July 08, 2015
With the prospect of Grexit increasing, there have been numerous news stories pronouncing this as a disaster for Greece. There have also been many accounts telling us that Greece will not have the same positive prospects as Argentina.
As Paul Krugman reminds us Argentina recovered fairly quickly after it broke the link between its currency and the dollar. As he points out, the real disaster was in the period leading up to the break.
While many people have emphasized ways in which Argentina has advantages in this break relative to Greece, that was not a general perception at the time. The general story back at the end of 2001 and 2002 was that Argentina faced disaster.
For example, on January 1, 2002 we got this NYT piece headlined, “Argentina drifts leaderless as economic collapse looms.”
Here are the first three paragraphs:
“Without a president, a cabinet or a functioning government, Argentina drifted rudderless today, as people waited for the Peronist party to resolve its bitter internal differences over who should run the country and for how long.
“The surprise resignation of the interim president, Adolfo Rodríguez Saá, late Sunday means that by Tuesday Argentina is likely to have its fifth leader in less than two weeks, counting temporary caretakers.
“But with bank accounts partly frozen, a moratorium on payment of the foreign debt and political leaders clearly at a loss for what to do, the possibility of an economic collapse loomed as an even larger concern. All day long, nervous depositors lined up outside banks in hopes of withdrawing some of their money.”
There was another dire piece on Janauary 4th after a new government had been installed. Among other things, this piece told readers:
“Though most Argentines earn their salaries in pesos, an estimated 80 percent of all debts here were contracted in dollars. That raises the specter of widespread bankruptcies if ordinary Argentines are suddenly forced to pay 30 or 40 percent more pesos to meet their obligations.”
Yes, Argentina did have its own currency before the devaluation, but it faced the same sort of debt problem that Greece will face with many debts denominated in a currency that will suddenly be worth much more relative to people’s pay checks.
Anyhow, this is not to claim that a break with the euro will be easy or that Greece will necessarily do as well as Argentina in the aftermath. But it is important to remember that many people were predicting absolute disaster for Argentina at the time of its default and they were proven wrong. Perhaps these folks’ judgements about economics have improved in the last thirteen years, but I wouldn’t bet on it.