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What Greece Can Learn From South America : NPR

What Greece Can Learn From South America : NPR


What Greece Can Learn From South America

Greek demonstrators protest in Athens on Nov. 8. Similar economic crises in Argentina and Uruguay a decade ago may be instructive for Greece today.
Enlarge Orestis Panagiotou/EPA /Landov

Greek demonstrators protest in Athens on Nov. 8. Similar economic crises in Argentina and Uruguay a decade ago may be instructive for Greece today.

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December 21, 2011

As Greece struggles with a financial crisis, there have been violent protests, creditors demanding their money, people losing their jobs and officials hunkering down.

A decade ago, that was the scene in South America when Argentina and Uruguay defaulted. The two handled the economic calamity in very different ways. Economists say their approaches — and what's happened in each country since — are instructive for European leaders as they try lifting Greece from its turmoil.

In 2001, Argentine police battled with rioters in Buenos Aires, and there was a run on bank deposits. The country couldn't pay its bills.

So President Adolfo Rodriguez Saa, who served just one week, announced before Congress that Argentina would default.

Argentina's President Cristina Fernandez de Kirchner won re-election in October with the country enjoying a relatively strong economy. Here, she answers questions during at the G-20 Summit in Toronto in 2010.
Enlarge Jim Bourg/Reuters/Landov

Argentina's President Cristina Fernandez de Kirchner won re-election in October with the country enjoying a relatively strong economy. Here, she answers questions during at the G-20 Summit in Toronto in 2010.

And then, in patriotic fervor, everyone shouted, "Argentina, Argentina!" It was the biggest default in history — $100 billion. Economists say the chaotic response from Argentine leaders was a recipe for disaster.

They failed to heed years of warnings. And then the government froze bank accounts and defaulted without negotiating with creditors.

Poverty rose to nearly 50 percent, and millions were instantly unemployed. Argentina also became a pariah for investors.

"In crises like this, there's a tendency to think that another loan will tide you over to the next year or the next two years, when things are better and you'll have access to the markets again," says John Taylor, who was an undersecretary at the U.S. Treasury Department back then and dealt with the Argentine fallout.

"But so often, and it certainly is the case in Greece, they had to have a write-down and more loans were not going to be the answer," says Taylor, who now teaches economics at Stanford.

By a write-down, Taylor says he means a default. But he says he has in mind an orderly and negotiated default, involving international creditors.

That was the case in the country of 3.5 million people across the River Plate from Argentina — Uruguay.

Uruguay's Pragmatic Approach

Like Argentina, Uruguay had a run on banks in 2002 and couldn't pay its bills.

But Uruguay's response was all calm pragmatism, according to Argentine economist Orlando Ferreres. Ferreres recently met with 70 European businessmen who came to Buenos Aires to learn about the Argentine and Uruguayan defaults.

The Uruguay solution was telling creditors we can't pay it all, Ferreres says, but we can pay you 80 percent by extending payments. Nearly all of Uruguay's creditors accepted. Uruguay also negotiated a $1.5 billion bridge loan from the U.S. Treasury Department and made cuts to pensions and salaries.

Carlos Steneri, an economist who oversaw Uruguay's debt management at the time, says moving fast was key.

"Time in these type of situations is crucial, and I believe the insolvency of the Greece case today is in part a consequence of the delay of taking actions," Steneri says.

Time in these type of situations is crucial.

What happened since can also serve as a lesson for Greece.

Both Argentina and Uruguay have seen their economies expand dramatically, thanks to booming Asian demand for agricultural products that took off soon after their defaults.

That growth generated adoration from Argentine supporters of President Cristina Fernandez de Kirchner, fueling her re-election in October.

But the effects of how the two countries responded to the crisis are still readily apparent — in their access to capital markets.

Only five months after defaulting, Uruguay was once again able to borrow internationally. Argentina, on the other hand, is effectively barred from borrowing on the open market.

Ten years later, it uses central bank reserves and the nationalized pension system to fund a big-spending government.

