Was It Possible to Prevent the Greek Crisis Having in Mind the Lessons from Argentina 2001? Similarities and Differences

Recently EU has been shaken with many crises, but the most important is the Greek crisis. This is maybe the worst scenario that ever happened to EU's economy. The reason is simple, EURO. The unique currency in the European Union makes the situation even worse than it is. Ortiz (2012) states that the global financial crisis of 2007-2008 resulted from the massive institutional failure and proved that more robust regulatory and supervisory frameworks are indeed necessary. But unfortunately those kinds of frameworks are not yet in place. He also states that comparing the indicators in the current Greece crisis to those in Argentina in 2001 is possible and there are certain lessons that can be learned from that case but there are some things that are very different.

But when talking about crises we cannot pass without mentioning Latin American economies, especially Argentina. In the economy world there is some kind of joke that says that if there is a crisis anywhere in the world Argentina will suffer from it. Many economic experts suggest that Greece should follow the Argentina example for solving the crisis. Argentina had a fixed peso rate until 2001, and this was maybe the main reason why Argentina went to most serious problems in Latin America. In the first moment Argentina could not devolved immediately after the start of the crisis and that made it only to last longer. After the flat course was abandoned, and the Peso depreciated the situation got slightly better. There is a suggestion by some experts to Greece that Greece should abandon the Euro and go back to Drachma, which is the original currency of Greece. In that case they can allow their own currency to depreciate and float, in which case Greece will in some way lift the weight on their economy.

1. History of the 2001- Argentina Crisis

The start of the crisis in Argentina was in 1980s. It was because of the high inflation in the country that was in average 570% but it had a 3079% peak in 1989. Argentina was forced to establish a Currency Board. The board had a mission and promised to keep a stabile Peso course and to maintain a forex reserve fund. The Peso was pegged with the US dollar. In the Argentina case 1 Peso was equal to 1 US dollar. And Argentinean people could exchange dollars in any time.

These arrangements helped to control the inflation. Also, national reserves were invested in safe assets of the targeted economy. To maintain a stable course of the Peso, Argentina government was conducting constant pressure on the Central Bank to keep printing money and to buy government debt.

Starting point for the 2001 crisis was in 1999 when Mexico and Brazil too were passing through rough times. The reason was that Argentina was a leading trade partner of the both economies, which also had pegged their currencies to the USD. But Mexico and Brazil depreciated immediately; Argentina couldn't because of the board arrangement. In that time Peso became overvalued to all the other currencies leading to the enormous deficit in Argentina. There were attempts to keep Peso stabile but the pressure finally came in 2002 when the currency peg was broken. The devalued currency really helped Argentine economy.

2. Comparison - Argentina Greece

 Central bank and monetary policy

As sad, Argentina adopted Currency Board and the role of the Central Bank was to defend the Peso. We already know how it ended. But Argentina was not accomplishing 100% with the principles of the Currency Board and did some central banking activities. This was fatal for the credibility of the Currency Board. Nechio (2010) stated that the lack of monetary policy autonomy in both countries had contributed to lower inflation and interest rates. Greece's banking system showed much less sovereign exposure wherein public debts represented only around 11% of the country's bank assets. However, the loss of independence eventually became problematic. Argentina's Currency Board regime deprived the country of monetary tools to fight recession. At the same time, it was unable to adopt expansionary fiscal policy because of its already high fiscal debt levels. In addition, the capital outflows that followed the Russian and Brazilian crises combined with Argentina's limited ability to expand exports left it without the foreign reserves to sustain the currency peg. Finally, Brazil's 1999 devaluation led to a sizable appreciation of the Argentinean Peso related to the currency of one of its main trading partners.

In Greece credibility loss was not that big because they're part of the European Monetary Union (EMU) and their central banking and monetary policy belong to European Central Bank. In Argentina case, the Board was abandoned but in Greece, since joining the EMU, that option is not possible.

 Depreciation of the Euro-Peso

In recent history it is known that one of the best ways to overcome crisis is with depreciation of the