The common wisdom being bandied about by analysts is that Greece needs a bailout and must remain part of the eurozone or else a global financial Armageddon will ensue. According to the Sydney Morning Herald, International Monetary Fund Managing Director Christine Lagarde said during a speech in Germany, “We need a larger firewall,” warning that otherwise the world could slide into a “1930s moment” of isolationism, "which led to the Great Depression.”
I guess the question is whether this is actually true. After all, the IMF has a tradition of messing up these situations. Just look at the Asian financial crisis of 20 years ago, or the Latin American crisis of a decade ago. The IMF prescription in these crises exacerbated and prolonged the problems for more time than was needed.
The IMF and the European Union are pushing for a bailout of Greece in exchange for austerity measures. The problem is that the bailout money they are talking about is barely enough to keep the country solvent for a month or two. It sure seems like a black hole. Keep pumping more and more money into Greece in order to delay the inevitable. Is this sound policy? Is this the solution to prevent a “1930s moment”?
Don’t cry for me, Argentina
A decade ago, another country was in similar dire straits as Greece is today. No, I am not talking about Israel, which was certainly teetering on the brink, but rather Argentina. There are many similarities between Greece and Argentina, and maybe we can learn from the Argentinean model and apply it to Greece.
Mario I. Blejer, a former governor of Argentina’s central bank, and Eduardo Levy-Yeyati, one of its former chief economists, jointly penned an opinion piece for Bloomberg about the Greek crisis; the authors pointed to a lesson that can be learned:
The first has to do with the timing and size of the debt exchange. In this regard, Argentina’s lessons are clear: Delaying the unavoidable and then defaulting belatedly, unilaterally and in a disorderly fashion, imposes significant costs in real activity, with no visible benefits. True, markets need to see some pain to be convinced of a country’s willingness to pay, in order to accept a default. But Argentina, like Greece now, went way beyond that. By the time Argentina defaulted in 2001, it had experienced four years of recession and its gross domestic product had declined by about 22 percent. How much pain should Greece endure?
Bob Adelman wrote in the New American about the similarity between then and now:
The Argentine crisis had been brewing for years (some say as far back as 1913 when the welfare state began to be installed) but came to a head when a new government was elected in December 1999 and found itself facing years of mismanagement and fraud left over from the previous administration, including much higher debts and deficits than had been claimed. In December of 2000, Argentina fell for the siren song of the IMF (“we’re here to help you”) and received its first bailout.
IMF aid made the problem worse. The Argentine currency, the peso, was tied one-to-one to the American dollar and had become grossly overvalued. With foreign trade declining and interest payments to the IMF increasing, the government couldn’t continue supporting the peso. An overnight devaluation of the currency took place, dropping the peso’s purchasing power by 40 percent over one weekend and beginning an inflationary spiral that reached an annual rate of 5,000 percent by the summer of 2002.
Just do it
Instead of punting the problem down the road another three or four months, why not just admit the truth: declare bankruptcy and start fixing the problems like Argentina? By starting off with a clean slate and a devalued currency, the Argentines were able to extricate themselves from the mess, and from 2003 - 2007 they averaged 9% growth. It wasn’t easy for them, but in the end Argentina has a flourishing economy.
Greece should declare bankruptcy and leave the euro so that it will be free to take the steps it needs to get its economy back on solid footing. It should bring back the drachma, let it devalue and then export its way out of the mess. Greece can’t do that if it is tied to the euro and constrained by EU rules. No one says this will be easy, but it will ultimately lead to living within its means and having a solid economy.
Ansgar Belke, a professor at the German Institute for Economic Research in Berlin, said:
What happened in Argentina proves that it is possible for a country to come back after bankruptcy and once again play an important role in international financial markets. I always supported a restructure of debt in Greece. The damage would not be as grave as is commonly feared. Greece is a relatively small country. A restructure would stagger a few German and French banks… but this scenario is more sensible than the massive credit that we’re currently giving.