Transcription of Finance News Network interview with Chair of the Political Economy Department at the Universidad Nacional de General Sarmiento in Buenos Aires, Professor Alan Cibils.
Joining me today from Argentina is Chair of the Political Economy Department at the Universidad Nacional de General Sarmiento in Buenos Aires, Professor Alan Cibils. Alan welcome to FNN. Having lived through Argentina’s financial crisis a decade ago now, could you briefly explain to us what’s happened and why?Prof Alan Cibils: The 2001/2002 financial crisis was really the logical outcome of 10 years of neo-liberal policies, not unlike what is happening - the same kind of policies that are being implemented in Europe today. In Argentina’s case, it didn’t have a monetary union but you had a fixed exchange rate. Argentina pegged its currency to the dollar, in our case by law, and this essentially inhibited the central bank from conducting independent monetary policy.
What factors tipped the nation into default?Prof Alan Cibils: So the accumulation of debt, essentially meant that Argentina’s economic system, Currency Board system, became only viable through increased indebtedness. So as long as people were willing to buy Argentine government bonds, then you know the system kept going. When it became, or it began to become clear that the system was not really viable in the long-term, private funding dried up and so that’s when Argentina’s troubles began to become visible.
That’s where the IMF [International Monetary Fund] steps in and the IMF said - OK I will lend you money to keep this going, but you have to implement this set of austerity measures, fiscal spending cuts, to lower your debt.
So the International Monetary Fund stepped in, why wasn’t its strategy effective?Prof Alan Cibils: The IMF strategy was not effective then and it was never really effective, there’s not a single case that the IMF can say, this is my success story of austerity measures. And the IMF strategy isn’t successful because it’s based on mistaken economics. You know, even the most conservative republican governments in the United States know that in a recession they have to spend their way out. They do not cut spending in a recession.
I guess what’s really surprising is that they don’t seem to have learnt anything from the Argentine and other failures, and are now together with the European Central Bank, doing the same thing in Europe.
Let’s take a closer look at Europe then and Greece’s debt situation: What makes it similar to what you saw and experienced in Argentina?Prof Alan Cibils: I think there are many similarities. One is a situation where you have lost control over your national monetary policy, adjoined the euro area where the policy is conducted by the European Central Bank, where supposedly each country has their say. But we all know that there are some that were more equal than others there, meaning Germany and France mostly. So you have a very rigid monetary arrangement that does not allow you to engage in deficit spending, once the recession hits. So that is one similarity.
The second similarity is a large accumulation of debt due to precisely unsustainable macroeconomic policies amongst which the monetary policies were a factor. And also you have finally, the IMF stepping in and recommending policies that only make matters worse. And so it seems to me that watching the Greek crisis unfold, it’s like as they say, seeing a train wreck in slow motion. I mean you know, based on past or at least based on past experiences, where this is going to end.
And Alan, are you more concerned about Argentina’s situation then or Greece’s situation now?Prof Alan Cibils: I guess what’s very preoccupying about the Greek situation is that, in the middle of a crisis and with growing unemployment, which is already very high anyway, and poverty rates and all sorts of social indicators like suicide rates etcetera, reaching record levels; they’re implementing policies that have never worked anywhere else. And so in some sense, this is worse because you know that this is a failed recipe.
If the current strategies are failed recipes as you say, what would you suggest needs to happen to get Greece back on track?Prof Alan Cibils: If the Argentine example or the Argentine case is any example, it seems there are several things that could be of great help. One is default. It’s very clear that in the Argentine case, the default was what enabled the economy to stop its free-fall, to free-up resources for better uses given the economic crisis. And then eventually to restructure the debt - debt default and restructuring I think, are inevitable and a must.
The other thing is to recover some degree of monetary sovereignty. And I think that the only way to do that given the current European Central Bank theoretical framework, is by exiting the euro area.
