Round 2 of elections in Greece are coming up this weekend, and all of the media spin machines are working in hyperdrive to make sure that A) the elections DON’T go according to plan, i.e. the anti-memorandum Syriza party doesn’t take down as many votes as the stark stench of uncertainty, uneasiness and anger permeating throughout the country implies that it would (forget the polls), and B) if Syriza does win and Greece is forced out, the rest of the EZ periphery is convinced that it would be unwise to follow the same path.
An article in the Telegraph by Jonathan Gilbert, published yesterday, is an excellent example of this type of media propaganda in its most potent form. Just take a look at this headline:
Why is that the cost, you ask? Gilbert answers by referring to the Argentinian default of 2001. But before we get to that, I want you to take a look at the conclusion of the article:
The Kirchnerist model, which has seen Argentina grow by around 8pc a year since Néstor Kirchner came to power in 2003, benefited strongly from the devaluation of the peso, which encouraged exports, especially of soy, and a fiscal surplus.
“Argentina’s economic success since the crisis is based on the default and its fiscal balance,” says Dr Blejer. “A partial default isn’t enough to solve Greece’s problems. It needs to be total.”
That’s not exactly the conclusion you would expect from the headline, is it? Well, it is really the only conclusion that can be reached at this point, but if you stick it in at the very end, most readers aren’t going to take that message away from the article. Instead, they will just see the BIG, BOLD headline, perhaps skim through the article really quick-like, and take away the following – Default = BAD, No Default = GOOD.
Yet, we should all remember that default is only a “bad” outcome for the Greek people right now because it has been put off for much too long. Their economy and society have been strip mined by the Eurocrats and the bankers to keep an inherently unsustainable situation profitable for the minority elites, and to buy time for those same people. The banking system, the pension system, the healthcare system, the civil service system, the legal system, the political system… you name it – all of them range from completely broken to highly dysfunctional, and that’s BEFORE a hard default on external debts.
That is the cost of denying reality for so long, and it is the same cost that was bore by the Argentinian people:
De la Rúa had declared a ‘state of siege’ after thousands marched throughout Argentina banging pots and pans – in what is now termed the cacerolazo.
The social unrest triggered further political turmoil: four presidents held office in 10 days after De la Rúa’s resignation. Following an emergency session at Congress, Eduardo Duhalde was sworn in on January 2, 2002, providing some stability.
This was the fallout from the collapse of Argentine economy, which led the South American nation to default on $100bn (£64bn) of debt – the biggest sovereign default in history until Greece’s partial restructuring three months ago.
Together with the default, Duhalde brought an end to the ‘convertibility’ system of the previous decade, which had tied the Argentine peso to the US dollar. The peso was subsequently floated, leading to its rapid devaluation.
Convertibility had been the response by former economy minister Domingo Cavallo to Argentina’s hyperinflation of the 1980s, which peaked at 5,000pc in 1989.
It meant the central bank would have to keep enough dollars in reserve to match the value of pesos in circulation, forcing the government into a strict monetary policy.
From 1991 to 1998, the economy grew at an average of 6pc a year with almost no inflation – just 0.2pc in 1996 – but the currency peg was “completely unstable”, Leandro Bullor, an economist at the University of Buenos Aires, said.
As the dollar strengthened and Argentina allowed up to a third of its reserves to be held in the form of bonds, the peg strained. Government debt rose and the fiscal deficit widened.
“The government didn’t suitably adjust its fiscal accounts to back up the convertibility system,” Mario Blejer, president of the Central Bank of Argentina in 2002, told The Daily Telegraph.
“And when things started to go wrong – after Russia’s default and devaluation in August 1998 – nobody was brave enough to abandon convertibility. There would have been total chaos.”
In the aftermath of the Russian crisis, Argentina was borrowing from international markets at progressively unaffordable rates. As its external debt became unsustainable, the government received huge loans from the IMF, including one of $14bn in December 2000.
In a mirror of modern day Europe, austerity measures were introduced in an attempt to cut the budget deficit. However on December 1, 2001, after a bank run by savers, Cavallo imposed the corralito – accounts were frozen for 90 days and capital flight was restricted. “The banking crisis was the most difficult thing to handle,” Dr Blejer said.
Days later, the IMF pulled out of a planned rescue package to replenish foreign exchange reserves.
The default that followed led to a huge debt restructuring and Argentina was shut out of international financial markets. It still is today. There remain debts to settle. Members of the Paris Club are still owed $7bn while creditors that held out and ‘vulture’ funds have taken their cases to the World Bank.
If there are any parallels worth noting between Argentina in the late 90’s-2001 and Greece right now, it is exactly this one – the longer you put off default, the worse it will be for the country’s population. The politicians and bankers and pundits know that, but they will still pretend that what inevitably ensues in Greece is a result of their decision to default and DEFECT from the Eurocratic nightmare. Right now, a “Grexit” is almost guaranteed, so it is all about convincing other peripheral populations that they should not follow in the footsteps of the Greeks.
“SEE, we told you that it was better for Greece to tough it out, follow through on austerity commitments and stay in the Euro… just look at how those poor Greeks are doing now!”
And they will appear to be right, because Greece will be an ugly sight after the default/exit – much uglier than Argentina. Capital controls, trade barriers, emigration restrictions, hyperinflation, malnutrition, starvation, social unrest, police/military crackdowns – it will be a whopping mess. What will the Spanish people think when they see all of this go down? What will they do when the financial contagion FULLY envelops their bond markets and the bankers demand a pound of flesh for bailing themselves out, just like they did in Greece?
We cannot be sure about that, but one can hope that the Portuguese, the Spanish, the Italian and others remember exactly how the Greek people got to this point in the first place – they were coerced into denying reality for far too long.