In December of 2001, after two years of recession and increasingly desperate attempts to forestall a debt crisis through IMF financial support, fiscal adjustment and debt management operations, Argentina defaulted on its external debt. A few days later, on 2 January 2002, it discontinued its "convertibility regime" —a legal commitment, backed by hard currency, to exchange the Argentina peso for US dollars at 1:1. The peso subsequently devalued by about 200 percent, and GDP fell by about 11 percent, before beginning a sustained recovery from 2003 onwards.
There are important parallels between the Argentine 2000-2002 crisis and the euro crisis ten years later, particularly as it played out in Greece. Both occurred in the context of hard pegs. Both were triggered by large external shocks. Both involved IMF-supported programmes that failed to restore solvency. Both resulted in historically large sovereign debt restructurings (Cruces and Trebesch 2013, Zettelmeyer et al. 2013). Both involved large output losses —cumulative negative growth of almost 20 percent in Argentina between 1999 and 2002, and almost 30 percent in Greece between 2009 and 2013. They differed, however, with respect to one critical outcome: the Argentine crisis resulted in the abandonment of Argentina's hard peg, while the euro survived the crisis—even though Greece came close to exiting.
This article aims to examine both the commonalities and differences of the Argentina and euro crises, with a particular focus on Greece, with a view to answering two questions.
- Firstly, what were the causes of the abandonment of the Argentine convertibility regime in early 2002, and what does this allow us to infer about the conditions, if any, in which the euro might in the future suffer a similar fate?
- Secondly, what does the Argentine experience teach us about the potential costs and benefits of a euro exit?
To answer these questions, the article begins by briefly recalling the origins of the two crises. The question of why there was a devaluation in Argentina, but not in Greece is examined next, followed by a review of the aftermath of default and devaluation in Argentina and its lessons for the euro area.