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So does
Argentina a decade ago set a template for today's crisis in Greece...?
Back in 2001,
Argentina was hit by a crisis similar to Greece's today.
Imposing a
strict currency peg of 1 Peso to 1 US Dollar meant the currency was
over-valued. Or the state should have reined in its spending. Or the economy
needed to be more productive. Or all three, depending on your view. But
either way, the trade deficit widened as imports became cheaper than exports
- especially after neighboring Brazil
devalued its Real in 1998-99, adding more pressure to the currency peg,
and leading the government to borrow huge amounts of money overseas, including
$40 billion arranged by the International Monetary Fund in December 2000.
High tax
rates already meant tax evasion was widespread, so raising taxes to try and
cover debt interest didn't bring extra revenue. Well aware how such crises
had ended before, the middle-class quickly moved to withdraw money from bank
deposits, even though interest
rates jumped to 16%, because that wasn't enough to beat inflation.
Squeezed by falling wages and rising prices, many Argentinians took to the
streets of big cities, especially Buenos Aires, banging pots and pans in
protest at soaring food costs, corruption and economic mismanagement -
protests that became known as cacerolazo.
Pressure on
the Peso, prices and now the banks mounted. Amid domestic riots and an
international debate
over the currency peg during the last week of 2001, and with bank
deposits already frozen, an interim government - led by right-wing governor
Rodríguez Saá - proposed a new
currency, the Argentino. Named after the gold coin issued at the
height of Argentina's 19th-century boom, it was to be backed by the country's
housing and real estate, not by central-bank reserves, which were virtually
empty anyway. But it never came to anything, as Saá
proved literally a "seven-day president", whose only achievement
was finally to declare default on the national debt.
Totaling $132
billion, that debt was approximately one-seventh
of all the money borrowed by developing states worldwide. Some payments
have since been refinanced and some restructured, but the International
Monetary Fund, just as with Greece today, would accept no losses on its
portion of the Argentine debt.
The
difference between these two great crises? Argentina could devalue its
currency, whereas Greece cannot. For 10 years before the 2001 crisis,
Argentina had a currency exchange standard of 1 US Dollar to 1 Argentinian
Peso. For the last 10 years, Greece has been part of the Eurozone, with 1
Greek Euro equal in every way to 1 German, Dutch, Spanish or Belgian Euro.
During the Argentinian crisis, however, the currency's exchange rate fell
dramatically, with the US Dollar rising from 1 to 4 Pesos.
This huge
Peso depreciation in turn propelled inflation, but the official measure
refused to show it. Annual inflation in Buenos Aires at one stage during the
crisis actually showed a negative reading, as the government fought to avoid
comparisons with the dictators' crises of the 1970s and '80s.
The
Argentinian people nevertheless stopped trusting their government, their
currency, and their banks, and the US Dollar began to overtake the country's
Peso as a store of wealth. They were right to worry.
After 10
years of the currency peg, some
70% of bank deposits, credit and loans were denominated in US Dollars. In
January 2002, new Argentine president Eduardo Duhalde
pushed through a "forced Pesification",
whereby everything was switched to the Peso. Bank loans were converted at
1-to-1, despite the real exchange rate already standing at 2 Pesos per
Dollar. The conversion rate on deposits was better, but it was still well shy
of the true rate and also handed the banks an immediate 30% shortfall on their
balancesheets. In total, the 44 billion US Dollars
in Argentinian bank deposits were
switched to 55 billion Pesos. So the net loss of value to people's
savings was more than 65% by the end of the year, when the Dollar exchange
rate hit 4 Pesos. The poverty rate rose from 1-in-3 to worse
than 1-in-2 inside a year.
Finally,
under the next president, Néstor Kirchner,
and with Duhalde's finance minister Roberto Lavagna still in his post, the external debt
restructuring - which affected more than 76% of Buenos Aires' public debt,
originally worth some $93 billion - came in January 2005. Did it work?
Already in 2007, the government of Néstor's
widow - Cristina Kirchner - imposed new exchange controls, capping the daily
amount of money people were allowed to withdraw from the banks. But
"Today we celebrate today our well-gained economic independence,"
said the Kirchner government in
2010, wrangling with the International Monetary Fund over $6 billion in
loan repayments while enjoying economic growth of 9% annually, plus
unemployment down by two-thirds from the crisis peak.
