What happens if a country default: Argentina that rejected austerity measures now being put in place to shore up the euro zone. On December 23, 2001, the government declared the biggest debt default in history, $100 billion. It then took the extraordinary step of refusing to negotiate with creditors, instead imposing its own conditions. By restructuring its debt, Argentina was thus able to secure a 75% reduction.
And the policy worked. Since 2003 the country's average economic growth has been around 9%, with the exception of 2009 when the economy grew a modest 0.9% in the midst of an international crisis. Consumption is booming and unemployment has stabilised at around 7%.
The significant growth rate is powered by high global prices for natural resources and soy beans, of which Argentina is one of the world's biggest exporters. The price of a ton of soy is currently over $500, more than double what it was in 2001 when president Fernando de la Rua was forced from office amid a financial crisis and riots over austerity measures.
But the Kirchner model also has its Achilles heel - a 35% annual increase in public spending and an inflation rate of between 25-30% this year, according to economists. Argentina has become a pariah on world markets now forced to finance itself from different national sources, like nationalised private pension funds, social security and the central bank.
10 years after default, Argentina emerges
Tuesday, 20 December 2011
Argentina has emerged from its crisis of 2001 by rejecting the austerity measures now being put in place to shore up the euro zone.
Ten years after declaring the biggest debt default ever, Argentina has emerged from the crisis by rejecting the austerity measures now being put in place to shore up the euro zone.
It was a period of tremendous upheaval for the key South American country, which saw five presidents in two weeks, 33 dead, thousands of people pouring into the streets in fiery protests, hundreds of children scouring through trash for food and unbridled vandalism.
"What did we do? We said that the dead do not pay their debts and that, in order to honor them, we had to first renew growth," President Cristina Kirchner said last week as she called the European debt crisis a "reflection of Argentina in 2001."
Her late husband and predecessor Nestor Kirchner, president from 2003-2007, boosted consumer confidence by encouraging reduced borrowing rates and making more subsidies available.
And the policy worked. Since 2003 the country's average economic growth has been around 9%, with the exception of 2009 when the economy grew a modest 0.9% in the midst of an international crisis. Consumption is booming and unemployment has stabilised at around 7%.
"The European crisis is similar to Argentina's crisis," said Belen Olaiz of the Abeceb economic analysis institute. "The austerity measures and deflation showed no positive results," she said.
But International Monetary Fund chief Christine Lagarde has rejected the comparison, noting that those European countries that are now underwater have the support of their European partners.
Just as euro zone countries are struggling today to save their monetary union, Argentina first tried to keep its peso pegged to the dollar, as required by law. It agreed to an IMF austerity plan and faced a long recession and rising unemployment.
But on December 1, 2001, a freeze on all deposits aimed at halting a run on the banks and shoring up financial institutions triggered the country's biggest economic and social crisis. It was a desperate measure taken after $22 billion was withdrawn from Argentine banks in just three months. It also marked the end of the dollar-peso parity, with the Argentine currency being devalued by some 70%.
Four days later the IMF refused a $1.26 billion loan to Argentina, meaning the country could no longer meet its obligations. On December 23, the government declared the biggest debt default in history, $100 billion. It then took the extraordinary step of refusing to negotiate with creditors, instead imposing its own conditions. By restructuring its debt, Argentina was thus able to secure a 75% reduction.
Talks have since dragged on for years to reach a deal with the Paris Club on a plan to repay the $6-8 billion Argentina still owes to creditor nations. Yet this approach, the flipside of the one now underway in the euro zone, would not succeed in struggling European countries like Greece.
Analysts have said that this model was possible because the world changed radically. Prices for raw materials like soy have quadrupled, the dollar has weakened and interest rates have remained low, they added.
The significant growth rate is powered by high global prices for natural resources and soy beans, of which Argentina is one of the world's biggest exporters. The price of a ton of soy is currently over $500, more than double what it was in 2001 when president Fernando de la Rua was forced from office amid a financial crisis and riots over austerity measures.
But the Kirchner model also has its Achilles heel - a 35% annual increase in public spending and an inflation rate of between 25-30% this year, according to economists. Argentina has become a pariah on world markets now forced to finance itself from different national sources, like nationalised private pension funds, social security and the central bank.
Kirchner is also facing a currency crisis amid concerns over capital flight, lower currency reserves and a race for the dollar. Her government has created a new Office of Financial Investigation in a bid to slow an outflow of capital that has put a dent in the country's foreign reserves.
Economists estimate capital flight has neared $68 billion over the past four years, including $22 billion this year alone, prompting the government to implement strict new exchange controls to try to stem the flow.
Kirchner's October 23 re-election with 54% support did not, however, bring more consumer confidence. Instead, Argentines increased their purchases of dollars to protect their assets |
