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Commentary

IMF from Argentina to Greece: similar but different

7 February 2012 | Comment

by Pablo Nemiña, Institute of High Social Studies at National University of San Martín, Argentina pnemina@unsam.edu.ar

The economic crisis in Argentina in 2001 and Greece today share similarities and differences; we should be wary of stretching comparisons.

The economic regimes that lead to the recession in both countries appear analogous. In the context of economic deregulation and financial and commercial liberalisation, Argentina’s convertibilidad policy, which pegged the Argentine peso to the dollar, and the adoption of the euro in Greece, established a fixed and overvalued exchange rate regime. This helped to control inflation but with the cost of deteriorating local productive capacity.

economic crisis in Argentina in 2001 and Greece today share similarities and differences

In both cases the stability of the economy became dependent on capital inflows to stimulate domestic demand. But due to permanent balance of payment deficits, the economies became dependent on foreign debt.  Therefore, the trigger of the crises in both cases comes from the limited external financing rather than fiscal deficits.

However, when the Argentine and Greek capital account crises deepened, with the 1998 Asian financial crisis and the 2008 crisis respectively, fiscal austerity and wage contraction became the mantra of creditors, who had an interest in maintaining the exchange rate regime in order not to experience financial losses. In Argentina, despite the context of a recession, the IMF encouraged the implementation of orthodox measures like the reduction of social spending and the easing of labour protections. In Greece, after a short period of flirting with Keynesianism, the troika (IMF-European Union-European Central Bank) imposed unpopular adjustments like the ones in Argentina to ensure the continuity of the monetary regime and protect financial sector profits.

After the outbreak of an unprecedented economic and social crisis in late 2001, Argentina devalued its currency and defaulted on over 65 per cent of total public debt. Combined with a natural resource boom, these measures subsequently contributed to a cycle of unprecedented growth.

The 2001 Argentine experience resonates in 2011 in Greece: the restructuring of an unpayable debt and improving competitiveness are key elements to the restoration of production and employment creation. However, the political economy of both cases makes it hard to believe in a linear reprint.

First, a return to a Greek currency depreciated against the euro will face opposition from Germany, as it will affect its export-led growth strategy. Greece’s limited productive capacity also hinders the likelihood of finding alternative international trade beyond the European Union (EU).

Second, the Greek debt is concentrated in French, German and British banks. These countries are less likely to promote a debt restructuring large enough to restore the solvency of the Greek government. Argentina, however, had its debt distributed in various individual and institutional creditors (almost 40 per cent local, which facilitated the negotiation), and its aggressive renegotiation strategy was supported by the US, which sought to reduce moral hazard in international capital markets by making an example of Argentina. Also, in 2001 the world economy was on the verge of a period of robust growth, but it is now mired in a deep international crisis.

Third and finally, IMF intervention in Greece is done with the EU and the European Central Bank (ECB), who are leading the process. Therefore, its role is limited to providing loans attached to the EU and ECB conditionality package of fiscal austerity and privatisation. In the Argentine case, the main global powers left the IMF in charge alone.

The reestablishment of a sustainable and inclusive growth path in Greece is more difficult than in Argentina and requires a strong commitment by all EU countries to reduce asymmetries in the region. The centrality of the regional dimension in the resolution of the Greek crisis means that Europe needs to re-assess whether it is willing to promote and safeguard financial interests at the cost of the social bases on which the EU is founded.