Then and now – Ireland & The Argentine Economic Crisis

Argentina entered recession in 1999 and defaulted on it’s public debt in 2001. According to Wikipedia

In the meantime, government spending continued to be high and corruption was rampant. Argentina’s public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it

.

Enormously eh? It hit the heady heights of..

Ratio of debt to GDP grows to 41% in 1998, then 47% in 1999.

Ratio of debt to GDP grows to 51%. (IMF loans another $20+ billion) [In 2000]

But according to Eurostat

Twelve Member States had government debt ratios higher than 60% of GDP in 2009: Italy (115.8%), Greece (115.1%), Belgium (96.7%), Hungary (78.3%), France (77.6%), Portugal (76.8%), Germany (73.2%), Malta (69.1%), the United Kingdom (68.1%), Austria (66.5%), Ireland (64.0%) and the Netherlands (60.9%).

By way of comparison the Argentine budget deficit was 6.4% in 2001, but in Europe today Ireland, Greece, Spain and the UK have deficits of approximately double that.

Back to Wikipedia

By 1999, newly elected President Fernando de la Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully

That’s up to, um, 9.1% folks – we are now at 13.3%.

In 1999 Argentina’s gross domestic product dropped 4% and the country entered a recession (which was to last three years, ending in a collapse)

A 4% fall? What would you give for a 4% fall in Irish GNP? In 2009 we contracted by 10.4%!

Economic stability became economic stagnation (even deflation at times), and the economic measures taken did nothing to avert it; in fact, the government continued the contractive economic policies of its predecessor. The possible solution (abandonment of the exchange peg, with a voluntary devaluation of the peso) was considered a political suicide and a recipe for economic disaster.

Sounds very, very familar.

Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001, people fearing the worst began withdrawing large sums of money from their bank accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn

The bank guarantee exists in part to prevent bank runs. Is it possible to have currency crisis within a single currency? Could depositors fearing a country will exit the currency union (or that the strong countries of the Union will exit) cause a bank run? Such a run would be in no-one’s interest, so it’s difficult to see how the mass psychology could take root (newspapers and television shows would not be pushing this line). If we did get a currency related bank panic in the Eurozone the response would almost certainly be identical – restrictions on the movement of capital to prevent a complete collapse of the banking system. One affect of this would be to make the withdrawal (from the Euro), of any countries affected, much easier.

After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso–dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional “official” exchange rate was set at 1.4 pesos per dollar.

The equivalent here would be one of the struggling nations breaking the ‘peg’ with the Euro and refloating their own currency. But still, sounds like a complete disaster?

Argentina has managed to return to growth with surprising strength; the GDP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007

And what of the default – how much of that, um, huge debt, is Argentina going to pay back? Moneyweek report that

Around a quarter of its creditors refused the government’s 2005 offer of new bonds worth just 35% of the old ones, and obtained court orders barring it from selling debt on the international markets. Now the ‘hold-outs’ are being offered a deal worth more than 50 cents on the dollar. Most are expected to accept.

So between 35%-50% of debts incurred by Anglo, offset by reduced debts we actually did incur ourselves in making productive investments? Doesn’t sound terrible!

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm