contracted by nearly 11% and unemployment soared to more than 20%.
The default left Lavagna with a daunting task: the biggest, most complicated debt restructuring in history. He was the chief architect of a plan that offered investors about 25 cents on the dollar for the defaulted bonds in 2005.
Today, Argentina’s debt-to-GDP ratio has fallen to just under 40% from about 150% in 2002 thanks to the haircut imposed on creditors and years of strong economic growth.
While there are similarities between the Greek crisis and Argentina, Lavagna said Europe has an opportunity to orchestrate a more orderly default and contain the problem.
As was the case in Argentina, Greece is facing a long recession, high unemployment and wide fiscal and current account deficits coupled with low levels of investment and productivity.
Greece, however, has much higher per-capita income and the backing of one of the world’s strongest political and economic blocks — the European Union, he said. Argentina faced its crisis alone.
Yet some say Argentina’s economic independence actually made it easier to break the peg, devalue and start to recovery. Greece is deeply embedded in Europe’s monetary union, a much tighter marriage than a currency board.
But Lavagna argued that a Greek restructuring could be much more market friendly, involving a roll-over to longer-term debt rather than the steep haircut that Argentina pushed through.
«The Greek situation can be handled…but there isn’t a strong political will right now,» said Lavagna. «The longer they wait, the more complicated it’s going to be.»
He said that pressing the country to lower salaries, pensions and public sector employment so that it can pay creditors is «totally the wrong prescription.»
Greece needs to recover competitiveness and growth through investment in education, health and infrastructure, said Lavagna, who ran for president in 2007 and now runs an economic consulting firm.
However, Germany and other E.U. leaders have no stomach for pumping more cash into their profligate southern neighbors and continue to demand budgetary reforms before extending credit.
While enraging creditors and drawing the ire of many orthodox economists for throwing out the IMF’s playbook as it formulated its own recovery plan, Argentina has seen its economy post envious rates of growth since 2003. GDP has expanded by more than 6% in seven of the last eight years thanks to strong international demand for Argentina’s manufactured goods and bountiful grain harvests.
Just what future awaits Greece’s ailing economy, which is commodity poor and heavily dependent on services like tourism, is harder to say.
-By Shane Romig, Dow Jones Newswires; 54-11-4103-6738; shane.romig@dowjones.com
Source: online.wsj.com