Greece and Argentina have shared monetary woesImage: DW/Bilderbox.com
Fiscal role model?
June 17, 2011
Ten years ago, Argentina devalued its currency in order to avert a crippling financial crisis. Financial experts are advising Greece to exit the eurozone and take a similar path. Can Athens learn from Buenos Aires?
The current economic crisis in Greece and the "Peso Crisis" that ravaged Argentina's economy at the turn of the century have similarities. At first glance, however, the possible ways to avert these crises appear to differ greatly.
While the government in Athens is confined to the EU's 17-member monetary union, or the eurozone, Argentina was able to determine its own course with the Argentine peso. When the crisis struck in the late 1990s, this allowed the government in Buenos Aires to create a completely new currency - the Argentino - which coupled the peso with the US dollar and provided funds for the seriously cash-strapped country.
A leading German economic institute, the Kiel Institute for the World Economy (IfW), has intimated that Greece could run into problems by blindly following Argentina's lead: "There are arguments for and against Athens exiting the eurozone and handing its economic crisis in the way Buenos Aires did, but I find the risks connected with such a move too significant and complicated," IfW research economist Klaus-Jürgen Gern told Deutsche Welle.
"Monetary reforms tend to replace a weak currency with a strong one. In Greece's case, we could see the exact opposite transpire. The Greeks thus won't accept a new currency after having had the euro, for the euro guarantees future purchasing power.
Argentina, the financial phoenix
But Ansgar Belke, a professor for macroeconomics and director of the German Institute for Economic Research in Berlin, said he is convinced that a resurrection like Argentina's is feasible for Greece.
"What happened in Argentina proves that it is possible for a country to come back after bankruptcy and once again play an important role on international financial markets," Belke said.
Before Argentina was able to return to the international financial flock, however, it went through periods of economic depression, corporate insolvencies, bank deposit seizures and unemployment and underemployment rates that topped out at over 40 percent. Economic conditions also led to the collapse of one government and the abandonment of a hard currency monetary regime.
After a number of failed international monetary interventions, Argentina, which had been mired in unprecedented foreign debts, restructured its debt obligations.
"The growth rate in Argentina is remarkable when one considers what happened and the fact that there was no consensus between the creditors and the government in Buenos Aires," Belke said.
A significant debt restructure would symbolically and concretely strengthen the European Union in the long-term by giving it a sense of cohesion, Belke added.
Debt restructure the final hope?
"I always supported a restructure of debt in Greece," he said. "The damage would not be as grave as is commonly feared. Greece is a relatively small country. A restructure may stagger a few German and French banks, but this could be controlled with government loans. This scenario is more sensible than the massive credit that we're currently giving."
Under a restructuring plan, Belke said he could imagine Greece repaying about half its debts and re-establishing its creditworthiness.
"For Greece to just continue receiving government loans will result in too many disadvantages," Belke added.