Tags: Pimco | El-Erian | Greece | Argentina

Pimco’s El-Erian: Greece on Same Dangerous Path as Argentina

Thursday, 16 February 2012 07:41 AM

Greece is looking eerily similar to Argentina, which haggled with multilateral lending agencies over austerity only to suffer a massive default that sent its economy tanking, says Mohamed El-Erian, CEO of Pimco, which runs the world's largest bond fund.

Argentina spent the late 1990s and early 2000s battling a hefty debt burden, constantly negotiating with the International Monetary Fund to avoid default, promising to implement austerity measures in exchange for aid.

"Neither side seemed willing to acknowledge what was obvious to many: the country’s economic and financial framework gave it little chance of addressing the dual problem of too little growth and too much debt," El-Erian writes in a Project Syndicate column.

Argentina defaulted in December 2001, which resulted in bank closures, widespread unrest and a messy end to convertibility, which had pegged the Argentine peso one-to-one with the U.S. dollar.

"Greece’s future will resemble that of Argentina if its government and official creditors (namely, the European Central Bank, the European Union, and the IMF) fail to internalize some of Argentina’s lessons and do not undertake an urgent mid-course correction," El-Erian writes.

To do that, both sides need to find a way to carry out an orderly restructuring instead of attaching aid to tough austerity.

"Greece need not continue to follow Argentina’s miserable example of ten years ago. Yet, unless Greek and European officials reflect on that example and adapt accordingly, Greece will be driven down the same dangerous dead-end path."

Greece has agreed to austerity measures in exchange for $172 billion in bailout money, although European Union officials have questioned whether Athens harbors the political will to carry those austerity measures out.

The Greek gross domestic product (GDP) shrank 6.8 percent in 2011, and it now entering its fifth year in recession.

Argentina suffered a 20 percent peak-to-trough drop in output after it defaulted on its debts, but Greece could be worse, says Uri Dadush, an economist with the Carnegie Endowment in Washington, a think tank.

"On the current path — which is not sustainable in my view — we may very well see Greek GDP go down 25-30 percent, which would be historically unprecedented. It's a disastrous crisis for them," says Dadush, a former senior World Bank official, Reuters reports.

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