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Global Crisis/Innovation Blog

Greek Tragedy: Why Argentina Can Provide a Happy End

By Shlomo Maital

  For those of us who love the history, culture and beauty of Greece, it is immensely painful to watch the suffering of the Greek people, doubly so because it is caused by economists and bankers driven by greed and folly.  And it is unnecessary.  About 25 mainly French and German banks hold the majority of Greek government debt. They will be seriously hurt if Greece defaults. But their governments can afford to help them.  Why are Greece’s 11 m. people being held hostage by the relative handful of bank shareholders?   It is unjust, and worse, stupid.

      There IS a solution.  Greek PM Papandreou, who is an expert on history, should study the modern history of Argentina and its crisis, 1999-2002.

    *  Like Greece, Argentina fixed its exchange rate, only, one-to-one with the dollar, rather than the euro.  Like Greece, this led Argentina to overspend, when in the 1990’s Argentina made the Argentina peso identical to a U.S. dollar, to halt rampant inflation, just as Greece embraced the euro when joining the EU and euro bloc.   The inflation stopped, but predictable trouble ensued.

   *  This led the government and people of Argentina to overspend and over-borrow, when imports became very cheap (in terms of local currency).  Argentina’s provincial governments, central government, banks and businesses all over-borrowed, accumulating huge dollar debts, just like Greece’s government and people did.  They borrowed, because they could. 

   * In 1999-2000, Argentina lost its export markets in Brazil and elsewhere, when Brazil devalued its real from one per dollar to two, making Argentinan products costly.  Moreover, the strengthened dollar worldwide also meant the Argentina peso strengthened (because of the rigid one-to-one rate), and similarly with the rising euro.  Same with Greece.  Greece is locked into the euro, and hence cannot stimulate its exports, tourism and  competitiveness by a currency devaluation.  Nor can it slash interest rates; those are set by the European Central Bank. Nor can it boost deficit spending, deficits are already too large. Greece has no bullets in its policy rifle. As long as it is in the euro, it never will have bullets either.

   * In 2001, there was a flight of money from Argentina, led by locals, as they saw the looming crisis and bailed out.  Banks closed their doors, depositors banged on the door to get their money out, but it was too late; when Argentina floated its currency in 2002, the dollar-denominated debt of Argentina’s government, banks and businesses, doubled overnight, meaning everybody, EVERYbody, was bankrupt.  Argentina defaulted on its debt. 

    Greece is in the same hot water. Greece’s government, with debt of 1.5 times GDP, cannot redeem maturing debt without new borrowing, and banks are reluctant to buy Greek bonds.  Without continuous bailouts, Greece is bankrupt, like Argentina was. Let’s admit it. Greece is bankrupt. When you go bust, you get debt relief, and you start fresh. That is how enlightened capitalism works.  Why does everyone understand this except Germany?

   * In Jan. 2002 President Duhalde abandoned the 1-to-1 exchange rate, and quickly, the Argentine peso fell to four-to-one!  Dollar debts were four times greater, in pesos.  The economy totally collapsed.  The IMF offered aid—with its usual draconian terms (“we’ll help kill the crisis, but in return, we want you to agree to let us kill you – or at least your economy”).  This is what Germany and its banks are proposing now for Greece, and what Greece has partly implemented. Why have Greek leaders not said, thanks but no thanks!

   * Argentina’s new new president Kirchner appointed an economist Roberto Lavagna, who knew what to do.  Argentina turned down IMF aid and defaulted on debt payments.  The IMF and banks said Argentina would sit in the penalty box for life.  But against all odds Argentina’s economy bounced back rapidly. Exports grew.  Foreign money poured in. Lavagna acted to keep the strengthening peso from hurting Argentina’s “re-industrialization”.  

   And this is where Greece’s story departs from Argentina’s.  Greek’s weak leaders are seeking EU bailout money, rather than rejecting it.  They are stuck on remaining within the euro, rather than dumping it and restoring the drachma, as they should.   Greece and Europe are like two warring people, man and wife, stuck in a Catholic marriage forever, rather than seeking a divorce that would liberate each. 

    And here is the key fact.  Argentina’s economy has grown by an average of 7.4 per cent since its 2002 trough!  Argentina’s output was above its previous peak within three years of its default.  So much for IMF doom and gloom. 

     If you don’t believe me, believe respected Financial Times columnist Alen Mattich, who says “Greeks might well decide an Argentine solution is the only real option”. (FT, June 19).  Believe respected Wall Street Journal blogger David Marsh, who says “very likely France and Germany have purchased extra time [for Greece, with a bailout]  for what will turn out ultimately to be a heroic but fruitless exercise.” (WSJ Marketwatch June 19). 

   The question is not whether Greece will leave the euro, but how long will its people be made to suffer until it does.  The question is, when will a Greek leader step up, who knows what to do, as happened in Argentina?  Will it be new Finance Minister Evangelos Venizelos, a tough Socialist?  Will he have the guts to send Germany and its banks, France and its banks,  packing, and rescue his nation? 

    Greece seriously mismanaged its economy and continues to do so.  Germany wants to punish it, so other nations won’t follow suit.  This is ironic, because Greece suffered terribly at the hands of Nazi Germany in WWII.  Germany is destroying Greece for the second time.      

      Eventually, Greece will have no choice but to default on its debt, leave the euro and start from scratch and begin rebuilding.  A deep crisis will follow, but it will be shorter than many believe.  And there is just no way to avoid it.   Let Greece stop prolonging the agony and act as Argentina did.  There is no time to waste.


Blog entries written by Prof. Shlomo Maital

Shlomo Maital
June 2011
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