Argentina’s crisis = Greece’s crisis

on May 31, 2012 in Economy, Home | 1,403 comments

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Argentina’s crisis was a dire financial downturn that affected profoundly Argentina’s economy during the late 90s.

Extensive borrowing accumulated over the years by the Argentinian government, both domestic and foreign, was gradually sending domestic interest rates up.

In the hope of eliminating the rampant inflation, Argentina pegged the ARS to the USD at a rate of one to one. In doing so, the government hoped to ease pressure from international lenders who had been dissatisfied by the currency’s inflation, and who had begun to reject pesos as a way of payment.

Initially, it appeared as the economy began to stabilize and brought inflation to a halt. Inflation was tamed, however, beneath the surface, nothing much had changed. Corruption and tax evasion were eroding economic prosperity, the budget deficit with heavy off-balance sheet spending was still expanding, there was literally no progress in labor market and the structural reforms badly needed, and there was clear loss of economic competitiveness.

Furthermore, during the slowdown of the late 90s, the dollar dramatically appreciated, increasing the value of the peso along. Argentina’s export market evaporated leaving the country in a challenging situation.

Still, the government was reluctant to abandon the peg, and instead opted to tighten macroeconomic policy by reducing spending, increasing interest rates, and increasing taxes. The hope was to bring the currency under control and when the peg will be removed, the peso would maintain its value, thereby giving a further boost to price stability. This plan, however, never happen in practice.

The downward spiral became quickly non manageable, and the immediate danger was that Argentina defaults on its debt could create a crisis in the international financial system and hurt investor confidence during a period of global slowdown.

The critical point of the crisis was the virtual cessation by the government of its foreign debt payments and which lead down the road to a restructuring of its debt. The currency peg was removed and debt denominated in dollar converted in devalued pesos. This painful process helped Argentina to bottom up!

Do you notice any parallels with the crisis in Greece? Does paving the way out of the crisis for Greece means moving out of the Euro?