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The most recent chapter notes that Germany’s Chancellor Angela Merkel and her allies in the Eurozone have won, but the story is far from over.
A rare voice in the developed world, Mark Weisbrot, an economist with the US-based Center for Economic and Policy Research, has repeatedly pointed out that the Argentine crisis should be blamed on the monetary and fiscal tightening policies implemented during the severe recession that began in 1998.
According to Weisbrot and his well-known colleague Paul Krugman, the social collapse should be assigned to the IMF-backed austerity prescriptions rather than to the default and the end of the one-peso-one-dollar rule — which was unavoidable by December 2001, when Argentine account holders massively went to banks to withdraw their “dollars.”
However, even if some similarities between the Argentine and Greek experiences are clear, thinking that 10 years of growth at “Chinese rates” immediately follow a devaluation and default could lead to a serious misunderstanding. Unfortunately for Greece, things may be not so easy to predict.
The dollar-pegged peso had become a quasi-religious belief in Argentina during the 1990s. No politician from the mainstream dared to openly propose ending the convertibility programme, even when the second-largest South American economy reached traumatic levels of unemployment and recession in the last third of that decade.
In October 1998, Argentine President Carlos Menem, a charismatic conservative Peronist, was praised by Bill Clinton and Michel Camdessus at the annual IMF-World Bank meeting. Months later, Argentina entered a recessionary spiral. The one-peso-one-dollar system, implemented in 1991, at first paid off. Between 1991 and 1999, Argentina’s economy grew at an annual average rate of 4.7 percent. Not too shabby.
The currency pegged to the dollar was set by law and backed by the federal reserves of the Central Bank. There was a flurry of foreign credits and investments, particularly for the purchase of state-owned companies, infrastructure and financial speculation.
If the middle and upper-classes were able to take holidays on Brazilian beaches at prices they considered ridiculous, the flipside was that a quarter of the country’s population survived but were left in the sidelines. The government had found a way to solve the financial problems: cutting funds for public health and education, and freezing the minimum state pension at 150 pesos/dollars. In short, one of the few examples of a welfare state in Latin America was being undermined.
The Tequila crisis in 1994 was followed by the Vodka crisis in 1998, and both met a drunk Argentina. Then, the IMF became less friendly in 1999, when the economy shrank by 3.5 percent.
Menem left office wrapped in the discredit of a social crisis and corruption. The new president Fernando de la Rúa, a conservative who led a wide alliance incorporating both liberals and dissident Peronists, based his campaign on the commitment that “I’m the guarantee of the one peso-one dollar.” Shortly after taking office, the new government made cuts in the wages of civil servants and enacted a law allowing the dismissal of workers during the first year of their contract without any compensation, a sacrilege in the Argentine tradition. De la Rúa’s approval ratings nosedived in a matter of months.
While IMF staffers who arrived at Ezeiza airport were interviewed by journalists as if they were rock-stars, unemployment rates were dangerously close to 20 percent. The mirror offered back an image that perhaps had always been there, but never had it been so cruelly exposed. As in Greece today, 15 years ago the feeling that disobeying the creditors would not be much worse than the nightmare they were living grew among Argentines.
While the IMF closed the tap, account holders withdrew US$18.3 billion out of banks in 2001, 21.8 percent of the money held in branches across the nation. The Central Bank’s reserves drained rapidly, so in December 2001, the government implemented the so-called “corralito”, which established a weekly withdrawal limit of 250 pesos/dollars for each bank account (The Greek “corralito” has a daily withdrawal limit of 60 euros).
The table was set in December 2001 — a groggy government, levels of absolute poverty above 35 percent, a 54 percent debt-to-GDP ratio (compared to 180 percent in Greece today), a middle class with their savings trapped, the prices of commodities depressed, no external credit and industry and production left devastated.
Christmas 2001 arrived with a default of US$100 billion and two weeks later, the convertibility programme was officially over.
The dollar doubled its value in late January, reaching 3.8 pesos in June. Economic depression, however, set a limit on prices. The value of the dollar would stabilize between three and four pesos for years, contradicting those who foresaw a jump to fifteen pesos.
Three months after the end of convertibility, all of the nation’s banks had replaced their windows with metal shutters, after they’d been smashed again and again by account holders. The provisional government established that debts taken on in dollars would be converted into pesos at a parity of one to one, as public bonds were issued to make up the difference, which, at the end of the day, benefited the main private debtors. “This transfer of funds to the corporate sector led to the increase of investments in 2003 and 2004,” recalls Eduardo Levy Yeyati, professor at the John F. Kennedy School of Government at Harvard.
Prices went crazy. The housing market collapsed, with prices less than half of what they were in 2000 (a few years later it recovered all it had lost and gained ground). In 2002, inflation was 41 percent (74.9 percent in the case of food), but much of the increase was concentrated in the first quarter. Water, electricity and public transport costs were frozen. The economy contracted 11 percent in 2002, the last and worst year of recession. External debt represented 160 percent of the GDP. Argentina’s poverty rate peaked at 54 percent, more than doubling that of 1996 and 10 times higher than in the early seventies.
And as every cloud has a silver lining, the industrial sector regained competitiveness. In turn, high unemployment restrained wage demands for two years, so many companies saw extraordinary profits. While imports plunged two years after the crisis, soybeans began a long-term boom. The government saw an opportunity to finance the state with high export duties.
In the 2003-2011 period, without any access to foreign loans, dollars entered via exports as refreshed profit margins attracted investors. The Kirchners, who took office in 2003, placed all of their bets on domestic consumption and implemented a series of social policies that allowed them to maintain good approval ratings.
The unemployment rate has hovered between seven and nine percent since 2007, while poverty rates have declined every year until 2011, when it stabilized (the government has falsified poverty statistics since 2007, so there is a variety of estimates for this figure, ranging from five percent to 30 percent).
Mariano Kestelboim, professor of macroeconomics at the University of Buenos Aires, says that the Argentine scenario is not quite similar to Greece, especially considering the opportunity brought by the commodities boom and the different development of their industry sectors. Instead, he argued that “tourism revenues will be high and immediate.”
As for the likely need to “recreate” the drachma, Levy Yeyati is sceptical: “Greece should introduce a currency that no one will seek out because everyone is going to try to keep the euro, which has no precedent; if Argentina had had the level of debt and the industry infrastructure of Greece, we would have suffered even more than we have.”
The consequences of the 1999-2002 collapse are still harming the country. While Greece falls, Argentina is there to tell the story, but it shouldn’t be a matter of choosing your own adventure.
@sebalacunza