Man at Center of Argentina’s Greek-Like Tragedy Has Some Advice

Domingo Cavallo, a man who knows a bit about sovereign defaults, says stiffing creditors would be a terrible mistake for Greece.

As Argentina’s economy minister in 2001, Cavallo restricted cash withdrawals from banks and negotiated with bondholders in the lead-up to the country’s $95 billion default. While he couldn’t keep Argentina current on its debt payments, he says the fallout if Greece defaults and is forced out of the European currency union would be even greater than what Argentina suffered.

“Exiting the euro would be the worst kind of default for Greece,” Cavallo said in an interview, interrupting his vacation on a cruise ship in the Mediterranean. “The results will be very bad for Greeks because it will lead to a big drop in economic activity and wages, as happened in Argentina.”

Cavallo said Greece should commit to economic reforms sought by creditors to stay in the euro and avoid a deeper crisis. The economy is in recession, already has a jobless rate exceeding 25 percent and currency controls were imposed this week. Prime Minister Alexis Tsipras has called a July 5 referendum on the austerity demanded by creditors and urged Greeks to vote “no.” His European counterparts say it’s nothing less than a decision on whether to remain in the euro.

Cavallo said that while Argentina’s economy rebounded strongly starting in 2003, the country benefited from a unique set of circumstances unlikely to be seen in Greece. The South American nation was sustained by a surge in prices for its biggest commodity exports, gaining relatively little from a tumble in the peso after the default. A devaluation is what some proponents of a Greek default cite as the main advantage of quitting the euro.

Currency Controls

As economy minister in 1991, Cavallo fixed Argentina’s peso to the dollar at 1-to-1, quashing hyperinflation. But the peg was unsustainable, and eventually helped contribute to the economic crisis that led to the 2001 default. He implemented restrictions on withdrawing cash from bank accounts in the midst of the collapse, helping spark riots that forced him and the president to resign. When the peso started trading freely, it plunged.

The former economy minister, who is now a partner at research company Global Source Partners LLC, thinks there’s a good chance Greece can avoid default. The European country is getting better treatment in its negotiations with the International Monetary Fund, he said.

IMF Managing Director Christine Lagarde “seems very concerned that there is an organized and negotiated solution between Greece and Europe,” Cavallo said.