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the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn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!

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  • Henry94

    Excellent post Mack.

  • John East Belfast


    I think it is probably more apt to compare Argentina with the UK than Ireland.
    ie they both have their own currency.

    Hence macro economic weakness was translated into a run on the Argentine Peso.
    Although an export led growth followed

    Therefore although the markets may want to sell ROI Bonds (making borrowing more expensive) being in the Euro is actually preventing a collapse in the whole economy – assuming Germany et al are prepared to stand over the PIIGS.

    Therefore although I think the Euro contributed to your problems and is also seriously hampering your recovery you are probably protected therein as part of the greater whole.

    The UK is possibly the one to watch with STG and Euro parity possibly back on the cards by Christmas ?

    I think the ROI could be looking at years of stagnation within the EURO and the UK could be riding up the roller coaster

  • Mack

    JEB –

    Argentina had a strict dollar peg – they held a dollar for each peso, which would imply a good portion of the national debt was in Dollars (if not it all). They were in a lose unofficial one-way currency union with the USA!

  • Mack

    I agree with the rest of your comment by the way. I think we need to make a choice about whether it is going to be more painful to remain in the Euro and risk debt deflation or to exit the Euro and default (or perhaps even some combination (Constantin Gurdgiev is arguing that Ireland should restructure it’s debts – public and private for 70-75c on the Euro, presumably within the Euro).

  • Mack

    4 days after the post – Krugman says the same thing 🙂

    Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling.

    And if Greece is in effect forced out of the euro, what happens to other shaky members?

    I think I’ll go hide under the table now.

  • Greenflag

    mack ,

    ‘I think I’ll go hide under the table now.’

    I believe that is Joe Canucks favourite response whenever Pete Baker posts one of his more terrifying videos of the possibility of the entire earth being gamma rayed instantaneously or pulsared out of the universe 😉

    On reflection I think JC’s hideaway was/is under his bed somewhere in deepest Canada 😉

    But even there he’ll not be safe from the reach of the shaky handed ouzo swillers 😉

    Of further reflection was it not the Greeks who conceived this ‘democracy ‘ business way back when the Germans Brits and Irish were clothed in animal skins ?

    Who was it who said ‘Beware the Greeks when they bring gifts ‘?

  • John East Belfast


    I still think a lot of people are under estimating the financial complexity and assocaited risks therewith of leaving the Euro.
    You just cant cash your chips in and walk away.

    There would be a massive flight of money out of a country to exchange Euros for any other currency at a rate more favourable than what your own currency will be as soon as signals of an exit arose.

    Also as a side issue all those people who bought holiday homes in Greece, Portugal and Spain are going to get stuffed – ie your Foreign asset will plummet in value and even if you had hedged it with a loan that loan is probably Euros and you wont be able to exchange Euro liabilities that easily – especially if you raised the loan in a non Greek, Spanish or Portuguese bank.

    The implications of the Euro galling apart are immense – I really cant see it happening.
    If the banking collapse was consdired too big to fail so will the Euro IMHO

  • John Joe

    Behind a lot of this are some of the ropey practices that got us in the credit crisis in the first place. Greek bonds and being short sold to get a run on them (which worked as they have been downgraded to junk status). Supposedly the same international financiers are hoping to now get a run on Portugese bonds and see if they can do the same. The objective being to buy low before an EU bailout package is resolved. Keeping pressure on the markets is meant to defer the bailout.
    Nice to see that no-one learnt anything from the credit crisis. Until we look at the mechanisms by which global finance operates and make some attempt to contain them (for instance make short-selling illegal – you should only be able to sell shares that you own!), there is no prospect of financial stability anywhere.

  • Mack

    John Joe –

    Making short-selling illegal is a terrible idea. The Irish property bubble was able to grow to such extremes in part because it isn’t possible to short-sell property (i.e. to make a counter-veiling move against the prevailing madness that property prices can only go up). Robert Shiller (US Keynesian-liberal, as opposed to neo-liberal) has suggested creating a market place where homeowners and investors can short property would help dampen future property bubbles and prevent a repeat of the sub-prime crisis.

    Some hedge-funds were able to profit from short-selling bonds, only because they weren’t matched on the other side of the trade by enthusiastic buyers- it’s inherently risky as there is no limit to what they can lose if prices rise, and they get hammered by margin calls, and worse a short-squeeze when trying to unwind their positions. You could have the same situation evolve, over a longer period of time, when the imbalances have grown much larger, simply by having an excess of owner-sellers over buyers. This is what happened in the Irish property bubble. We would have been much better off had that burst in 2001 rather than 2006-2007!

    The investment bankers wanted short-selling banned when hedge funds and the like were helping drive their share prices down. With hindsight, it’s pretty clear the hedge funds were right. Would we have been better off if the investment bankers were allowed to continue to on their merry way for a few more years of selling sub-prime CDOs? I doubt it..

    It mightn’t seem like it now, but bringing sovereign debt issues and fiscal imbalances to a head before they grow into unhandleable proportions is a good thing (let’s hope we’re not past that point already!)..

  • Driftwood
  • John Joe

    Now Mack – thats almost a sleight of hand trick – property bubbles are created by cheap credit and soft lending, not being unable to short-sell property. There is an untouchable core of financial trading that argues that everything should be subordinate to the market. Currenly that includes meaningful Greek soverignty. Maybe we have passed the end of history (I don’t agree), but surely the only response to the credit crisis should have been global regulation, even as a short term measure, to promote stability.
    The Irish property market would have burst long before if weren’t for that tent at the Galway Races…

  • Mack

    John Joe –

    You do understand the difference between the preventing something (or even simply mitigating some of the negative effects) and causing it, right?

    Had investors been able to short-sell Irish property it is unlikely the bubble would have reached the proportions it did.

    By banning short-selling you would be forcing people into holding only long only positions in assets – i.e. the sole position they could take would be a position on the asset rising. Imbalances can build to even greater extent in markets without short-selling.

  • Mack

    FWIW – The ECB could prevent any speculative attacks by short-sellers on European bonds by changing collateral rules or simply purchasing the bonds themselves..

  • Mack

    This is worth a watch – how a hedge fund used Naked Short Selling to time the crash of Bear Sterns and profit from it..

  • Mack

    Also following these principles would be superior to banning short-sales