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(Can someone explain to me how a socialist Grexit will avoid an economic
catastrophe? Argentina was an export-oriented nation that took advantage
of a commodity boom while Greece relies on imports. I have yet to see an
answer to this, including from Left Platform luminaries--the KKE and
Alex Callinicos are hardly worth mentioning. Yanis Varoufakis
understands this but the ultraleft can't be bothered with what he says
because he stays at fancy hotels apparently. What a fucked up situation.)
NY Times, June 26 2015
If Greece Defaults, Imagine Argentina, but Much Worse
By JAMES B. STEWART
There may be a one-word explanation for why Greece will ultimately
capitulate to European demands for more austerity:
Argentina.
Greece is hardly the first nation to face the prospect of defaulting on
its sovereign debt obligations. Argentina has defaulted on its external
debt no fewer than seven times since gaining independence in 1816, most
recently last year. But it’s Argentina’s 2001 default on nearly $100
billion in sovereign debt, the largest at the time, that poses a
cautionary example for Greece.
Should Greece default, “Argentina is an apt analogy,” said Arturo C.
Porzecanski, a specialist in international finance at American
University and author of numerous papers on Argentina’s default. But for
Greece, “It would likely be worse. Argentina was comparatively lucky.”
Daniel Gros, director of the Center for European Policy Studies in
Brussels and the author of “A Tale of Two Defaults,” a paper comparing
Greece and Argentina, agreed. “Default would be much worse for Greece
than it was for Argentina,” he said.
Like Greece today, Argentina had endured several years of hardship and
austerity by 2001. It borrowed heavily from the International Monetary
Fund, the World Bank and the United States, all of which demanded
unpopular spending cuts. The I.M.F. withheld payments when Argentina
(like Greece) failed to meet its deficit targets. A bank run led the
government to freeze deposits, which set off riots and street
demonstrations. There were deadly confrontations between police and
demonstrators in the heart of Buenos Aires, and the president at the
time, Fernando de la Rúa, fled the country by helicopter in December. In
the last week of 2001, Argentina defaulted on $93 billion in sovereign
debt and subsequently sharply devalued the peso, which had been pegged
to the dollar.
In addition to social unrest and a wave of political instability (at one
point, the country had three presidents in four days), Argentina’s
economy plunged into depression. Tens of thousands of the unemployed
scavenged the streets collecting cardboard, an enduring image that gave
rise to the term “cartoneros.” Dollar-denominated deposits were
converted to pesos, wiping out over half their purchasing power.
The country became the epicenter of Europe’s debt crisis after Wall
Street imploded in 2008. Now, it is struggling to pay its debt, and its
people and creditors are growing restive.
Despite this trauma, the Argentine economy stabilized in 2002. The
country was able to repay the I.M.F. in full by 2006. But the country
has never re-entered the international debt markets. It has refused to
comply with a ruling by a United States federal court judge that the
country must repay in full private creditors who did not participate in
the country’s debt restructuring. As a result, Argentina defaulted again
last year, and the standoff continues.
Even without much external financing, Argentina’s economy has fared
relatively well since 2002, leading some economists, notably Mark
Weisbrot of the Center for Economic and Policy Research in Washington,
to suggest that Greece should default, suffer the short-term pain and
follow Argentina’s example.
But even Yanis Varoufakis, Greece’s firebrand finance minister who
advocates standing up to the European Union’s demands, said the idea
that Greece could default and emulate Argentina was “profoundly wrong,”
as he put it in a recent blog post— a point he reiterated when we spoke
a few weeks ago.
Argentina’s economic recovery was largely driven by a fortuitously timed
surge in commodity exports driven by demand from fast-growing Brazil and
China. (Although the commodity boom is long over, and Argentina’s
economy today is at best stagnating, those two countries still account
for about 28 percent of its exports.) Soybean meal, corn and soybean oil
are the country’s top three exports. Argentina had a population of over
41 million and gross domestic product of $610 billion in 2013. Although
it’s a net importer of energy, it has vast shale oil and gas reserves
that could make it self-sufficient.
