Argentine politician and former finance minister Domingo Cavallo this week voiced opposition to the prospect of Greece’s exiting the euro, stressing that such a move would be “wrong”, in a commentary published in the European policy portal (www.voxeu.org <http://www.voxeu.org>) on July 15.
Cavallo, who served as minister during the major debt crisis in the Latin American country, maintained that “Argentina’s growth recovery after it de-pegged the peso was due to exogenous developments in global commodity prices - not to the peso devaluation” and suggested steps “for an orderly restructuring of Greek debt”.
He underlined that the Greek political leadership should get “clear commitments from Europe and the IMF that the ‘Greek Orderly Debt Restructuring Process’ will not be interrupted mid-course.”
According to the five-point road map suggested by Cavallo in the case of Greece, “the easiest way to conduct a Greek restructuring would be to offer a swap between non-official Greek debts with these valued at the market rate of the day before to the announcement of the restructuring. This would allow Greece and Europe to capture the debt haircut that the markets have already conceded. The loss for the bond holders would not be larger than that that is already reflected in the market value of the Greek bonds.
To allow the banks to continue with the current procedure of delaying the registration of their losses, the regulatory authorities could authorise the amortisation of those losses in various years. The situation would be no different than what it is today, when the financial institutions are not reflecting the market value of their bond holdings in their balance sheets.”
He underlined that “the European bonds that Greece would use to conduct the massive repurchase operation should be lent to Greece by the European Stabilisation Fund which would take as collateral Greek property that is available for privatisation. But the selling of the assets should be done at an adequate gradual pace as to avoid fire sells.”
Cavallo stressed that “Greece should stay committed to introducing all necessary fiscal and structural reforms needed to regain competitiveness and renewed growth. But it will be much easier to find the political and economic support once the debt overhang disappears. Nobody would be able to argue that austerity measures have the only purpose of meeting creditors’ demands and the argument that Greece has to follow the Argentinean way of inflating its debt away by abandoning the euro would become obsolete.”
Finally, he pointed out that “Greek and European authorities should be prepared to fund the banks that will inevitably suffer runs against their deposits while Greece conducts its debt restructuring program. If the depositors fear that the lender of last resort may finally abandon those banks, the run will prove hard to stop and that may by itself precipitate the collapse not only of Greece but of many Greek and European Banks with severe contagious effects on other European economies.”
Domingo Felipe Cavallo is an Argentine economist and politician, best known for implementing the Convertibilidad plan, which fixed the dollar-peso exchange rate at 1:1 between 1991 and 2001 and brought the Argentine inflation rate down from over 1,300 pct in 1990 to less than 20 pct in 1992 and nearly zero during the rest of the 1990s.
He is also well known for implementing the “corralito”, the economic measures that almost completely froze bank accounts and forbade withdrawals from US dollar-denominated accounts, restraining savers from withdrawing their own money from bank accounts. It was followed by the December 2001 riots and the fall of Argentine President Fernando de la Rua.