CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Argentina Suffering From Default: Not on This Planet

Argentina Suffering From Default: Not on This Planet

Monday, 17 October 2011 14:41

NPR's Planet Money made its entry in the Stake Your Claim game show with a segment on Friday that claimed that Argentina is suffering horribly as a result of its decision to default at the end of 2001. It turns out that Argentina has actually been doing quite well since its 2001 default as the most recent data from the IMF show.

Click to Enlarge


Source: International Monetary Fund.

As can be seen, Argentina was already in a severe recession prior to default. It had tied its currency to the dollar, which went through the roof following the East Asian financial crisis in 1997. While the United States could support the trade deficit that resulted from the over-valued dollar, Argentina could not. It eventually had no choice but to break its peg with the dollar and default on its debt in December of 2001. Its economy fell sharply in the next quarter, but had stabilized by the summer of 2002. It then began to grow rapidly and was above its pre-recession level by the end of 2004. It has continued to grow rapidly in the subsequent years, although the 2009 recession did bring growth to a halt for a year.

The IMF projects that Argentina's GDP this year will be almost 60 percent above its pre-recession level. This is where Planet Money's claim breaks down. 

Comments (21)Add Comment
Yammering, Stammering, And Wrong ...
written by Charley_James, October 17, 2011 4:43
I do not want to single out NPR because its mistake the Argentina "game show" answer" is reflective of the typically poor economy news reporting jobs done by most media outlets in the US. Even your friend Dr. Paul Krugman has pointed this out repeatedly.

The fact is that major media devotes too little time and too few resources to actually understanding the underlying problems in an economy - including ours - and rely instead on "he said/she said" reporting that does nothing to inform anyone.

It is especially sad, though, when an otherwise fine news organization such as NPR falls victim to portraying half-truths and completely incorrect facts as being accurate. It should know better than that - unless Herman Cain and Michelle Bachmann have taken over as news directors at the network.
..., Low-rated comment [Show]
..., Low-rated comment [Show]
True but China was the reason
written by Filippos Petroulakis, October 17, 2011 7:11
You are of course correct, but in the Argentina-Greece debate people often forget that Argentina picked up nicely from the crisis because it happened to be lucky enough to have it coincide with the rise of China, and had China buying up Argentinian soy and meat - at rising agri prices.

And this is my only beef with Paul Krugman, in that he keeps arguing that a devaluation (by Euro exit) will be great for Greece, citing Argentina as an example. However, given that we produce very little agricultural products and even fewer manufactured products, unless there is a massive rise in demand for olive oils and antiquities sightseeing, massive devaluation will do little good to Greece. The Greek economy is uncompetitive not because of high wages (because they aren't), but because of an very extensive system of markups along the production process.
written by frank revelo, October 17, 2011 8:56
There is some question about the accuracy of Argentine statistics. In particular, there are accusations that official rates of inflation are drastically understated. If these official inflation figures are used to deflate nominal GDP, then this will tend to boost real GDP. Also, some of the good performance of Argentina has nothing to do with devaluation and default, but rather structural change. In particular, understated inflation caused the parastic elderly pensioner class to take a big haircut. This is precisely what Greek needs as well, and what the rest of the developed world will eventually need. Argentina has also imposed some export controls/taxes on agriculture, which acts like a land tax.

If Greece were to do something similar, say raising property taxes on raw land (but not improvements) to 10% (with a €30,000 exemption per Greek citizen) and replacing pensions with soup kitchens and some sort of housing subsidy for poor elderly persons, it would be in a position to default on its debt and thereafter run a balanced budget (since it would be cut off from the credit markets) while remaining in the euro. This is probably the ideal solution for Greece. For a country with its own currency, devaluation is easier than deflation. But Greece doesn't have its own currency, and the havoc that would result from going back to the drachma would probably outweigh the havoc caused by default, reneging on pension promises, restructuring and deflation.

In general, because the wealthy of the world refuse to accept higher taxes, the best solution for debtors is to simply default. Default is worse for creditors than higher taxes, but if they refuse to see this, then hit them with default until their eyes are opened.
Not really
written by mathking, October 17, 2011 8:58
Krugman has not argued that a Greek exit would be "great for Greece." He has argued that a default and exit from the Euro may be the only way for Greece to avoid a decades long economic slump from trying to grind down its economy in order to pay off its creditors. So far all of the bailing out has simply left Greece in deeper debt. The Greek debt will have them paying off more than three times as much per capita as the United States, and the debt is still growing. This is in spite of already fairly high tax rates.
This changed my views on the IMF
written by Jeff Thompson, October 18, 2011 1:27
I remember reading about this at the time, and it woke me up to the wrongheadedness of the IMF's austerity programs, which Europe and America have now internalized.

South American countries used to avail themselves of IMF loans when their economies periodically fell into deep recession, but austerity programs were attached to the IMF's loans which only prolonged the crises, impoverished the borrower, and often made it necessary for borrowers to revert to exporting natural resources instead of higher profit manufactured goods. The IMF's lender nations were the only ones that gained from the arrangement.

