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Tango Lesson

The Argentine preview of the eurozone crisis.

Dec 12, 2011, Vol. 17, No. 13 • By ANDREW STUTTAFORD
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And so had the banks: According to the IMF, close to 60 percent of the Argentine banking system’s assets and liabilities were denominated in dollars throughout the second half of the 1990s, leaving the banks horribly exposed in the event that the peg broke. Indeed, the potentially enormous cost of breaking the peg was a good part of why it was maintained, a logic similar to that now keeping the embattled PIIGS (Portugal, Italy, Ireland, Greece, and Spain) on the euro’s leash. This should come as no surprise: The stability that such mechanisms can bring largely rests on the absence of any obvious exits. Countries that sign up for them need to be sure that they have what it takes to stay the course. Slinking in on fudged numbers and, ludicrously, expected to maintain some sort of pace with Germany’s Porsche economy, the Greek jalopy stood even less of a chance than had far-better-intentioned Argentina.

Argentine headlines in 2000-01 must have read much like those in Greece today. The country accepted billions in international assistance (from the IMF) in exchange for the imposition of austerity measures that pummeled an already faltering economy. There was a voluntary debt swap (on terms as absurdly expensive as those proposed for Greece earlier this year) that bought time, but no confidence.

Massively widening spreads between peso and dollar debt signaled the market’s fear that the peg was doomed. But, to quote the IMF’s invaluable Lessons from the Crisis in Argentina (approved by one Timothy Geithner), it was “the resumption [in July 2001] of large scale withdrawals from Argentine banks [that was] perhaps the clearest sign of the system’s impending collapse.” Indeed it was.

The banks—and, of course, the country itself—were quite literally running out of the dollars that made up a monetary base already depleted by previous capital flight, and a growing current account deficit. The rules of a currency board (even in its looser Argentine variant) meant that it was not possible simply to print money to fill the gap. This is a problem familiar to those of today’s PIIGS who have to watch the money drain out of their economies, yet are blocked from direct access to the printing press by the European Central Bank. Argentina’s more sinuous treasuries (provincial and then national) tried to meet this challenge by issuing a series of evocatively named quasi-monies (IOUs, basically), but these patacones, porteños, quebrachos, and lecops were harbingers of doom, not a solution.

And when the dominoes of finance finally fall, they fall quickly. To return to the IMF’s grim textbook: “The crisis broke with a run [on] private sector deposits, which fell by more than $3.6 billion (6 percent of the deposit base) during November 28-30.” At that point the game was up. The authorities’ response (notably the introduction of the corralito) should alarm depositors throughout the PIIGS as they mull how their governments might stop precious euros escaping to safe havens abroad in the wake of bank runs at home.

The corralito limited cash withdrawals from individual bank accounts to the equivalent of $250 a week (the dollar value would soon fall sharply). And the response to it should worry those now running the PIIGS. Argentinians took to the streets and reduced the country’s political order to chaos. Depending on how you define the term, Argentina had five presidents in less than a month, but none could change the inevitable. The country defaulted on its debt, the peg was scrapped, the peso tanked, and the corralito was replaced by the corralón, the centerpiece of an even tougher regime. Depositors were allowed to withdraw a little more money than before, but only in heavily depreciated pesos. Term deposits were frozen, and transfers of money out of the country heavily restricted. Not so long after, dollar deposits were switched into pesos, and the ruin of Argentine savers, many of whom lost their jobs as the economy crashed, was complete.

History does not always repeat itself. Maybe those remaining Greek depositors are confident that, however battered their nation’s finances, its guarantee of bank deposits up to some $135,000 will hold up through the toughest times. Maybe they have faith that Greece will stick with the euro. And maybe they trust that, should the walk from Greek banks turn into a run, the European Central Bank will do what it takes to put things right. But if they do have any doubts, they can, for now, easily move their euros to a part of the eurozone—Germany, say—where there is no currency risk and bank deposits are blessed with a guarantor that is, you know, solvent. Thinking like that is how a run on the banks can begin. Paranoid? Well, if you were a depositor with a Greek bank, what would you do?

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