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s the Greek government careens towards an expected default on June 30, observers have been drawing parallels between the current crisis and Argentina’s 2002 default. Pointing to a rapid recovery and strong export growth following the latter’s default and abandonment of its peg to the US dollar, several officials, including former Argentine finance secretary Guillermo Nielsen and Columbia University economist Jeffrey Sachs, have advised Greece to default and attempt to restructure its debt on favourable terms. While there are many indications that Greece’s debt load is unsustainable under current circumstances, a unilateral Greek default would devastate the embattled Mediterranean nation’s economy. An Argentina-style recovery from default is unlikely to materialize in Greece.
By all metrics, Argentina’s default plunged its economy into free-fall. The figure above displays Argentina’s GDP from the establishment of its Currency Board in April 1991 to the end of 2011. Argentine real GDP fell by 62% between 2001 and 2002, a figure that eclipses the total drop in American GDP from its 1929 peak to the bottom of the Great Depression in 1933. Unemployment peaked at 18.3% in 2001 and only dropped below 10% in 2007. The lead-up to the default featured crippling riots and looting in Buenos Aires. Political instability was such that the country was under the rule of five heads of state over the course of ten days. By the time the dust had cleared, Argentina’s GDP per capita at PPP was just under US$8000, on par with Thailand and Panama.
But Argentina recovered quickly. By 2006, its debt to the IMF had been repaid in full. By 2008, its GDP had returned to pre-default levels. Unemployment stood at 7.8%. The recovery was initially made possible by the devaluation of the peso that followed its float in 2002. This, in combination with surging soybean prices, helped drive up exports that had been suffering under the weight of a peso pegged to the US dollar, which had been appreciating since 1995. This increase in exports acted to absorb the immediate shock of the default. Further recovery was enabled by the enactment of redistributive policies such as stipends for unemployed heads of households, which were intended to reduce inequality and drive up domestic demand. These policies were successful on both counts. Argentina’s Gini index plummeted from 0.538 in 2002 to 0.436 in 2011. At the same time, its total household consumption returned to its pre-default levels by 2007. Argentina would offer an attractive example for Greece if their economies were fundamentally similar.
Unfortunately for Greece, they are not. Argentina is a net exporter: in 2010, net exports accounted for 4.4% of the country’s economic output. Conversely, Greece is a net importer. Despite the small size of its economy, Greece runs the 11th-largest trade deficit in the world. Its net deficit was equal to 7.9% of its GDP in 2010. If, as many speculate, Greece returns to the drachma following a default, the resulting devaluation will dramatically increase the cost of Greek imports. Since the value of Greece’s exports is greatly surpassed by the value of its imports, devaluation will have a negative short-term effect on its international trade balance. Even tourism, which accounts for approximately one quarter of Greek exports, is unlikely to save the country from its economic woes; Greek finance minister Yanis Varoufakis claims that the sector has been “in speedy decline” over the past few years. Additionally, 55% of tourists in Greece originated from other EU countries in 2014. As the EU’s economic growth has been weak since the recession, this is likely to place constraints on the growth of Greece’s tourism sector in the coming years.
If Greece defaults on its debt to the IMF, it may trigger a wave of cross-default provisions included in the terms of its current bailout agreement. If Greece’s Eurozone creditors choose to demand immediate repayment of their loans, this crisis may lead to the largest sovereign default in history. Though this scenario is unlikely to occur, it is nevertheless a possibility that must be avoided at all costs. The best-case outcome for a Greek default is a negotiated debt restructuring that leaves Greece with a manageable debt load and institutes reforms in spending and revenue collection that enable the country to return to fiscal stability within a reasonable timeframe.
