Which Latin lessons?
Daniel Marx is Executive Director of Quantum Finanzas, a financial boutique based in Buenos Aires, and the former Undersecretary and Chief Debt Negotiator for the Republic of Argentina.THE fiscal and balance-of-payments deficits of the Greek economy leave it heavily dependent on transfers from the euro zone and the other troika members—the European Central Bank and the International Monetary Fund. This lifeline makes Greece understandably hesitant to leave the euro area, but it also entails a significant burden that restrains recovery—considerable new debt in the form of loans to be reimbursed at par and with preferred status over other creditors. Since the unsustainability of the current debt level is no secret, there can be no expectation of voluntary lending to the Greek public sector. In an analysis published in The Economist of February 18, 2012, Mario Blejer and Guillermo Ortiz have not sufficiently emphasised this and certain other elements of the Greek situation, which, when taken into consideration, could well alter their conclusions.Greece faces few good options concerning its currency regime and other relevant matters, like rules for nominal price and wage formation, and will soon have to take tough decisions. Outsiders may help provide information about these possibilities, but, in the end, it is the decision of the Greek people and their representatives that counts.One highly relevant goal is to provide for a better future and realign flows, i.e., revenues with expenditures for the economy as a whole. To this end, it is necessary to design a transition path that will enable competitive gains. Another aspect is how to manage prevailing commitments in a way that, at least, will not hinder those future possibilities. In these exceptional circumstances and when looking through the monetary veil—beyond the currency arrangements—certain meaningful contracts have to be revisited. Acknowledging this and minimising the scope of the exercise is desirable, and to aim at the best possible cost-benefit outcome it is necessary to select the least harmful timing and make the resolution mechanisms as efficient as possible.In this respect, the Argentine restrictions on bank withdrawals (corralito) and the mandatory conversion of bank foreign currency assets and liabilities (pesification) do not deserve to be in the template of policies. Other options were available. Those measures had very poor cost-benefit outcomes when factoring in their effects on economic activity, outflow of resources, overshooting of the foreign currency and inflationary consequences. They unduly penalised domestic savers and did not even benefit larger debtors, the bulk of whose debts were governed by foreign law. In this respect, Greece has a comparative degree of freedom since most contracts are governed by domestic law.In crisis situations moreso than in normal times, fairness considerations and related burden-sharing among different constituencies of stakeholders are of utmost importance. As in these cases there are no pre-written mechanisms, a legitimisation of the outcomes is required. Very often, the temptation is to skip this step in the name of efficiency, perhaps justifying the omission by a sense of urgency. That’s why functioning democratic means must prevail over, though they take into consideration, economic efficiencies, including timing considerations. Greece, the cradle of democracy, can learn these lessons from the Latin American experience.