The Greek tragedy of sovereign debt, the overlay of a potential for regional recession, social turmoil, perceptions of structural corruption, and political theatrics and brinkmanship is all too familiar. This is reminiscent of Argentina in 2002, which remains the largest sovereign debt default in economic history. This comparison should give the Greeks some hope — after all, Argentine 10-year government bonds today are comparable to other emerging market economies and investors flocked back to Argentina. What did Argentina do and what can Greece learn from its experience?
Hardly music to European leaders’ ears, Greece needs to take control of its monetary policy. Argentina did so with its currency by ending its fixed exchange rate with the US dollar. Argentina had once issued bonds in the big metropolitan centres of New York and London. Without the constraints of operating inside a currency zone, however, Argentina could act in a far more autonomous and risk-prone fashion, as witnessed by the 2002 move to abandon the 10-year convertibility regime, while continuing to control currency trading and banking, causing a de facto peso devaluation of 30 percent.
Although the social consequences of Argentina’s devaluation, banking restrictions and subsequent bank runs and recession should not be minimized, the mainstream view of the fortunes of Argentina post-default is a positive one in terms of economic growth (with an increase of eight percent per year since 2003). Argentina has enjoyed the ability to ride a global commodity boom (animated to a large extent by the rise of China and India) with a weakened peso. Such a view reinforces the position that the best option for Greece is to take decisive action, as opposed to continuing to muddle through. Exiting the euro zone needs to be seriously considered.
Another lesson to be drawn from Argentina is the need for resilience on the part of the political class. In a declaratory manner, no less so than George Papandreou in Greece, Argentine Néstor Kirchner campaigned in 2003 on the promise that the defence of the domestic interests of the Argentinean populace must come first. But what distinguished the negotiating style of Kirchner and his key state officials, including then-senator (now president) Cristina Fernandez de Kirchner in the post-default era, was a far more sophisticated approach. Tough words were deployed not symbolically, but instrumentally, as a device to extract the best deal with creditors.
One device in Kirchner’s wider approach was to simply play for time. From the original default in December 2001, the government took until September 2003 to sign an agreement with the International Monetary Fund (IMF) for the rescheduling of its debt. Although a substantial portion of the waiting period was the result of acute political and economic turmoil surrounding the Argentine crisis, part of the Kirchner government’s tactic became buying time to allow for political breathing space and an economic recovery (with enhanced tax receipts). Greece has simply rushed to meet the demands of its European creditors; Papandreou allowed himself to be summoned to the G20 meeting in Cannes and backtrack on his call for a referendum, before his departure from office.
Despite enormous IMF pressure, Argentina separated its negotiations with the Fund from those with the private international creditors (which were, in effect, non-negotiations). The Argentinean government succeeded in taking the issue of resolving disputes with private international creditors off the table in its dealings with the IMF. This was a considerable break from the Fund’s historical role as the effective coordinator and enforcer of private international debt restructuring. Argentina had effectively divided its creditors; Greece, on the other hand, has accepted the legitimacy of the troika — the European Commission, the IMF and the European Central Bank. Argentina’s approach of non-negotiating with the private international creditors included refusing to contemplate any kind of engagement beyond “discussions” with this sector, allowing little or no room for any form of compromise. In effect, the Kirchner government simply made the writeoff a “take-it or leave-it” offer. Going on the offensive, it adopted the position that this was a one-time offer that would not be repeated or replaced by other offers. Greece, however, continues to be a “taker,” but it needs to be a rule maker.
Argentina's combative stance held considerable risks. On the one hand, scenarios of capital flight were mooted. On the other hand, the spectre was raised of Argentina moving toward the status of an international financial “pariah” suffering from an investment strike. Yet, a few years after its default, international investors returned to Argentina calling it “a deal.”
At odds with the temptation to make a quick agreement, the Argentine government waited for almost two years after the default to begin to enter “discussions” (or, as the language evolved during the process, “consultations,” “talks” or “meetings”) with its private creditors, continuing to take a hard line. The final offer made to the private international creditors in January 2005, reflected this tough position: old bonds would be cut by 70 percent of the face value and bondholders had six weeks to make a decision. Approximately 76 percent of bondholders took the offer, swapping debts in the last few days before the February 25, 2005 deadline.
Argentina’s ability to use its vulnerability as a bargaining tool was augmented in terms of its domestic forces. Argentina effectively portrayed a strong political message to its creditors: stability in the country’s socio-political situation had to be the top priority or else the state could collapse. When a concerted populist movement was mounted within Argentina — the so-called “Piqueteros” — the threat the movement posed was used by state officials as a persistent bargaining chip in dealing with its creditors. The Greek government needs to treat the Athens street protests as a bargaining tool, and turn the tables on its creditors.
The experience of Argentina is compelling in revealing the embedded strengths of a country experiencing a default scenario. The notion of structural discipline imposed by a coalition of creditors, at least in the Argentine case, failed to match the reality. The Kirchner government discovered that it could do much to gain and retain momentum, modifying the direction of discourse and policy innovation. Albeit under enormous stress, Argentina found unanticipated means to create room to manoeuvre. The Greeks need to read the current economic history and take lessons on how to deal with its creditors.