BY WALTER T. MOLANO
There is a perception in the marketplace that Argentina demonstrated the positive aspects of a default. Three years of high GDP growth, a booming market and a case of Malbec later, it seems like Argentina was a success story, but nothing could be further from the truth. The default was a debacle that plunged Argentina into economic, social and political chaos. The fact that Argentina emerged from the crisis rapidly (or at all) is a testimony to the resiliency of the economy, the strength of the political institutions, the homogeneity of the social fabric and the state of the international environment. Most countries, in the developed or the developed world, would have decayed into civil war or been rent asunder by a crisis of a similar magnitude. Therefore, to apply the Argentine experience to other countries, particularly those with weaker characteristics, would be a recipe for suicide.
The Argentine default was one of the greatest economic tragedies of the modern age. The collapse was disorderly, chaotic and complete. Argentina cycled through five presidents in two weeks. There was widespread looting. The police indiscriminately shot people in order preserve law and order. Government buildings were set ablaze. Household savings were frozen and/or lost. People committed suicide. There was hunger, with large groups of people scavenging the trash bins of the toniest neighborhoods of Buenos Aires. The fact that Argentina did not return to military rule is a testimony of the democratic institutions that were established during President Alfonsin’s tenure. For all of its faults, the country still respected the authority of the congress and the courts. The society did not want to repeat the repression of the 1970s and 1980s, when it allowed the military to take over.
Argentina’s rapid recovery was attributed to several internal and external factors. On the internal side, the speed and depth of the contraction suggested that the recovery was going to be similar. The dollar amount of Argentina’s Gross Domestic Product (GDP) contracted by almost two-thirds in less than a year. Argentina’s level of output at the end of 2001 was $270 billion. It fell below $90 billion by the end of 2002. Like a compressed spring, Argentina was ready to pop. The recovery that began in 2004, and accelerated through the end of this year, allowed the country to recover 60% of the ground that was lost in 2002--without speaking about the interim growth that was never realized.
Today, Argentina’s economic foundation is solid, but the cost of the transformation was painful and very risky. The Argentine economy is externally oriented, with large fiscal and trade surpluses. The exchange rate is flexible, and the labor force is mobile. The external environment also helped. The surge in commodity prices boosted the trade accounts. High levels of international liquidity financed Argentine companies and provincial governments, despite the debacle. Therefore, a unique set of domestic and international conditions mitigated the pain of the debacle.
JOKE OR LUNACY
Memories tend to be selective in Argentina—and the vestiges of the debacle are slipping away. Nevertheless, this is not an experience that should be repeated. The rumors that Ecuadorian President-elect Correa is using the Argentine experience as a precedent to push his country into default should be taken as a joke or a sign of lunacy. Although international conditions are good, the domestic conditions in Ecuador are weak. The country is socially divided, along geographical and racial lines. Ecuador does not have Argentina’s excess capacity to replace the loss of external markets. The Ecuadorian banks cannot withstand a possible run caused by a unilateral default and the loss of external credit lines. President Correa’s tenure would be short-lived in such a scenario, and the country could plunge into chaos.
Default is an act of desperation. It is the last item on the menu of policy choices; after leaders already exhausted their attempts to attract foreign investment, privatize assets, moderate domestic demand and run down their international reserves. There is no rational reason for Ecuador to default. It is flush with cash, credit and growth. Trying to repeat the Argentine experience in order to increase social spending would be tantamount to suicide.
Walter Molano is head of research at BCP Securities.