Finally, as the 2001 chart shows, South American nations wised up and stopped taking the IMF's bait.
written by Chris Talbot, October 18, 2011 7:08
Hi Filippos, what are these markups in the manufacturing process in Greece? Is it taxes / corruption or are you speaking of tariffs? Just curious.
written by awhartman, October 18, 2011 7:41
why are some people so blithe about countries defaulting on their debt?
many argentine bonds were held by individuals as part of their "life savings". were any attempts made to make those bonds whole when
the argentine economy took off?
written by michael, October 18, 2011 8:09
I think you're way off base here. Planet Money presented the story as a mixed bag. There was high growth post default, but lots of people lost their life savings. Then you point to a single GDP chart and say everything was rosy and the reporting was inaccurate? Please.
The conscience of an Argentinean
written by Guido, October 18, 2011 9:18
Boys and girls, it is true we benefited from soy prices and growing meat exports (How come our protectors, the economic all-knowing gurus @IMF did not see this potential? Or did they?). It is true our official inflation rates are understated (our own private "moody" consultants, in turn, over estimate it). It is also true the IMF made sure we tied our debt paying to these figures.
It is true Greece cannot rely on meat or soy... but Argentina did not have a Tourism Minister, and since 2010, it does; and it didn't have a Science and Technology Minister, and now it has one. We could not use or even survey our own oil wells (not to mention those in Malvinas @ the South Atlantic), and now the first national oil company, YPF, is partly owned by Argentine capital, after it was privatized -like almost everything during the 90's- after IMF's "advice".

We relied on our primary goods for too long (and the IMF and Europe and the US sure knew how to benefit from this). Now we have a Technological added value Agro-Industrial oriented Policy. And 1.8 million kids in school age have their own netbooks.

I'm not asking Greece to do as we did. I'm asking Greece to find their own way out of this mess we call Capitalist Financial System, and African countries call Death itself.
your criticism is misplaced
written by Jay Johnson, October 18, 2011 11:16
I went back to listen to the Planet Money pod-cast and found that it said just what you said. There is no error in their report. Their conclusion was that default was bad for the creditors, and terrible for the country, but since default their economy has recovered.

I think your criticism has no foundation, or did i misunderstand your post?
in reply to awhartman
written by ks, October 18, 2011 12:33
you ask "were any attempts made to make those bonds whole when the argentine economy took off?" Not "whole," but those who accepted the terms of the restructuring received growth-linked bonds, i.e. interest payments linked to Argentina's GDP growth rate. Since the economy has grown so much, creditors who accepted these bonds have done well (at least so far as I understand). But that only refers to those creditors who were willing to exchange their defaulted debt for the new, growth-linked bonds. Some of the creditors refused to accept these terms and as a result are still litigating.
Unemployment and real wages
written by Matías Vernengo, October 18, 2011 12:38
And unemployment went down from 25% to around 7%, and real wages have grown fast. Meaning not only the economy grows, but most people benefit from it.
The default is what allowed the country to recover
written by Joe Emersberger, October 18, 2011 2:55
As Mark Wesibrot pointed out in a New Yor Times piece

"Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty."

Argentina didn't recover from the default. It recovered BECAUSE of the default, contrary to what the "experts" predicted, the same IMF experts (and their cheerleaders) who led Argentina to disaster.

written by dri, October 18, 2011 4:02
No, sorry, the reporting was quite unbalanced and overly negative, in that it focused overwhelmingly on Argentina's massively reduced ability to borrow after the default (and boy, that borrowing had gone so well for them), rather than what happened to employment, the trade balance and the real economy. But it does end on a fairly positive note, even saying that Argentina had an escape valve (peso devaluation), unlike Greece. Kind of contradicts the overall negative tone of the report.
This reminds me of something else
written by MR, October 19, 2011 2:07
This sounds essentially like the following lovely segment on NPR's All Things Considered from two weeks ago:

Apparently, nearly government assets from Argentina can be seized. Well first these assets need to be in a jurisdiction that is willing to seize these assets due to an award from a civil court.

I also assume that since no figure has been stated as to how much "America Taskforce Argentina" has actually recovered through its lawsuits, along with a there being no mention of an actual effect on the Argentinian economy, that the amount of assets seized is probably insignificant.
Wait, what?
written by Scott, October 19, 2011 11:11
I listened to that podcast - that's not what they said at all. They pointed out the short term problems and then concluded, as you did, that it was positive for Argentina.
Did you actually read it?
written by CK, October 19, 2011 4:56
I'd just like to point out that your diatribe here a) is based on a fundamental misunderstanding of what the NPR article said, and b) deliberately casts NPR in a pall of bias that simply doesn't exist.

Shame on you. Next time you whip out your poison pen, you might try actually READING the article you're going to lambaste.
uh...the NPR podcast didn't actually say it was bad....
written by Graham, October 20, 2011 12:40
You are apparently an idiot.

Transcript of NPR podcast you refer to:

"Robert Smith: It has been a tough decade for Argentina, but a lot of people think that the default was the best thing to happen to them.

Zoe Chace: After the money was devalued, banks opened up again. Pesos weren't worth as much, sure, but Argentinian products suddenly looked cheap on the world market. And that's been really good for Argentina's economy. Exports of staple products like soybeans and wheat went up. And eventually, some investors started to lend Argentina money again...

Robert Smith: This whole thing is something of a happy ending, after a long nightmare of a story."

Tip: You can't just make stuff up. If you want to criticize someone for saying something, they actually have to have said it.

@Chris Talbot
written by Filippos Petroulakis, October 24, 2011 12:26
It's a combination, but the overwhelming issue has to do with corruption at the local level and monopoly rents. To give you an example, the orange producer in a village in Crete earns 20 cents per kilo - the retail price at the farmer's market (so that there's no massive building or equipment or labour costs involved) is around 2 euros! This is a ten fold increase when the transportation costs involved are a half an hour truck ride. I don't know about specific cases, but by and large various rents are captured by vested interest groups with political clout, as they manage to be massively protected. Notaries are one example - every contract drawn requires a notary (or a lawyer with notary privileges) with a fee that varies but is in most cases 5-10% of the amount involved, even if the notary does absolutely nothing.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.