Argentina in December 2001 versus Europe in December 2011

This month marks the ten-year anniversary of Argentina’s massive sovereign debt default, an event with many lessons for the European sovereign debt crisis of today, though analogies are far from perfect.

First, as has been discussed and debated on planet money and naked capitalism, the Argentine economy actually recovered quickly from the painful default and crisis of 2001 after it negotiated a substantial write-down of its sovereign debt.

Second, the experience of Argentine’s neighbor Uruguay shows that the economic pain of such crisis is less severe if a more orderly restructuring is employed from the start rather than a chaotic default. Such an orderly restructuring could have taken place in Greece two years ago as it did in Uruguay ten years ago as veteran debt expert Carlos Steneri and I discuss with Juan Forero in this NPR price “What Greece Can Learn from South America” which aired last week. (I worked closely with Steneri during the Uruguayan crisis when I was US Treasury Under Secretary).

Third, and most important, despite the immediate and sharp impact of the default in Argentina, there was very little international contagion at the time of the default. This outcome was contrary to many warnings at the time that such a default would have large contagion effects much as the Russian default three years earlier in 1998. The first chart shows the contagion following the Russian default in terms of emerging market bond spreads in Asia. The second chart shows, using the same measure, that there was virtually no contagion following the Argentine default.

In my view the reason for this remarkable difference is that the IMF and the international policy community was clear (at least following an increase in loans in August 2001) that the bailouts of Argentina would stop, making a debt restructuring inevitable or at least more predictable than the surprise withdrawal of support for Russia in 1998 which caused the contagion then. Contagion is not automatic if the policy is clear and predictable.

As the investigative reports in the Wall Street Journal this week make clear, this same type of fear of contagion (expressed, according the the WSJ story, very strongly by Jean-Claude Trichet during the past two years) is why a restructuring of Greek sovereign debt has been kicked down the road so many of times. Instead of reducing the role of bailouts as occurred for emerging markets around the time of Argentina, the role of bailouts in European policy has increased and this has made policy even less predictable. As the prospects of bailout increased, the political incentives to take action to reduce deficits and debt decreased as evidence in Italy over the past year and made the crisis much worse.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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