After Argentina ended the peso’s peg to the dollar, its economy collapsed. Yet five years on it was booming. Could that crisis provide a role model for Greece?

An economy in freefall. A run on the banks. Curbs on the amount of money that could be withdrawn from accounts. A team from the International Monetary Fund called back to Washington.

Greece in July 2015? No, this was Argentina in late 2001, when the currency peg between the peso and the dollar was coming under extreme pressure, and capital was leaving the country at an alarming rate.

Like Greece, Argentina was in a currency arrangement that was causing it extreme pain. Like Greece, Argentina had a stark choice: impose fresh budget cuts in the hope of remaining a “hard” currency; or cutting loose from the peg with a devaluation and debt default.

The parallels between Argentina and Greece are not exact; Argentina was never part of a single currency with the US. What it had was one-for-one convertibility so that the dollar and the peso were interchangeable. Argentina continued to issue its own currency, but used the peg to import anti-inflationary discipline from the US. When monetary policy was tightened in the US, it tightened in Argentina as well. When the dollar strengthened, so did the peso. By the end of the 1990s, Argentina had conquered inflation, but at the expense of driving the economy deep into recession and deep into debt.

Argentina under convertibility was a dry run for Greece in the single currency. Investor confidence rose as a result of the dollar peg and money came flooding into the country, prompting a lending boom. When the mood soured, money started to leave the country – at first in dribbles, but eventually in a flood. To stem the flows, restrictions were introduced that meant Argentines were only allowed to take 250 pesos (then £175) a week out of their accounts. Within six weeks, Argentina had announced a debt default and the end of convertibility.

Facebook Twitter Pinterest People wait for a bank branch to open in Buenos Aires in January 2002. Photograph: Dario Lopez-Mills/AP

The short-term impact on the economy was to turn recession into a slump. Argentina’s national output collapsed by almost 11% in 2002 and unemployment rose sharply. Annual per capita income fell from $8,500 in the late 1990s to $2,800 in 2002, in large part due to the fall in the peso. The pain was, though, relatively short-lived and growth in the five years after the devaluation was stronger than in the five years that preceded it. Household incomes rose by 43% in five years.

Argentina’s adjustment was aided by five factors. First, it already had its own currency and thus avoided the disruption that Greece would face if it returned to the drachma.

Second, it had commodity exports that were in high demand during an upswing dominated by China’s arrival as a global economic superpower. For Greece, the outlook is not as good. World trade is growing more slowly than it was in the early 2000s, and the Greek economy is dominated by tourism and shipping.

Third, Argentina had been forced to keep interest rates high in order to maintain the dollar peg. When convertibility was abandoned, borrowing costs no longer had to be kept so high and came down sharply. Interest rates in the eurozone are currently at 0.05%.

Fourth, Argentina’s deep recession meant it could expand rapidly for a number of years without running into inflationary difficulties. This meant it reaped the benefits of devaluation in its international competitiveness. Greece, too, has ample spare capacity. Its economy has contracted by a quarter and unemployment is 25%.

Finally, devaluation allowed Argentina to write off a chunk of its debts, which fell from 125% of GDP to 72% of GDP by 2005. Again, this would be an option for Greece were it to leave the eurozone.

Those who think Greece would be better off outside the single currency say Athens should heed the experience of Argentina, even though Latin America’s second-biggest economy has subsequently run into serious economic problems, with weak growth and high inflation.

Andrew Kenningham, senior global economist at Capital Economics, said: “While no two economies are the same, there are clear parallels between Greece today and the economies that fared best after currency crises. Greece is suffering from a high level of spare capacity, tight credit conditions and a heavy public sector debt burden denominated in a currency against which it may not devalue.

“This suggests that, once the dust settles, Greece would be well placed to see a sharp rebound in confidence and a period of rapid GDP growth if it left the eurozone. This would not, of course, solve Greece’s economic problems forever, as Argentina’s and Russia’s experiences also amply demonstrate. But it would lead to a brighter outlook than struggling on within the monetary union.”