Greece 2009 vs Argentina 2001

At the peak of the Greece and Europe crisis, comparisons were drawn betwwen Greece and Argentina.

This short paper from Fernanda Nechio of FRBSF explains the similarities and differences.

Greece’s revision of its fiscal deficit numbers in November 2009 was the first of a sequence of events that culminated six months later in the European debt crisis. After numerous rating agency sovereign debt downgrades and rising debt financing costs, the Greek government announced a series of austerity measures to reduce its public deficit and the buildup of its public debt. In addition, the International Monetary Fund and the European Commission implemented their first fiscal stabilization and financial assistance program for a euro zone country. Despite these steps, yields on Greek bonds stabilized above pre-crisis levels, signaling that markets still question the sustainability of Greek public debt.

This Economic Letter compares Greece’s recent experience with developments in Argentina in 2001, which culminated in a public debt default. In 2001, Argentina was in the midst of a crisis characterized by high indebtedness, a fixed exchange rate regime, and an economy in the throes of a recession. IMF financial assistance, which was conditioned on a program of fiscal austerity, was not enough to prevent a government debt default and abandonment of the Argentine peso’s peg to the dollar. The Argentine example has many parallels with the current experience of Greece, which is characterized by high debt levels, a stagnant economy, and utilization of the euro, the equivalent of a hard currency peg. Moreover, Greece, like Argentina, is carrying out an IMF program with a focus on fiscal adjustment and reform.

See this table for a comparison. Argentina had much better indicators but faced a much severe crisis.

Nechio says:

While the Greek and Argentine episodes have in common some fiscal and monetary features, they differ importantly in their exchange rate regimes. Argentina’s currency board exposed the country to balance sheet mismatches and made it vulnerable to speculative attack. More importantly, both its decision to establish a currency board in the first place and later to abandon it were unilateral. Greece’s use of the euro protects it from speculative attack. Moreover, its currency regime is a result of a multilateral agreement involving continental Europe’s dominant economic powers.

As a member of the euro area, Greece is part of an important and influential “family.” It gains a measure of protection by being under the monetary authority of the European Central Bank, one of whose primary objectives is the maintenance of stability in the euro area. As recent developments show, disorder in one country can undermine the financial stability of the whole euro area, giving member countries strong incentive to back each other up. As part of the European Monetary Union, Greece gains powerful supporters that it would lose if it were to go it alone. The magnitude of Greece’s debt problem is very great and is not likely to normalize quickly. So these relationships may be tested in a few years when Greece’s financial assistance package is depleted.

Both did not do any fiscal and labor reforms and felt monetary arrangement would be enough.

Interesting note….

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