"The
outcome would have been totally different if we had followed the
recommendations traditionally made by the IMF - opening our economy, foreign
indebtedness, financial liberalization and 'unbeatable' market-oriented
reforms. Today we would have been embroiled in a fresh economic, social and
political crisis."
Here in 2012,
however, and with commodity prices now falling and economic growth quickly
fading, cacerolazo is being revived in protest at the
government, and again middle-class savers are attempting to flee their
currency.
An unofficial
exchange rate, offered by Buenos Aires' illegal casa de cambios has been created, known as the "Parallel
Dollar" or "Blue Dollar", which trades at an extremely high
price compared to the official price. Today's exchange rate standard is 1 Dollar
to 5 Pesos, but 1 "Blue Dollar" is 6.15 Pesos, which is closer to
the official Peso-Euro rate. The "Blue Dollar" is available in the
downtown area, where traders now known as arbolitos,
or little-trees, can be found at the side of the road flashing wads of green
notes like leaves.
To block the
black-market in Dollars, Argentina's tax inspectors - the AFIP - were last
year armed with 300 sniffer dogs, trained to find money. By mid-December
2011, they'd found $2.7 million in illegal Dollars. But the government
continues to support the thriving Blue Dollar market by blocking legal
exchange. This month, on its website, the AFIP
deleted any choice beyond "travel" or "business
procurement" from the options for enquirers wanting to know if they're
allowed to buy US currency. "Savings and investment" queries are no
longer available. And the Argentinian government is also playing games with
inflation data again, worsening the loss of confidence as strikes break out
over inflation-linked wage increases and state benefits.
In
particular, Kirchner's secretary for domestic trade, Guillermo Moreno, has
been accused of cooking the books by encouraging McDonald's not to cook
Big Macs. "In some branches of McDonald's," noted the Cronista newspaper in March 2011, "the
Big Mac is advertised only by a small hand-written note, hidden on a side
wall. In other places there is not even that.
"What's
led Ronald McDonald in Buenos Aires to hide your favorite dish?"
Well, The
Economist magazine's Big Mac index - launched in 1986 - tries to get
round government manipulation of statistics, by comparing the price of
McDonald's iconic burger around the world. Because "the price of a good
should not vary much across efficient markets," as The
Economist puts it. Comparing the different local prices of a Big Mac
is therefore a blunt, if frivolous way of measuring the purchasing power of
different currencies.
So by
suppressing the Big Mac's price, people believe, Argentina would be able to
suppress its apparent rate of inflation from what El Cronista
calls "the very British Economist magazine." But it would
also put McDonald's at risk of selling lots of under-priced
burgers to hungry Porteños, however. So the
world's most famous burger was hidden from view. Until now.
"Moreno
lost the battle," reported Cronista.com
in early June. "The Big Mac combo is out of the price freeze and has
jumped in price by 26.2%." A discount of 2 Pesos two days later was
"a result of negotiations with the Ministry of Internal Trade,"
according to the Argentinian
press. But it also affected the burger alone - not the meal-deal
including fries and a shake - edging down the Big Mac's Peso price where it
might matter most. On the Big Mac Index.
Now, the
Greek government already had a reputation for cooking
the books long before its crisis broke, specifically to meet the
requirements for Euro entry in 2001. Tax evasion has also been widespread,
with untaxed business worth some 27.5% of the annual economy on
one estimate. Given these drags, external debt has also leapt as Athens
struggles to maintain its currency regime - a relatively strong currency
that's seen relatively unproductive Greece slip to last place in Western
Europe's league
table of competitiveness. A run on the banks has already begun, with withdrawals
now reaching €80 billion - one third of total deposits before the
crisis began in 2010 - as household and business depositors fear the very
same "freeze" imposed by Argentina a decade ago.
The
difference is, quitting the Euro - unlike Argentina quitting the Dollar -
can't be done overnight. "Pesification"
would first mean create (or recreating) a currency to switch to. Whatever
mess Argentina has suffered - before and since abandoning its currency peg -
the mess in Greece would likely be much uglier still.
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