Gadsden Post: Lessons of Argentina crisis ignored in handling of Greece

Originally published in October 2003, this policy review document was signed off by a then relatively unknown IMF official called Tim Geithner, now the US Treasury Secretary no less.

Strangely enough, he seems entirely to have forgotten about this eight-year-old tome, whose candid and illuminating account of Argentina's descent into economic and fiscal chaos, and the not inconsiderable role the IMF played in the process, provides an object lesson in how not to proceed.

There's no application of its lessons to Greece and the rest of the troubled eurozone periphery; worse, in blind disregard for its own analysis, the IMF is making exactly the same mistakes all over again.

On Karl Marx's famous dictum that history always repeats itself, once as tragedy, second as farce, Argentina provides a case study in where Greece is heading, which is out of the single currency, into default and a brutally imposed re-engagement with harsh economic realities.

It's still remotely possible that notions of "European solidarity" might avert this process through a system of indefinite fiscal transfers, but to believe that Germans are ready to subsidise Greeks on a more or less permanent basis requires something of a leap of faith.

The parallels with Argentina are so strikingly exact as to bear repeating at length. Substitute the word Greece for Argentina in the IMF's analysis, and euro for currency board, and you'd have a near perfect account of the present crisis, all written nearly eight years ago.

Here's what happened in Argentina. In the hope of eliminating hyper-inflation and years of currency turmoil, Argentina adopted a "currency board regime", which pegged the peso to the dollar.

Policy credibility depends crucially on the idea that a currency board is hard to escape, so the effect is much like being part of a single currency. To begin with, it worked just as the doctor ordered. Inflation was tamed and Argentina was widely hailed as a model for successful economic reform.

Beneath the surface, however, nothing much had changed. Corruption and tax evasion was still rife, the government routinely hid the true size of the budget deficit with heavy off-balance sheet spending, there was little if any progress in labour market and other forms of structural reform, and behind the candy floss of debt-fuelled, consumer-led growth there was progressive loss of competitiveness.

Tying yourself to someone else's monetary policy is always high risk, but for a small economy such as Argentina to be joined to the mighty US is a bit like trying to ride a whale. As the Federal Reserve tightened policy to choke off the overheating of the dot.com boom, Argentina plunged into deep recession, made even worse when Brazil, its largest export market, devalued.