Some readers and commentators have argued that the EU should not have bailed out Greece, but instead should have restructured its debt. The logic is that Greece is a goner; there is no way it can meet its existing obligations, and a bailout serves to throw good money after bad. Better to engage in triage and save resources for countries that have more realistic prospects. In addition, the Greek population might be more likely to accept austerity measures if it saw banks sharing the pain. (Yes, we have that wee problem that Greece still has a fiscal deficit and does not control its currency, but we don’t see the current “solution” as much more than kicking the can down the road).
But a related argument that hasn’t gotten the play it deserves is that a restructuring now could also be better for Greece. And we proudly report that a Naked Capitalism reader beat the Financial Times to the punch. Scraping_by noted last week:
Ah, dear Greece.
I think the fate of the cradle of Western Civ will follow one of two Latin American paths. The first was Ecuador, which can be read in Greg Palast’s The Best Democracy Money Can Buy. When, in the early 1980’s, the IMF forced the Ecuadorean government to take over the debts of its busted elites, it left them in a billion-dollar hole that just grew deeper. This required IMF directed capital liberalization, which meant every peso in the country disappeared in hours, leaving the Ecuador government unable to pay the debt bomb. The IMF responded by pushing the majority of the citizens into poverty with its demands for austerity, until peaceful protesters filled the streets. The police shot the protesters down and claimed anarchists were rioting, justifying draconian police state measures. What was left was a government run by the IMF, with free trade and other slogans in place of economic policy.
On the other hand, Argentina told the IMF to go pound sand. While the Argentines couldn’t force the discounts they got on the private debt, they got them out of governing their country. They’ve been recovering steadily ever since.
So, our Greek friends can tell the ECB and their front group the EU to piss off, or they can hand them the keys to their country. I hope for their sake, they choose wisely.
Today in the Financial Times we see similar messages in “Does Argentina have lessons for Greece on exiting a crisis?” While the piece argues that Argentina has been exaggerating its degree of success, the FT might have neglected to ask what the benchmark was. Stacked up against a properly-selected peer group, Argentina’s still rocky path back might indeed not look so bad.
One myth that creditors like to hold over borrowers is that if you default or negotiate a haircut, you will become a pariah and no one will lend to you on reasonable terms again. But the Chapter 11 process belies that. A deeply indebted borrower is risky; one that has lowered its burden and has a much cleaner balance sheet is a vastly more attractive proposition, provided the lender has reason to believe it has changed its ways.
From the Financial Times:
Argentina defaulted on nearly $100bn in 2001 and has since played hardball with creditors. In 2005, it offered them what was billed as a one-off swap that was worth just a third of their investment. Three-quarters accepted. Now it is now offering a similar deal with the warning that this time, it really, truly, is now or never. The assumption in the government is that 60 per cent acceptance, plus the 75 per cent in 2005, will neutralise any future litigation by showing Argentina’s good faith and will thus discourage judges from ordering the seizure of any bonds or money to pay holders of defaulted debt. This has been the stumbling block to Argentina issuing global debt since the default.
Argentina is widely expected now to ditch its plan to raise $1bn in parallel to the swap, for fear of looking desperate, since it is unlikely to secure the single-digit rate it has said is essential. But it will nevertheless be seeking to paint the swap and Argentina’s economic management as a huge success. As Greece struggles to exit its crisis and Portugal and Spain wobble, Cristina Fernández, Argentina’s president, has been predicting the failure of IMF rescues and grandstanding about her heterodox policy successes.
Argentina has plenty of red lights – including a weakening fiscal situation and accelerating inflation – but it is flush with dollars which should help avert another of the crises Argentines experience so regularly and almost seem to expect.
Yves here. The FT article includes quotes which caution against following Argentina’s lead. But Greece is faced with poor choices, so it is fair to ask which one is likely to be least bad.