When Argentina and Greece meet in the final Group B game of the World Cup on Tuesday, the European players might be asking for more than a change of shirts with Maradona’s men. For when their stay in South Africa comes to an end, the Greek team will return to a country mired in a debt crisis the likes of which haven’t been seen since 2001… in Argentina.
Argentina: The Biggest Default in History
On 21st December 2001, embattled president Fernando de la Rúa resigned amid mass public protests, abandoning the Casa Rosada by helicopter so as to avoid the riots in the streets outside. In the two weeks that followed, Argentina would see four new presidents, formally default on a large part of its US$132bn debt, and implement a mega-devaluation of the peso. The social consequences were nothing short of catastrophic: inflation soared to over 40%, unemployment rose to over 20%, and soon over half the population were living below the poverty line.
This spectacular collapse sent shockwaves through international financial markets, but the problems that led up to default began a long time earlier. The Argentine economy was in decline from the end of 1998, hit by successive financial crises in Asia (1997) and Brazil (1999). Meanwhile, the ‘Convertibility Law’, which tied the peso at 1:1 with the US dollar was hurting local producers and exporters, who struggled to compete using an increasingly overvalued currency. A series of interest rate hikes in the US also made government borrowing to plug the external deficit progressively more expensive, leading to a rapid build up of debt.
As the recession reduced the government’s capacity to service its debt, confidence began to waver: investors fled the country, followed closely by any individuals who were able to move their savings abroad. By late 2001, with the Central Bank’s reserves almost dried up, it was clear that De la Rúa’s government was running out of options for keeping the Argentine economy from total collapse. The only source of finance left was the IMF, but these loans were conditional on the government’s implementing deeply unpopular austerity measures that would deepen the recession further and aggravate social tensions. When the desperate government froze bank deposits in a last ditch attempt to stem the outflow of money, its fate, and that of the economy, was all but sealed.
Greece: The Biggest Default in History?
The situation in Greece today bears many of the hallmarks of the slow-motion crash that Argentina suffered. It is the Athenian government who faces the impossible task of trying to service its huge debt while also steering the economy through a deep recession, who last month was forced to appeal for financial assistance (from a combination of the EU and the IMF), and who now must convince the public to swallow painful spending cuts and tax hikes for at least the next three years.
Will the end result be the same? Prime Minister George Papandreou and his cabinet are relentlessly upbeat, dismissing talk of a default as the work of ‘irresponsible media’ and reassuring investors that the country is slowly finding the way back to fiscal discipline and growth. But anyone who saw the images of Athens in flames during riots last month will wonder how long the government will be able to squeeze the economy in the face of public outrage.
Some economists don’t even think they should try. EU financial assistance will give the country some breathing room, but it will not solve the debt problem, and the magnitude of the fiscal adjustment and structural reforms required is such that it could take many years for the Greek economy just to return to its pre-crisis levels. And that’s a best-case scenario.
Mark Weisbrot, co-director of the Washington-based Center for Economic Policy and Research (CEPR), wrote in the New York Times last month: “no government should sign an agreement that guarantees an open-ended recession, and leaves it to the world economy to eventually pull them out of it. This process of “internal devaluation” — whereby unemployment is deliberately driven to high levels in order to drive down wages and prices while keeping the nominal exchange rate fixed — is not only unjust, it is unviable.”
Weisbrot’s comments capture the lingering sentiment here in Argentina, where the IMF is still vilified for its involvement in the crisis. One creative company even created a board game loosely based on Monopoly called ‘Deuda Eterna’ (Eternal Debt), in which players must try to build up industries without falling afoul of the IMF’s punitive lending conditions.
No Easy Way Out
In short, the few options still available to Greece from this point are almost universally bleak. With the immediate threat of bankruptcy diminished by the EU bailout, events in South Africa could provide a welcome distraction from reality. In 2002, as Argentina reeled from its financial meltdown, its national team crashed out of that summer’s World Cup in the group stages. On Tuesday, the whole of Greece will be praying that, on the football pitch at least, history won’t be repeating itself.