NEWPORT BEACH – Let me set the scene: an increasingly discredited economic policy approach gives rise to growing domestic social and political opposition, street protests and violence, disagreements among official creditors, and mounting concerns among private creditors about a disorderly default. In the midst of all of this, national leaders commit to more of the same harsh austerity measures that they have been unable to implement for two years. Official creditors express skepticism, in private and public, but hold their collective nose and get ready to disburse yet another tranche of money into what they fear is a bottomless pit.
Sound familiar? It should, but not just because it encapsulates Greece today. It is also what Argentina faced in 2001. Unless Europe reflects on key lessons from that experience, the parallels that extend to Greece may also end up including a financial meltdown, a deep output collapse, and social and political turmoil.
I remember 2001 well. I was serving on PIMCO’s Emerging Market desk, where we were closely following developments in Argentina. In August of that year, the country was again begging the International Monetary Fund for more money in order to avoid a default. The authorities were willing to enter into yet another set of commitments knowing that they had consistently over-promised and under-delivered, and that the country had failed to make any progress on restoring growth, halting its competitiveness decline, and containing the rise in debt.
A blame game broke out over who was responsible for “losing” Argentina. Official creditors, led by the IMF, pointed to the Argentine government’s repeated policy failures. The government countered that official creditors were nickel-and-diming the country, rather than providing the financial cushion needed to restore confidence and re-engage private capital. Neither side seemed willing to acknowledge what was obvious to many: the country’s economic and financial framework gave it little chance of addressing the dual problem of too little growth and too much debt.