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March 03, 2005

Nouriel Roubini Adds to My Book Pile

Yet another book to read:

Nouriel Roubini's Global Economics Blog: March 2005 Archives: Paul Blustein of the Washington Post [has] published a fascinating book - 'AND THE MONEY KEPT ROLLING IN (AND OUT: Wall Street, the IMF, and the Bankrupting of Argentina' - that provides an excellent post-mortem of the Argentine crisis even if it does not cover the debt restructuring deal. This is a first rate, very well researched and gripping account of the causes of the Argentine crisis and the events and background that led to the default and collapse of the currency board. Thus, a very good follow-up to Blustein's The Chastening, his earlier book and tale of the Asian crisis.

With the default behind it - we will get back to the issue of the remaining holdouts soon - what are the lessons one can learn from this episode? Some worry that the behavior of Argentina means that now defaulting and getting large haircut has become much easier. This argument has no merit. Is default easy or costless? Argentina had do go through a most severe crisis with output falling by over 25%. Even today after two years of high 8% growth, the real GDP of Argentina is barely back to the 1999 level (and still much lower in dollar terms) that it had before the recession that preceded the eventual crisis started. Argentina lost 6 years of growth, had massive social and economic pain with poverty and unemployment rates through the roof. And all this would mean that default is costless and that other countries will rush to default like Argentina did? Utter non-sense. Lula, as soon as he was elected, looked across its border and saw what default - even an unavoidable one like Argentina's - causes as his by-product, i.e. massive crisis and pain. And he rightly decided to do even more fiscal adjustment and try to avoid default.

The lesson of Argentina is that crisis and default are very costly and painful, not that they are costless.

Posted by DeLong at March 3, 2005 10:40 AM