Latin America
2:04 pm
Wed December 21, 2011

What Greece Can Learn From South America

Originally published on Wed December 21, 2011 3:08 pm

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.

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.

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.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

LYNN NEARY, HOST:

Economic trouble in Greece this year has led to violent protests, high unemployment and widespread debate about whether the country would or should default on its debts. One decade ago, that was the scene in two South American countries. Argentina and Uruguay both defaulted, but the two handled the economic calamity in very different ways. Now, economists say their approaches could be instructive for European leaders. NPR's Juan Forero has that story from Buenos Aires.

JUAN FORERO, BYLINE: Some economists fear that Greece, on the brink of default, could suffer the same fate as Argentina, one of the best-known cases of economic turmoil.

(SOUNDBITE OF GUNSHOTS AND EXPLOSION)

FORERO: In 2001, police battled 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.

ADOLFO RODRIQUEZ FORMER PRESIDENT, ARGENTINA: (Foreign language spoken)

FORERO: And then, in patriotic fervor, everyone shouted, Argentina, Argentina.

(SOUNDBITE OF CHANTING)

FORERO: It was the biggest default in history - $100 billion dollars. 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.

VICTOR BEKER: (Foreign language spoken)

FORERO: That's economist Victor Beker recounting how poverty rose to nearly 50 percent and millions were instantly unemployed. Argentina also became a pariah for investors.

John Taylor was an undersecretary at the U.S. Treasury Department who dealt with the Argentine fallout. Taylor, who's now teaching economics at Stanford, says countries often wait too long to diagnose their own financial problems.

JOHN TAYLOR: In crisis like this, there is 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. 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.

FORERO: A write-down, meaning a default. But Taylor 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.

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.

ORLANDO FERRERES: (Foreign language spoken)

FORERO: 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 it made cuts to pensions and salaries.

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 agro products that took off soon after their defaults.

(SOUNDBITE OF CROWD)

FORERO: That growth generated adoration from Argentine supporters of President Christina 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. Juan Forero, NPR News Transcript provided by NPR, Copyright NPR.