Greece and Argentina: A Tale of Two Debt Crises Kunibert Raffer © K. Raffer 2014

PARALLELS AND SIMILIARITIES 1)State itself borrowed (unlike in the Asian Crisis, in Ireland, Iceland or Chile 1982) 2)Autonomous monetary and exchange rate policies abandoned good short term results (AR: after 1991, GR: after 2001); fiscal discipline to be strengthened; „quasi-monetary union“ (Alcidi et al 2011) 3)Easier access to capital markets until crisis ” … mixed blessing: the high credibility of Argentina’s currency board through 2000 helped enable the country to borrow from the capital markets at spreads that did not fully reflect the risks. This temporarily insulated the country from adverse market reactions to unsustainable policies, and thus ultimately allowed a much bigger disaster to materialize” IMF 2003, S.70 5) Presented as a success stories right into the crisis 4) Liberalisation

PARALLELS AND SIMILIARITIES 5)Insolvency delayed by multilaterals ARGENTINA “September 2001 augmentation suffered from a number of weaknesses in program design, which were evident at the time. If the debt were indeed unsustainable, as by then well recognized by IMF staff, the program offered no solution to that problem.” IMF, Independent Evaluation Office, Evaluation Report: The IMF and Argentina, 1991–2001, p.89 (stress KR) Internal memorandum of 26 July 2001: “staff estimates that a haircut of between 15 and 40 per cent is required, depending on the policy choice.” ibid., p.90, fn 95 “program was also based on policies that were either known to be counterproductive... or that had proved to be ‘ineffective and unsustainable everywhere they had been tried (as was the case with the zero deficit law).”... [A]s expressed by FAD [Fiscal Affairs Department] at the time.” “Nor did the program address the now clear overvaluation of the exchange rate” (ibid, p. 55) Board supported “a program that Directors viewed as deeply flawed” (p.50)

PARALLELS AND SIMILIARITIES GREECE “The Fund approved an exceptionally large loan to Greece under an SBA [Stand-By Arrangement] in May 2010 despite having considerable misgivings about Greece’s debt sustainability … The decision required the Fund to depart from its established rules on exceptional access. … The euro partners had ruled out debt restructuring and were unwilling to provide additional financing assurances.” IMF "Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement”, Country Report No. 13/156, June 2013, p.32 “Avoiding undue delays in debt restructuring … Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output. The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook.” ibid., p.33

PARALLELS AND SIMILIARITIES Public sector delays insolvency Abusive credits (J.P. Bohoslavsky) - subordination of these public sector claims and damage compensation mandatory External shocks trigger crisis - AR: Brazilian crisis 1999 GR: Financial crisis 2008 Evolution of spreads Source: Alcidi, Gio- vannini,Gros 2011, p.2

PARALLELS AND SIMILIARITIES PARALLELS AND SIMILIARITIES In BOTH CASES – and not only in these two cases – a Rule of Law based and fair insolvency mechanism (thwarted by the public sector!!!) would have avoided a lot of damage and big problems; GR: necessary complement to Art. 125 TFEU („No-Bail-out Clause“); AR: would have had no problems with hold-outs Best Solution: Raffer Proposal - aka FTAP, or International Chapter 9 (= based on US domestic insolvency law for debtors with governmental powers, Chapter 9, Title 11 USC)

DIFFERENCES GREECE  Scale of public intervention and fault of the public sector in aggravating crisis  Entry into Eurozone in spite of faked statistics and ratio debts/GDP far beyond Maastricht limit  Basel I and II: too low capital weights for GR and other problem countries of Eurozone (but at least: Basel II, though dependence on Credit Rating Agencies)  EU exacerbates situation - capital requirements directives: capital weight of zero for EU-members if borrowing in their own currency; exempting highly rated countries from “large exposure” limit Slashing sensible regulation = regulatory original sin

DIFFERENCES GR: presently nearly exclusively official creditors ” After a €200 billion debt exchange in March/April 2012 and a buyback of a large portion of the newly exchanged sovereign bonds in December, the amount of Greek bonds in the hands of private creditors was down to just €35 billion—just 13 percent of where it had stood in April 2010” (Zettelmeyer, Trebesch & Gulati 2013, p.2) GR: outstanding generosity, especially vis-à-vis speculators “created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdouts … likely to make future debt restructurings in Europe more difficult. Partly as a result, it will be hard to repeat a Greek-style restructuring elsewhere in Europe should the need arise.” ibid., p.1 & p.3

DIFFERENCES GR: outstanding generosity, especially vis-à-vis speculators “Bondholders were offered an exceptionally large cash sweetener, in the form of highly rated EFSF notes—worth 15 percent of the ‘old’ bond’s face value and due to mature in 2013 and These notes turned out to be by far the most valuable component of the securities bundle offered to creditors, representing almost two-thirds of its value” 40 To our knowledge, this was the largest cash sweetener ever offered in a sovereign debt restructuring (aside from outright cash buybacks). According to data by Cruces and Trebesch (2013), the average cash sweetener across 180 debt restructurings since 1975 amounted to only 3.6 percent ibid. (stress KR) “new bonds issued under a ‘co-financing agreement’ that created an exact symmetry between Greece’s debt service to the new bondholders and its debt service to the EFSF … shortfall pro rata between the EFSF and the bondholders “ ibid.

DIFFERENCES Neither corralito nor corralon – in contrast to Cyprus 1 January 2010 till October 2001: 58,9 B withdrawn from savings accounts; 9.5 B during 45 days! (Spiegel online) Solidarity with Greece? “Vulture funds stand to make a fortune from a second Greek bailout after buying hundreds of millions of euros of distressed sovereign debt in the past few months.” The Telegraph, Philip Aldrick, 25 June 2011 Robert Marquardt, founder of Signet, a fund for hedgefunds: Greek crisis "certainly a great chance to make money". (ibid)

DIFFERENCES GR: No problem with hold-outs An extremely interesting question: WHY DID ICELAND AND GREECE NOT FACE PROBLEMS WITH HOLD-OUTS, WHILE ARGENTINA DID?

DIFFERENCES Reaction to crisis by the EU Yves Leterme (Deputy Secretary-General of the OECD, formerly PM of Belgium) Keynote Address at the Conference Can the Eurozone be Saved at the University of Texas at Austin, November 2013: In “the first stage of crisis and first range of decisions … enormous fear amongst other members of the eurozone“ of financial markets; because of high public debt and domestic banks affected by Lehman Brothers ▬►PSI not even to be mentioned Re. No-bailout-Clause: “fair to say that we infringed a little bit on what‘s literally in the Treaty“ Whole Conference on video easily accessible via

Hvala lijepa! Thank you very much! Danke sehr! Kunibert Raffer