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  The Ghost of Argentina: What Happens when Countries Go Bankrupt?

The Ghost of Argentina What Happens when Countries Go Bankrupt?

By SPIEGEL Staff

Part 2: Bailing Out a Sinking Ship with a Bowl

And the sound of pots and pans being banged together is back. President Cristina Fernandez, who succeeded her husband Nestor Kirchner in 2007, increasingly resembles the hapless de la Rúa. Last week, she presented her version of the "Corralito" -- the term used to describe the freezing of bank accounts in 2001 -- when she ordered the nationalization of private pension funds, allegedly to prevent the funds from going bankrupt.

But economic experts believed that Fernandez's true objective in nationalizing the private deposits, which are worth $30 billion (€24 billion), is to avert a government bankruptcy. Columnist Mario Grondona criticized the president, likening her to "a captain trying to save a sinking ship by bailing it out with a bowl from the kitchen."

Her husband was more decisive. He defied the IMF, which has sought to impose drastic rules on the country. He alienated international creditors by offering to buy back government bonds for only 25 percent of their face value. Since then, Argentina has received almost no new loans in the global financial marketplace.

Nevertheless, the country recovered from the crash with astonishing speed. In recent years, the Argentine economy has grown at impressive rates of 7 to 9 percent. At the first signs of the impending end of the boom, Venezuelan President Hugo Chavez came to the country's rescue by buying up Argentine bonds. But now the authoritarian Venezuelan leader can no longer serve as Argentina's savior. With oil prices sharply in decline, Venezuela itself is seen as yet another candidate for economic disaster.

This has prompted President Fernandez to discreetly seek rapprochement with the hated IMF and the Club de Paris, a group of lending nations made up of some of the world's richest countries, in an attempt to reconnect Argentina to the international lending cycle.

The European Union's Achilles Heel

Hungary is another country being hit hard by the financial crisis. Until recently, the Hungarian government would not have dreamed it would be forced to accept aid from the IMF. But in recent days Hungary barely avoided sliding into national bankruptcy, and only a €12.5 billion ($15.9 billion) IMF rescue package -- bolstered by billions more from the European Union and the World Bank -- prevented it from happening.

The incident has historic significance. Hungary is the first country in the European Union obliged to accept an IMF loan of this nature. The conservative newspaper Magyar Nemzet writes that the move will turn Hungary into the "only colony of the International Monetary Fund" within the EU. The opposition party calls the plan "a disgrace." Brussels's contribution was €6.5 billion ($8.26 billion), while the World Bank contributed another €1 billion ($1.27 billion). The measures represent the most comprehensive international rescue package assembled in the current financial crisis.

How could this have happened, an EU member finding itself in such difficulties?

Much of the blame for Hungary's current debacle lies with the failings of the past. The once-successful nation of 10 million people lived beyond its means for years. With government finances spinning out of control, the national debt ballooned to two-thirds of the country's GDP. "The funding for our excessively high standard of living came from other countries," admits András Simor, the governor of the central bank, not without a dose of self-criticism.

The Hungarians have always been considered shopaholics. Hundreds of thousands bought themselves big cars and went on shopping sprees in the chic boutiques on Váci Utca in Budapest -- all on credit. The real estate market boomed, turning close to 90 percent of Hungarian apartments are privately owned. Most mortgage loans were denominated in euros and Swiss francs. But that practice has taken its toll. As the Hungarian forint plunges in value, mortgage holders are suddenly paying astronomical interest rates. It was primarily this dependency on other countries that has fueled the crisis in Hungary. Ironically, Budapest was once seen as a role model for other countries seeking EU membership. But instead of following in the footsteps of the Czech Republic and Slovakia, and introducing structural reforms after the collapse of communism, the Hungarians kept growing their national debt. A few days before the runoff vote in the 2002 parliamentary election, the conservative government of then Prime Minister Viktor Orban increased pensions by a substantial amount. Orban's successor, Peter Medgyessy, a socialist, introduced a 50 percent salary hike for teachers and healthcare workers.

The current premier, Ferenc Gyurcsány, also chose borrowing as his preferred method, at least initially. Only when the planned introduction of the euro threatened to become a more distant possibility for his country did Gyurcsány change course and encourage saving, at least to the extent possible. The opposition fought against the necessary reforms with missionary zeal. A referendum eventually broke the deadlock, and Gyurcsány was forced to put his savings plans on ice.

Nevertheless, the socialist was able to celebrate a few modest successes. The country's public deficit was brought down from more than 9 percent of gross domestic product in 2006 to about 3 percent more recently. But this was still not enough to help the country withstand the tremors of the financial crisis. "Before we were able to reach a safe harbor," says central bank Governor Simor, "the hurricane caught up with United States"

After receiving international credit assurances, neighboring Austria can finally breathe a sigh of relief. Its financial institutions, including Erste Bank, the Raiffeisen savings bank and Austria-Creditanstalt, have a strong presence in Hungary, where they control 22 percent of the banking sector. These days, it is quite possible that a crisis in small countries could end up pulling larger ones into its vortex.

Ukrainian Crash

Further east, the Ukrainian Central Bank last Thursday set the official exchange for the country's currency at 5.70 hryvna per US dollar. But its effort was in vain. By noon, currency traders in Odessa were already charging 9 hryvna for a dollar, until they were forced to close when their supply of greenbacks ran out. Ukrainians with rents to pay in dollars -- a common practice in many parts of the country -- suddenly faced the prospect that they couldn't pay their landlords come Nov. 1.

Europeans are familiar with the constant trouble between Yulia Tymoshenko, the prime minister, and President Viktor Yushchenko, her curmudgeonly rival. But it is less well known that Ukraine was in a better economic position than Hungary until recently.

Massive amounts of foreign capital began flowing into the country in 2007. The Ukrainian market was attractive and brought in unexpectedly large investments. At the same time, the price of steel, Ukraine's top export, was ballooning on the world market. The price of a ton of steel in July, €189 ($240), was already €55 ($70) higher than at the beginning of the year.

After the government had forecast 6.5 percent GDP growth, the precipitous drop in Ukraine's economy came as a shock to Kiev's political elite, especially in a country that was barely integrated into the global financial system. Ukraine was in a "state of euphoria," and yet it was unable to cope with the massive influx of capital, say the Eastern Europe specialists at the University of Bremen. Pensions and wages were raised, in some cases savings accounts lost at the end of the Soviet era were replaced and banks issued loans without examining their borrowers' creditworthiness. This stimulated consumption, with consumers increasingly spending their newfound riches on imports. But then the price of steel plummeted.