Cavallo Says Greece Must Swap Debt, Keep Euro to Avoid Argentina's Fate
Domingo Cavallo, the former Argentine economy minister who sought to avert that country’s record default in 2001, said Greece must carry out an “orderly restructuring” of its debt to restore solvency.
A debt swap, measures to restore competiveness and spending cuts would help Greece avoid Argentina’s fate, he said. The plan depends on European nations and the International Monetary Fund pledging sufficient funds to meet Greece’s near-term obligations and not making disbursements conditional.
“My main advice is that they seek a comprehensive solution, an orderly restructuring of the debt in such a way that the funds committed by Europe and the IMF don’t run the risk of being insufficient to fully restore Greece’s solvency,” Cavallo, 63, said in a telephone interview from Buenos Aires.
As economy minister under President Carlos Menem, Cavallo sold state companies and stabilized the currency, reducing the annual inflation rate to zero by the time he left office in 1996, from more than 1,300 percent in 1990. From 1991 to 1996, Argentina’s economy expanded 36 percent, spurring demand for the country’s debt that helped make it the biggest seller of emerging-market bonds in the 1990s.
Cavallo, who returned to the post of economy minister in March 2001, resigned in December of that year after he imposed a freeze on bank deposits that sparked nationwide riots and toppled the government of President Fernando de la Rua. After Cavallo left, the country defaulted on $95 billion of debt.
Greece’s fiscal woes, which are much worse than those faced by Argentina in 2001, can be overcome by an “orderly exchange” if bailout funds are used as a guarantee, Cavallo said. The new bonds would have longer maturities to reduce short-term funding pressure and have yields similar to those on bonds issued before the crisis hit.
“Of course, perhaps the credit rating agencies would consider this a default,” Cavallo said yesterday.
“The orderly character of the restructuring is what ensures a reduced haircut. If there isn’t an orderly restructuring and they collapse into a disorderly process I promise you the haircuts will be enormous,” he said.
Greek stocks rose and the euro strengthened today as an EU spokesman said an agreement on the rescue package could come as soon as tomorrow. Moody’s Investors Service said yesterday Greece was vulnerable to a “multinotch” downgrade if measures don’t go far enough. The fiscal crisis cut through Europe this week, sending the euro to its lowest in a year after Germany’s reluctance to approve emergency funds sparked a drop in Greek bonds and Standard & Poor’s cut the country’s credit rating to below investment grade.
Keep the Euro
Greek officials shouldn’t consider dropping the euro to restore competitiveness, Cavallo said.
“Don’t even think of abandoning the euro, whether temporarily or definitively, because that will provoke a financial catastrophe in Greece and various other countries in Europe,” Cavallo said. Argentina ended its one-to-one peso peg with the U.S. dollar in 2002, which Cavallo implemented in 1991.
While Cavallo declined to estimate the necessary size of the bailout package for Greece, he said it needs to be large enough to restore confidence.
“If what they offer doesn’t convince those who have to accept the new bonds that solvency will be restored and they don’t accept bonds, then what will happen is that there will be a default and very disorderly process like we had in Argentina, where eight years later we still haven’t completed the restructuring,” Cavallo said.
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