The Government also sought to take advantage of the massive shift in relative prices (terms of trade) by providing incentives for import substitution. The tourism industry also grew rapidly as a result of the currency depreciation.
Before too long, the peso started appreciating again but by then the economy was on a solid growth footing with strong social welfare spending to maintain domestically-sourced growth and a booming export sector.
In the mid-2000s the Government actually had to take measures to stop the peso appreciating further given the size of its trade surplus. The central bank acquired huge stockpiles of foreign reserves (USDs mainly) by selling pesos in the foreign exchange market. The exchange rate is now relative stable at the higher value.
The foreign exchange intervention of the central bank (selling pesos) is sterilised by issuing government debt which is a quite different operation to the current ECB claims that it is sterilising its SMP. But that is another issue again.
So is any of that applicable to Greece? Of-course it is. Greece would suffer the same short-term collapse in its currency. But in Argentina’s case it is clear that people still wanted to buy the currency on foreign exchange markets even with the massive default and the plunging value.
In this report from the Banco Central de la Republica Argentina (BCRA) – Report on the foreign exchange market performance. First quarter of 2007 – you see that international buyers of the depreciating currency were many.
Here is a sequence of graphs taken from that Report that highlight the massive changes that occured once the peg was abandoned and the exchange rate liberated.
The first shows the swing in the Current Account. I know there are readers of my blog who vehemently deny that exchange rate depreciation improves competitiveness and claim that it is a neo-classical position to take to suggest such a thing. Neither is true.
Here are the facts for Argentina between 1995 to 2007:
So no-one would want a currency in free fall? The second graph shows the movement in USD reserves held by the BCRA between 1999 and 2007. They nearly ran out in 2002. The question you need to ask yourselves: where did they get these dollars from?
The final graph in this sequence shows the volumes of foreign exchange transactions for Argentina between 2003 to 2007. It is hardly descriptive of a necrotic foreign exchange sector.
It is true that the Greeks do not have large quantities of natural resources like Argentina did when it defaulted and floated in 2001-02 but it is equally untrue to say it has no desirable assets that are exchange rate sensitive. I noted its tourism capacity