Greece Cannot Do What Argentina Did.

by Nicolás Creus[1] and Esteban Actis[2]

The triumph of the left-wing Syriza party in Greece has sent shockwaves through international politics and the global economy. The coalition government led by Alexis Tsipras announced that its main economic goal is to restructure Greece’s considerable external debt, which stands at 175 percent of gross domestic product, as a necessary condition to return to  economic growth.The triumph of the left-wing Syriza party in Greece has sent shockwaves through international politics and the global economy. The coalition government led by Alexis Tsipras announced that its main economic goal is to restructure Greece’s considerable external debt, which stands at 175 percent of gross domestic product, as a necessary condition to return to  economic growth.

Tsipras and other Syriza members have highlighted Argentina as a viable model for undertaking the difficult task of negotiating with creditors. Argentina at the end of the 20th Century experienced an economic crisis of similar magnitude. Gross Domestic Product fell sharply for four consecutive years; the country was mired in high debt; unemployment stood at 25 percent, while 40 percent of Argentinians fell below the poverty line. This culminated in December 2001 with the largest default ever recorded.

After tough negotiations, Buenos Aires was able to ease the burden of Argentina’s external commitments – the country emerged from years of economic recession. Argentina’s debt restructuring was an exceptional case. Not only was Buenos Aires able to avoid the involvement of the International Monetary Fund, but creditors agreed to include a strong haircut in nominal terms (about 75 percent), a reduction in the rate of recognized interest, and a considerable extension in the maturities of new bonds. The exchange was completed in June 2005 and was considered a success, with 76 percent of creditors who held defaulted bonds accepting a nominal haircut.

How did a peripheral, developing state such as Argentina lock in this kind of debt relief while negotiating from a position of weakness? The role of the United States – not only a global power, but also a guarantor of regional stability – was a crucial factor. Washington’s support favored Argentine interests and helped shore up Buenos Aires’ bargaining stance.

Evolutions in Washington’s international financial policy helped determine the United States’ functional and at times openly favorable attitude toward Argentina. Washington at the time was implementing a new approach for resolving sovereign debt crises. Further, the United States wanted to head off any contagion to the global economy.

The U.S. government sought to end the costly bailout policies that had characterized the resolution of debt crises during the nineties. The debacle in Argentina provided a test case for a new approach, especially since U.S. nationals were not too highly exposed. In this regard, Washington’s interest was for a resolution of the Argentine default that would avoid the extension of any financial assistance.

In tune with Washington’s new approach, a sheltered and recovering Argentina held back from the search for new money. Thus Buenos Aires broke the unity of the main stakeholders in the financial system while strengthening its demands for a strong haircut on private creditors, understanding that with no rescue or financial assistance forthcoming, the latter would have to share in the costs of restructuring.

This was reinforced by the imminent danger of a contagion that would threaten regional stability. The main fear was that Brazil’s vulnerable economy would suffer, thus jeopardizing the success of the new approach for solving sovereign debt crises. Accordingly, the United States, pursuing its own strategic interests, endorsed and supported the Argentine government’s bold restructuring proposal, haircut and all.

The Greek case is very different. There is no overlapping interest between the debtor country – Greece – and Germany, the main power responsible for ensuring order and financial stability in the European system. Athens initially proposed a haircut as an important condition. Berlin flatly rejected this possibility.

The German reluctance to support Greece’s proposals responds to a number of factors that create a clear contrast with Argentina’s experience. First, European banking sectors in general, and German banking in particular, have high credit exposure to Greece. Second, evidence shows a low risk of contagion to the European periphery, which removes the incentive to accept debtor conditions. Finally, Germany fears that countries such as Spain, Italy, and Portugal could emulate Greece. These are countries imposing considerable fiscal austerity measures to counteract their high indebtedness, and this dynamic hampers the possibility of a more flexible policy toward Greece. From the German view, any replication of the Greek approach not only threatens the financial stability of the European Union – it also legitimizes a new political vision for Europe’s future.

The Greek government has far less room to maneuver than did a Washington-backed Argentina. Athens is unlikely to push an aggressive haircut on its creditors, lessening the prospects of a debt restructuring process with South American characteristics. The lack of support from Germany, and that country’s conflicting interests with Greece, demonstrate the limitations imposed by context. There is a clear gap between reality and Athens’ desires.

[1] Assistant Professor of Argentina International Politics at the National University of Rosario, Argentina. Fellow of the National Council of Scientific and Technical Research.

[2] Assistant Professor of Latin American International Politics at the National University of Rosario, Argentina. Fellow of the National Council of Scientific and Technical Research.

(Texto publicado no jornal no site Real Clear World, em 11/02/2015. Reprodução autorizada pelos autores).

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