South America has lessons for Greece on debt

Πηγή: The News Tribune
By JUAN FORERO AND MICHAEL BIRNBAUM (WP)

Noev 5 2011

BUENOS AIRES – Rage in the streets, workers thrown from their jobs, creditors demanding their money – that’s Greece, but nearly a decade ago that scenario played out in this region of South America.

In a story that might provide a lesson for Europe, one country, Uruguay, that was on the edge of financial oblivion organized a fast, orderly and negotiated response that revived the economy and ended a run on banks. Another, Argentina, spiraled into a chaotic default and remains a pariah in world financial markets.

The possibility of a quick or easy salvation looks increasingly unlikely for Greece, which would be bankrupt without international support but whose leaders have had difficulty making the drastic reforms European leaders say are necessary.

With uncertainty still hanging over a European bailout package, it remains possible that Greece could default on its debts entirely, making it an outcast like Argentina.

But the tales of other countries in crisis have shown that it’s possible to push through tough measures and emerge with growth on the other side.

Today, tiny Uruguay, with just 3.5 million people across the River Plate from Argentina, is a darling of Wall Street and its economy is among the world’s fastest-growing, 10 years after being forced to ask creditors to accept a 20 percent writedown on its debts.

Carlos Steneri, an economist who oversaw Uruguay’s debt management at the time, said officials agreed that it was vital to quickly restore public confidence in the face of a bank run. Technically, Uruguay defaulted. But it worked closely with U.S. and International Monetary Fund officials, negotiated with bondholders and slashed wages and pension payments.

The goal, he said, was to ensure that Uruguay’s reputation remained intact.

“We are a country known for being serious, respecting contracts and the law,” Steneri said. “There was no sense throwing that away. Simply defaulting would have brought gains, but we would have lost being a credible country.”

So far, however, Greece has responded to its crisis with political paralysis. No civil servant has been laid off, privatizations of inefficient state companies are at a snail’s pace and tax evasion remains rampant. A decision by Prime Minister George Papandreou to seek a referendum (he seemed to be backing away from the public vote late Thursday) on bailout plans means that rejection by the voters would spell a quick end to his country’s attempts to pay its debts.

It is a scenario that is beginning to resemble what happened in Argentina, whose $100 billion default in December 2001 was history’s biggest.

In the Argentine case, five presidents stepped down in two weeks, deadly riots shook Buenos Aires and Argentines lost their life savings.

Much later, Argentina issued a take-it-or-leave-it offer to bondholders, offering to pay about 35 cents on the dollar.

Today, the government still owes an estimated $15 billion to hard-core creditors and has lost numerous judgments in U.S. courts to pay up. With the country still blocked from tapping international capital markets, it is mostly because of booming demand for its agricultural products that Argentina has been lifted from economic calamity.

“Nobody recommends the Argentine approach to anything,” said Arturo Porzecanski, a Uruguayan economist and professor of international finance at American University in Washington, D.C.

The way European finance officials see it, Greece has no other option but to abide by the bailout package being offered by European leaders. The plan, developed by euro zone and IMF leaders, calls on Greece’s creditors to take a 50 percent reduction on their debt – larger than Uruguay’s, smaller than Argentina’s.

Even if the package is approved, official European projections for Greece suggest that the country’s woes could linger for decades. The country is hamstrung by its ties to the euro, which it cannot devalue to make its exports cheaper, while leaving the currency zone might prove even more painful. The harsh austerity programs being forced by the country’s creditors might also be reaching their limits.

Economists say Greece will not be able to borrow on the open market for at least a decade, and the worry now is that the crisis will spread to other hobbled economies like Italy and Spain.

“In terms of pain inflicted on the creditors and in terms of the boomerang effects around the euro zone, it looks like the Greek debt overhang problem is going to have a traumatic solution analogous more to the case of Argentina than Uruguay,” Porzecanski said.