Ten years ago Argentina defaulted on $95bn-worth of public debt, in a move that still holds the record for the largest sovereign default of all time. By last year, it was back on the international capital markets.
True, the major rating agencies assess the creditworthiness of almost all Argentine debt – sovereign, sub-sovereign and most corporate loans – as ‘single B’, which is squarely in the high risk bracket. But that’s not the point here.
The issue is that just a decade after a protracted crisis that toppled five short-lived governments, the country that really did think the unthinkable has clocked up major gains in real GDP, employment growth, and other key financial ratios, including tax revenues, export earnings and international reserves.
So is there a lesson for Greece in all this? A growing body of opinion, as reflected in such indicators as credit default swaps, seems pretty confident that Papandreou ultimately has no alternative but to repeat the Argentine experience. And if you are going to be forced to do something, why not go down fighting?
Sections of the Greek left are even openly counselling the government to follow just such a path. They have domestic political reasons for presenting an alternative course, although there is nothing intrinsically leftist about default on the basis of saving national capitalism.
Argentina suffered pain as well as gain when it did just that. International investment dried up overnight, and the rich made sure they got their assets out of the country, creating further problems of capital flight. The number of people living in poverty more than doubled in 2002, and it took over seven years for the economy to return to pre-default levels. Even now, per capita GDP is still below what it was in 1998.
Yet by 2005, the Argentine government had reached a deal with its creditors to pay back approximately 75% of what was owed at a deeply discounted rate of 30%. Meanwhile, Hugo Chavez pumped several billion dollars worth of Venezuelan oil revenue into Argentinian paper, in a gesture that was as much political as financial in motivation.
In June 2010, Buenos Aires restructured what remained of the debt on similar terms to the first tranche. The second debt swap had a participation rate of approximately 70%. Added to the previous restructuring, some 90% of the default has been restructured.
There is, of course, major differences between the Argentinan economy in 2001 and Greek economy in 2011, the most important being Greece’s membership of the eurozone. Argentina followed up its default with a 70% devaluation in the peso, which had previously been pegged one-to-one with the US dollar. That meant a major boost to exports.
Unless it reverts to the drachma, Greece simply lacks that option. So unless default is positively linked to a programme for the transformation of the economy, it will still entail the adoption of fiscal austerity, including tax rises and the kind of savage public spending cuts that has generated such spectacular industrial and social unrest.
Nor would Greece benefit from devaluation as much as Argentina did. It actually exports little. However, it is an important tourist destination and could expect an influx of holidaymakers if things were again as cheap in relative terms as they were in my backpacker days.
In short, then, default is clearly not a panacea for the troubles facing Athens. It is, however, at the very least a serious option.
