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Greece and Argentina

Oct 25, 2011 • Demand, Supply, and Markets, Developing Economies, Economic History, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 186 Views    No Comments

Nobody wants Greece to become Argentina.

It all began with what scholars Rogoff and Reinhart called the lending boom of the 1990s. Enjoying the influx of dollars, Argentina borrowed and grew and prospered…for awhile.  But when recession hit at the end of the decade, the good times quickly unraveled. She defaulted on $95 billion (p. 19) of sovereign debt while also undergoing banking, currency, and inflation crises.

Some say a part of the problem was her inflexible currency. To combat 3,000% hyperinflation Argentina had tied her peso to the dollar. Yes, she got a stable currency. But also, she lost the ability to make her currency cheaper when a recession threatened and her export revenue needed a boost.

Is Greece similar? She too has a massive debt, a damaged economy, and the inability to manipulate her own currency. And, were she to default, her connection to banks throughout the euro zone and beyond could stimulate a banking crisis.

On the other hand, we could say that Argentina seems to be doing okay. True, she still faces a tough time borrowing. But, with control over her own currency, she was able to enjoy a booming export sector and a growing economy.

Here, NPR’s Planet Money discusses Argentina in “The Price of Default.”

In “Default Deja Vu” econlife looked a serial defaulters.

The Economic Lesson

Alexander Hamilton surely knew about sovereign debt defaults and wanted to avoid them. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit. His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt. It worked. Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.

An Economic Question: One debt rating agency said that congressionally gridlocked budget negotiations could affect worldwide confidence in the safety of U.S. debt. Your opinion?

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