On Greek debt, lessons from South America

DANIEL GARCIA/AFP/GETTY IMAGES - A woman passes in front of the window of an exchange in downtown Buenos Aires on October 28, 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 may 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.

Gallery

Gallery

More on this Story

View all Items in this Story

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 undertaking 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. Ten years after being forced to ask creditors to accept a 20 percent write-down on its debts, its economy is among the world’s fastest-growing.

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, Steneri said, was to ensure that Uruguay’s reputation remained intact.

“We are a country known for being serious, respecting contracts and the law,” he 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 progressing at a snail’s pace and tax evasion remains rampant. Prime Minister George Papandreou’s decision to stage a referendum on the bailout plan and then his sudden backing away Thursday only added uncertainty to the drama in Europe.

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

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 about $15 billion to hard-core creditors and has lost 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.

Weathering debt trouble

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

Other countries have found other ways to weather debt problems.

Iceland devalued the krona, making exports cheaper, at the same time it wrote off debts held by newly nationalized banks in 2008. Billions of dollars in investments were wiped out. But now, the economy is growing, and the government successfully issued bonds in June, less than three years after its default.

In the Baltics, Latvia used deep budget cuts in 2009 to stanch skyrocketing debt and improve its credit rating.

And Uruguay, whose debt crisis in 2002 followed Argentina’s collapse, opted to engage creditors and received a short-term $1.5 billion loan after meetings with the U.S. Treasury Department. The run on deposits swiftly ended, and nearly 93 percent of foreign creditors accepted a 20 percent reduction on their holdings, with payments extended over five years.

Five months later, the country was accessing international loans, recalled Steneri, the economist who helped manage Uruguay’s debt. And soon came the boom — seemingly insatiable Asian demand for soybeans, meat and other items Uruguay produces. Economic output has increased nearly 7 percent a year since 2003.

Had the Europeans moved more quickly to shore up Greece, it could have done “an Uruguay-type deal, one that involved minimal losses to investors and was consensual,” said Porzecanski, the Uruguayan economist.

Instead, economists say, Greece will not be able to borrow on the open market for at least a decade, and the worry is that the crisis will spread to other hobbled economies, such as 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.

Birnbaum reported from Athens.

 
Read what others are saying