What Can Greece Learn From Argentina's Past Woes?

What happens when a country with a big foreign debt defaults? That's the question hanging over Greece. On a much bigger scale, it's a question some people fear is hanging over the U.S. Argentina may have the answers. In the 1990s and early 2000s, Argentina had hyperinflation, high unemployment, economic contraction, a run on the banks and a mounting national debt. Robert Siegel talks to former Argentine Bank president Martin Redrado about what lessons Argentina can offer Greece regarding its financial crisis.

(SOUNDBITE OF PROTESTERS)

SIEGEL: The streets of Athens, today, riot police battled protestors. They fired tear gas. The protests are against the austerity measures proposed for Greece so that its creditors can reschedule the Greek debt and avoid a massive default. The sounds of Athens today evoke the sounds of another capital in economic distress around ten years ago, Buenos Aires.

Argentina had seen it all, hyperinflation, the high unemployment, economic contraction, a run on the banks, a freeze of deposits and a colossal national debt. And all that brought the protestors out to the streets with pots and pans. In December 2001, Argentina defaulted on around $100 billion. Then came a big devaluation of the Argentine peso, which had been pegged to the dollar, and then came austerity measures which brought out still more protestors.

So, is the Argentine crisis safely consigned to history or does it still plague Argentina and what possible lesson is there in that story for Greece? Well, Martin Redrado is a former president of the Central Bank of Argentina and joins us from Buenos Aires. Welcome.

(SOUNDBITE OF PROTESTERS)

MARTIN REDRADO: Good to be here.

SIEGEL: And tell me, in what ways has Argentina recovered from the default of 2001 and in what ways would people still feel it there every day, in everyday life?

REDRADO: Well, the fear of 2002 was of great anarchy in Argentina and the poverty rates increased to around 28 percent of the population. So I wouldn't recommend the route that Argentina has taken to any country around the world. Although the country's back on its feet, clearly there are a lot of social issues and social inequalities that need to be tackled.

SIEGEL: Let me read to you, though, what Paul Krugman(ph) wrote a few days ago about the relevance of Argentina to the prospect of a default by Greece. He wrote this. He said, Argentina suffered terribly from 1998 through 2001 as it tried to be orthodox and do the right thing. After it defaulted at the end of 2001, it went through a brief severe downturn, but soon began a rapid recovery that continued for a long time. Surely, he writes, the Argentine example suggests that default is a great idea. What do you think about that?

REDRADO: I think, with all due respect, Paul Krugman is wrong. He has not lived in Argentina. GDP, gross national product, came down eight percent during 2002. And, yes, we are blessed because commodity prices are, on the outside, prices of what we sell out to the world are increasing and Argentina is a food producer and, therefore, you have an inflow of dollars to the country given the state of world affairs. That is not the case for Greece, at this point.

So my view is I would recommend what you need is to extend maturities, to lower the interest rate burden, which is very high, and also putting pro-growth measures, opening up closed markets for foreign investment and domestic investment so that investment and less debt burden could be the way out of the Greek crisis.

SIEGEL: Ten years after the default, can Argentina borrow? Can it float a bond?

REDRADO: It can do it with certain restrictions, but at the spread over the rest of Latin America, which is 3 percentage points higher than the average of Latin America. So yes, Argentina can borrow. At this point if you look at the yield on a ten-year bond, around 9 percent per year in dollar terms.

SIEGEL: So you're saying Argentina can borrow, but the cost to Argentine taxpayers would be huge because you'd be paying such high interest rates.

REDRADO: That's exactly right. Unfortunately, the government, after 2010, grabbed the Central Bank to finance public sector expenditures and that is creating higher inflation. And that is one of the main inconsistencies of Argentina's economic policy today.

SIEGEL: Martin Redrado, thank you very much for talking with us today.

REDRADO: Great pleasure. Good to talk to you.

SIEGEL: Mr. Redrado is the former president of the Central Bank of Argentina.

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