Greece, by contrast, is heavily dependent on imports. Its top three are
crude oil, refined petroleum and pharmaceuticals, all necessities. While
its top export is also refined petroleum, it has to import crude oil for
its refineries. Its only major homegrown exports are fresh fish and
cotton. It would be hard to significantly increase sales of either
product: The European Union has strict quotas to prevent overfishing,
while cotton production is struggling from reduced demand for textiles
and a lack of bank financing.
“Idle productive resources in Greece cannot produce much for which there
is increasing demand,” Mr. Varoufakis wrote.
Mr. Gros noted, “Greece doesn’t export much.” If the country left the
European Union and brought back a sharply devalued drachma, “They’d gain
some from tourism,” he said. “But they’ve already cut prices and tourism
has gone up. But it hasn’t really helped because total revenue hasn’t
gone up.”
And compared with Argentina, Greece is tiny, with a population of just
over 11 million and gross domestic product of $242 billion in 2013.
“Argentina is a resource-rich country that, if forced to, can live with
its own resources,” Mr. Porzecanski said. “The economic viability of
Greece on its own has never been tested” since 1981, when Greece joined
the European Union.
From a small island to the capital in Athens, here is a glimpse into
some of the lives of Greeks as their country struggles to repay billions
in debt.
Everyone pretty much agrees that, if Greece could devalue its currency,
as did Argentina, its economy would benefit. But it was also relatively
easy for Argentina to devalue the peso by severing its link to the
United States dollar, a tie that was self-imposed. As Mr. Varoufakis put
it, Greece doesn’t have a currency that’s pegged to the euro: “It has
the euro.” The practical challenge of disseminating a new currency would
be enormous. Moreover, Greek savings now denominated in euros (and, in
many cases, deposited in European banks outside Greece) can’t be
converted to drachmas, as the Argentines converted savings into pesos.
Converting to the drachma would also be a crushing blow to the private
sector, much of which finances its activities with euro-denominated
loans from non-Greek banks. “They wouldn’t be able to service the debt
with devalued drachmas,” Mr. Porzecanski said. Nor would Greek courts
have the final say in any ensuing litigation.
In Argentina, “the government ruled that a corporation or bank that owed
debts denominated in dollars were payable in pesos at a one-to-one
exchange rate,” Mr. Porzecanski said. “They could do that with internal
debt. But Greek companies have a lot of cross-border obligations. The
European Central Bank has kept Greek banks alive. Its collateral would
be worth only a small fraction if Greece leaves the euro. The Greek
banks would be insolvent immediately.”
In sum, he said, “It would be a royal mess.”
But as game theorists point out, there’s no guarantee a rational outcome
will prevail.
After surging early this week on optimism that Greece had come forward
with a workable proposal, markets gyrated on concerns that it still
didn’t go far enough to satisfy Greece’s major creditors. And Mr.
Varoufakis, while conceding that leaving the euro would be a disaster,
still contends a Greek default would be manageable and give Greece more
leverage in longer-term negotiations to keep Greece in the European
Union and eurozone.
No matter how much worse it might be for Greece than Argentina, “the
outcome will ultimately be determined by politics, not economics,” Mr.
Gros said. “Economists are terrible at predicting political outcomes.”
Mr. Porzecanski put it another way: “Do the Greek people know they’re
playing with fire and might get burnt? It’s what they voted for, and
they seem to have voted with their eyes wide open. Not everyone values
prosperity the same way” as people in the United States and most of
Europe do.
For others, which evidently includes many Greeks, ceding national
sovereignty to foreign lenders may be worse than economic chaos. As Mr.
Varoufakis wrote, “I salute the Argentinian people for having toppled a
regime, and more than one government, that tried so desperately to
sacrifice a proud people on the altar of I.M.F.-led austerity.”
People in countries like Venezuela and Cuba have tolerated failed
economies and low standards of living for years, and the Russians seem
all too willing to follow President Vladimir Putin into recession.
“Populism and nationalism,” Mr. Porzecanski said, “are still potent forces.”
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