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Steve O (Steve_O)

Steve O (Steve_O) wrote:

Sean, I hereby invite you to buy Italian bonds are the high, high loan shark rates of 7%, or the rates in Greece of 9%. Maybe you'll do better than Jon Corzine. But as fair warning, I have a paper bill for 100,000 Argentine pesos that I use for a bookmark.

2011-12-22., dčetvrtak 13:08:32

Pasquino Marforio (Allergic_To_Political_Correctness)

Pasquino Marforio (Allergic_To_Political_Correctness) wrote:

Well, the central point here, is that Greece has defaulted already. The write down that French banks took effectively killed France's won credit ratings.

The breakup of the EU and the demise of the Euro is already accepted fact. People are preparing. Time for the rest of the public to prepare, too.

2011-12-22., dčetvrtak 10:16:36

Sean Gay (ThoughtProvocateur)

Sean Gay (ThoughtProvocateur) wrote:

This article is so laughably wrong about its assessment that it does not belong on any news site. It is simply BS.

2011-12-22., dčetvrtak 09:20:35

Sean Gay (ThoughtProvocateur)

Sean Gay (ThoughtProvocateur) wrote:

The problem was never entitlements. The problem was with excessive interest charges by loan sharking banks.

If Greece had reasonable rates between 3-5%, which is excessively high for sovereign debt as sovereign debt is repaid nearly 100% of the time, they would not be in trouble. Italy wasn't in trouble until the loan sharks jacked up the prices.

What happens after the loan sharks try to extort criminal levels of interest? The IMF swarms in and forces the countries to privatize assets. Privatize assets that are performing. This increases the cost of said services while decreasing their benefits. In Haiti they even privatized national granary in order to shut it down so that extra-national could provide the grain at a higher price. So, the country has no way to pay off the debt and interest rates that are criminal, and defaulting doesn't seem like that bad of an option.

The kicker is that if the banks had charged reasonable rates then they wouldn't have to worry about default.

2011-12-22., dčetvrtak 09:19:45

Sara Frazier (crassfrazier)

Sara Frazier (crassfrazier) wrote:

In response to McBob Slice (McBob79): Within our current economic system ALL money is created out of debt. There is not even enough money in existence to pay off the debt...this is not a simple matter of balancing budgets...this is nothing short of economic enslavement and default is certainly in order.

2011-12-22., dčetvrtak 08:01:31

peter evenhuis (peterako)

peter evenhuis (peterako) wrote:

Why do people write and do not know the real story. Greece is just the top of a very big iceberg. If it was just the dept from Greece the EURO country's, payed out Greece. The real problem is the complete setup from all modern country's and banks.

2011-12-22., dčetvrtak 01:31:07

j r (alucard1)

j r (alucard1) wrote:

Why do all the reports dealing with Latin and South America have such an extreme condescending tone? Seriously, how racist can you guys be? These are sovereign countries and you report on them as if you're speaking about the adventures of three year olds. Grow up.

2011-12-21., dsreda 23:58:35

McBob Slice (McBob79)

McBob Slice (McBob79) wrote:

Pretty unbelievable. So let me try to understand the convoluted logic. The answer is to default on your debt obligations, but do so in an orderly manner to avoid panic. No lesson learned about spending more on entitlements than you take in?

2011-12-21., dsreda 23:20:00

JULIO BRAGAGNOLO (Sesentista)

JULIO BRAGAGNOLO (Sesentista) wrote:

Regarding the Argentine approach to default and the use of "central bank reserves and the nationalized pension system to fund a big-spending government", reasonable people might argue that borrowing internationally has not been a successful approach. Private borrowing in US dollars resulted in 2001 in the transfer of private debt to the Argentine State (the taxpayers), and the expropiation of a substantial portion of dollar accounts held by Argentinians in Argentina. Ten years ago the Argentine people rose up against these policies and paid with 39 deaths. The "big-spending government", reelected in 2010 with 54% of the popular vote, confronted in 2003 with an untenable situation after 30 years of corrupt globalization, has had to invest in re-industrialization and poverty remediation. The current policy has certainly not stopped growth during the last eight years. So far, so good.

2011-12-21., dsreda 18:43:10



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