Argentine lessons for Greece

As Greek Prime Minister George Papandreou is fighting to putting together a new government after he yesterday survived a no-confidence vote in the Greek parliament I am once again reminded by the Argentine crisis of 2001-2002.

In my view the similarities with the Argentine crisis are striking – and most of the mistakes made by Argentine policy makers and by the international institutions are being repeated today in regard to the Greek crisis. Most important both in the Argentine case and in the Greek case policy makers refused to acknowledge that monetary policy is at the root of the problems rather than fiscal matters.

My favourite account of the Argentine crisis is the excellent book “And the Money Kept Rolling in (And Out)” by Paul Blustein.

You can’t help thinking of Greece and the efforts of the last year to “save“ the country when you see the title of Chapter 7: “Doubling a Losing Bet”.

I highly recommend Blustein’s book for those who want to understand how international institutions like the IMF works and why they fail and to understand how monetary regimes like Argentina’s currency board become “sacred” – in the same as the gold standard used to be – and this leads to crisis.

But back to Greece – or rather to the parallels to the Argentine crisis.

It has been rumours that former Greek central bank governor Lucas Papademos could take over as new Prime Minister in Greece. I have no clue whether this is going to happen, but the story made me think.

When you are in serious trouble you call in a well-respected former central banker to get some credibility. Argentina did that when Domingo Cavallo – the former successful central bank governor – became economics minister. Cavallo became economics minister on March 20 2001. He then tried to push through a number of austerity measures. He resigns on December 20 after massive protest and violence that kills 20 people. So far there has luckily been less killed in Greece.

So Cavallo lasted only 8 months – even respected central bankers cannot preform fiscal miracles in insolvent nations. But Cavollo’s 8 months as economics minister might be a benchmark for how long a central banker can stay on as economics minister – or Prime Minister.

Another measure of how long Papademos will be able to survive as Prime Minister if he indeed where to succeed Papandreou is to look at how many presidents Argentina had in 2001.

First president to step down was Fernando de la Rúa – on December 20 2001 – the same day Cavallo stepped.

Next one to step down was Adolfo Rodríguez Saá after 7 days in power on December 30 2001.

Eduardo Duhalde came into office January 2 2002 and stays on until May 25 2003. Duhalde a populist famously defaulted on Greece foreign debt – and is more popular with the Argentine public than with foreign creditors.

The question is whether Papademos would be Cavallo, Saá or Duhalde. He can’t really be Cavallo – as we are too long into the process and as Greece has already defaulted on some of the debt, but on the other hand the EU has not pulled the plug on Greece yet. It was really the IMF’s stop for funding of Argentina on December 5 2001 that “killed” Saá. Saá, however, while in government defaulted on foreign private debt on December 7 2001 (Greece effective defaulted on a large share of the private sector debt last week).

The Argentine currency board came to an end on January 6 2002 – around a month after the default on foreign debt and three weeks after Saá resigned…

If this is any guidance for the Greek situation we are surely in the end game…

PS I met Cavallo at a seminar back in 2008 – I was somewhat shocked to hear that he still thinks it was wrong that Argentina gave up the currency board despite more than 20 people died in civil unrest while he was economics minister. The Argentine economy rebound strongly after the currency board was given up and has growly strongly since then.I am certainly not claiming everything is fine in Argentina, but things are certainly better than in 2001.

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Update: Cavallo indeed has a view on Greece in the light of his own expirience. See his comment here. Lets just say I think he is mostly wrong…

Update 2 (November 13): Scott Sumner is out with an excellent comment on the lessons from Argentina.

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2 Comments

  1. Lars, you said:
    I met Cavallo at a seminar back in 2008 – I was somewhat shocked to hear that he still thinks it was wrong that Argentina gave up the currency board despite more than 20 people died in civil unrest while he was economics minister.
    Just like Cavllo thought that about the “Currency Board”, Bernanke thinks IT is the world´s seventh wonder and refuses to give it up (in favor of NGDPT, or something else). People have not “died” yet…

    Reply
  1. Exchange rates and monetary policy – it’s not about competitiveness: Some Argentine lessons « The Market Monetarist

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