Map of Argentina (Photo credit: tiswango)
This article originally appeared in the Apr. 23, 2012 issue of Forbes magazine.
Greece is in default and its economy in painful contraction. Where does it go now? One siren call is to follow the path of Argentina, which is advising Greece that it should do what that country did a little over a decade ago: Tell creditors to take a hike. Argentina repudiated its international debts and offered a punitive settlement to its lenders, saying, in effect, take our offer or you’ll get nothing. Unburdened by international debt, Argentina had a few years of high growth.
After its May elections Greece will be tempted to do the same as Argentina. But that would be a catastrophic mistake. Argentina benefited from the commodities boom brought on by the weak U.S. dollar. Greece has no such fallback. Moreover, Argentina is, once again, an economic basket case. It’s high time the U.S. and others cracked down on deadbeat Argentina—and any other country that pursues its course. (Argentina has routinely ignored adverse judicial decisions.)
Unable to borrow internationally, Argentina, led by its Peronist president, Cristina Kirchner, has been stealing from its own people. A couple of years ago the government seized the dollar-denominated pension assets of its citizens. The country’s inflation rate is one of the highest in the world.
While commercial banks and the IMF won’t lend to Argentina, the World Bank and the Inter-American Development Bank still do. The U.S. is opposing an upcoming World Bank loan. However, most other countries seem willing to go along with it, including, astonishingly, the British government, despite Buenos Aires’ renewed threats against the Falkland Islands, which belong to Britain. Moreover, the American opposition is of the wink-and-nod variety: Money being fungible, cash from the World Bank can be used to pay arrears at the IMF. Congress should weigh in here and make it clear that the World Bank will suffer sanctions if it continues to finance Argentina. We should also remind the Europeans that making an example of Argentina would serve as a useful reminder to its own over-indebted countries that it is best to restructure debts, working with creditors rather than unilaterally repudiating their obligations.
Back to Greece. What Germany is doing here and elsewhere (think Portugal, et al.) is a political/economic nonstarter. Creditors should structure settlements that combine government-spending cutbacks with pro-growth economic measures, such as big cuts in tax rates (flat tax, anyone?), liberalizing job-killing labor laws and making it easy to set up new businesses by removing regulatory obstacles. This is, alas, manifestly not the current approach of Europe’s paymaster, Germany.
For more from this issue’s Fact and Comment see here: EPA All Wet
