Thursday, July 14, 2011

Argentina’s Crisis Can Shed Light into Greece’s Future


WSJ: Argentine Episode is Little Comfort for Greece
IMF: IMF Executive Board Completes Fourth Review Under Stand-By Arrangement for Greece
World FactBook: Argentina's Economy

Last week the International Monetary Fund (IMF) completed its fourth review under the Stand-by Arrangement for Greece. This review allows for the immediate disbursement of €3.2 billion to the country, making the IMF’s total disbursements nearly €17.4 billion. Although Greece’s economic adjustment program has continued to make some progress and a return to positive economic growth is expected by the middle of 2012, the economy is extremely fragile and fiscal adjustments are to come in the future. Over the past ten years, there has been a wave of financial crises all throughout the world. But perhaps the one that resembles the most to that of Greece is the collapse of Argentina’s economy in 2001.

There are strong parallels between Argentina and Greece. Both countries have overvalued their currencies, suffered from undisciplined fiscal policies, and taken advantage of apparent stability, in order to take on a lot of debt. For instance, in 2001, Argentina’s economy was in a very similar predicament as that of Greece. It was crushed by debt and its exports crippled due to an overvalued peso. This caused the country to default on its foreign debt and put an end to the currency’s 1-to-1 peg to the U.S. Dollar. The economy bottomed out that year, with real Gross Domestic Product (GDP) 18 percent smaller than in 1998 and almost 60 percent of Argentineans under the poverty line. Nonetheless, after the devaluation of the peso and the default on its debt, Argentina‘s economy experienced exponential growth in the years to follow.

However, Greece’s economic recovery may not come as easy as Argentina’s did. This in part because the solutions used by Argentina to combat the crisis may not work for Greece’s economic troubles. One of the main issues is Greece’s deep integration into the European Union, which makes it extremely difficult for the country to renege on its debts or devalue its currency the way Argentina did. Another factor to consider is that even if Greece’s debt payments were eliminated, the country would still have a budget deficit equal to about three times the size of Argentina’s in 2001. Lastly, one of the reasons why Argentina was able to emerge from its economic crisis so quickly is because of its strong farming sector which allowed the country to exploit the weak peso by exporting to the world. However, Greece does not count with a strong farming sector which is going to make it even more difficult for the country’s economy to recover.

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