Alan you say default is inevitable and a must, what percentage would you put on the likelihood of a Greek default?Prof Alan Cibils: I do think that if the current policies continue, if Greece continues to implement austerity measures, then a default seems almost inevitable. And I think that would be the better of the two scenarios because if it’s not inevitable, then it means they’re going to have many years of a very profound recession. So the default would at least cut the current free-fall of the Greek economy.
Is there a chance we could see a default this year?Prof Alan Cibils: It’s entirely possible; I think it’s entirely possible. And I also think it would be desirable to have it sooner rather than later, I tend to think it’s already too late. I mean I think the Greeks should have defaulted before things got as far out of hand as they have.
Would a default mean Greece would be forced to exit the Eurozone?Prof Alan Cibils: I mean it’s not automatic, but that decision doesn’t depend only on Greece and so one would have to see what happens there. I do think that given the European Central Bank’s monetary policy rules, that Greece would benefit from exiting the Eurozone, which does not mean exiting the European Union which is a different matter. The European Union’s the political entity; the Eurozone is an economic entity, so that Greece could exit the Eurozone without exiting the Union.
Practically speaking Alan, in the event Greece does go back to the drachma. Do you believe it would be a fixed or floating currency?Prof Alan Cibils: Well I think if it implemented a fixed currency, they would eventually or sooner or later, be in the same situation. Argentina’s a good example of that – a fixed exchange rate sooner or later ends up being a straitjacket on the economy. So I think the most successful exchange rate policies have been what are called a managed float, which is in between a fixed exchange rate and a totally free float.
A totally freely floating exchange rate is not desirable either. So I think to have an exchange rate that is managed according to economic policy needs – export, imports etcetera, then I think it is the most desirable.
Greece’s second €130 billion bailout was recently approved, effectively averting a default. What is your response to the austerity package, was it a wise move?Prof Alan Cibils: I don’t think austerity packages are a wise move in Greece’s current situation. So from that perspective, no I don’t think so. I think all this is doing is postponing what appears to be the inevitable.
What would be the repercussions of a Greek default for its people?Prof Alan Cibils: Assuming that the Greek Government defaulted and implemented policies that were geared towards reactivating the economy, as we were saying before, with a managed float and other kinds of policies. I think that a default would definitely be beneficial for the Greek people and certainly a lot more beneficial than continued austerity.
But even if Greece defaults and survives what would be the repercussions for Europe?Prof Alan Cibils: That’s a different, I mean that’s a more complicated matter and you have to see who has assets, what the financial positions of
different actors in Europe are, vis-a-vis the Greek debt. So those who are creditors would clearly take a hit and the more that you’re exposed in that sense, the greater the hit.
So if Greece defaults what do you believe is the risk of contagion to other European nations?Prof Alan Cibils: The main problem is that you have a series of highly indebted countries implementing austerity measures. So whether the Greeks
default first or second or third, is somewhat almost irrelevant because I think what the problem here is that the countries are being forced to implement policies that don’t work.
Now Alan, Greek elections are expected in April. What result do you anticipate and how will this impact their fiscal situation?Prof Alan Cibils: The more left leaning political parties and groups in Greece, I’m not sure that they’ll be able to pull it together to get a majority. And even then, it’s unclear whether they will be willing to say, OK we’re going to bite the bullet, we’re going to default and we’re going to say, enough to the IMF and enough to these mistaken and crazy economic policies.
Finally Alan, you say Greece could default this year and should, sooner than later. But despite your calls, what do you think are the most likely developments that will occur this year?Prof Alan Cibils: It’s hard to tell really what it is that’s going to happen. But given past, given history and given other countries’ examples and given what’s happening today in Greece and what kind of policies are being pushed and promoted. I think it’s inevitable that either a default, or a worsening of the situation, until the default or a radical change in policy happens, is inevitable.
Alan Cibils, thank you so much for your time and insights today.Prof Alan Cibils: You’re very welcome, it’s been a pleasure.
Ends
