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What the EU can learn from Latin America

Astrid Prange / sgbApril 15, 2015

Latin America is today at the forefront of successful debt management - something few would have expected just a decade ago. One expert says the region holds many lessons for the creditors in the Greek crisis.

Argentinien Hedgefonds Proteste
Image: picture alliance/AP Photo/Pisarenko

"Latin America has slipped into this role quite by accident," said economist Rolf J. Langhammer of the Kiel Institute for the World Economy (IfW). In the late 1980s, he explained, the region realized that its debt crisis could not be overcome by fresh money alone. "The problems ran deeper, the debt service was very high. We are in the same situation now in Europe," he said in an interview with DW.

Langhammer, who has advised international organizations such as the World Bank and EU as well as German government ministries, remembers the Latin American debt crisis well. From Mexico to Chile, the International Monetary Fund (IMF) became synonymous with ruthlessly implemented austerity measures that led to the perceived impoverishment of large sections of the population. "They even used to say the IMF eats babies," he said.

Latin America was long among the IMF's best customers. But this changed on August 13, 1982, when Mexico became the first country in the region to default on its foreign debts. Interest rates on loans exploded and Latin American countries were virtually cut off from the international capital market. Argentina filed for bankruptcy in 2001, while the following year Brazil took a rescue loan from the IMF. Ecuador declared insolvency in 2008.

Deutschland Professor Rolf J. Langhammer
Rolf Langhammer is an economist at the Kiel Institute for the World EconomyImage: picture-alliance/ dpa

Fiscal life support

Today, the situation has changed completely. Latin American countries are no longer among the world's biggest debtors - which are now the industrialized countries. According to figures published by Deutsche Bank Research, the public debt of the 10 largest emerging economies decreased from 50 percent to 25 percent of gross domestic product (GDP) from 2000 to 2012, while the ratio in the G7 members grew from 80 percent to 110 percent over the same period.

Langhammer said there were two lessons that emerged from the debt crisis in Latin America: First, all programs should be examined for their social impact prior to being implemented. And secondly, any reforms that aim to change structures, institutions or legal frameworks need more time.

Quito comes to Athens' aid

"Back then the IMF and World Bank underestimated the distribution problems of short-term stabilization programs," Langhammer said. But in the meantime, the IMF had learned "very sensible lessons" from its mistakes, he said. First, it had considerably expanded the time horizon for structural adjustments. And secondly, every IMF program must today answer the question of whether it exacerbates poverty. "That was not the case earlier," Langhammer said.

Syriza Unterstützer Feier 25.01.2015 Athen Transparent Troika
Ecuador has offered Greece's new government help in its negotiations with creditorsImage: picture alliance/ZUMAPRESS.com

Ecuador's President Rafael Correa does not trust the IMF's ability to reform itself. Shortly after the left-wing Syriza movement won the Greek general election, he offered his support to the new government in its negotiations with creditors. After all, Ecuador had been able to reduce the pressure of debt service on the state budget and public finances through successful debt restructuring.

"European banks have loaned money to Greece while pretending not to see that the budget deficit was nearly three times higher than that reported by the state," he wrote in a guest article for "Le Monde Diplomatique" in 2013. "Once again, this raises the problem of indebtedness without mentioning its counterpart: an excess of credit. It's as if financial capital never had the slightest trace of responsibility."

Langhammer takes a less combative approach. He says the Greek debt crisis offers the hope of a breakthrough in bringing about a bankruptcy law for states, something that does not exist at present. "Greece is a special case. As long as we do not have an official state insolvency law, we have to be able to define elements of long-term debt sustainability," he said. "We need to help Greece, including through reforms in the creditor countries."