Sadly enough, Britain of 2012 is an image of the Faltering Economy of battered Argentina of 2002. There is a striking similarity between the economic condition of the two nations – the problems that seem to be plaguing Argentina about 10 years ago and the ones faced by Britain in 2012. In both these cases, the governing authorities believed that they could actually avert a debt crisis through their tricky moves. Way back in 2002, every move made in Argentina only made matters worse. And today, Britain finds itself committing the same mistakes over and over again.

Argentina had won accolades for its market capitalization initiatives till the savage depression engulfed it in 1998. Just like Britain, it was considered as a safe domain on account of its open markets and favorable environment for business. Quite like Britain, Argentina effortlessly attracted foreign investments. It was no surprise therefore, that one fourth of JP Morgan’s market bonds was invested in Argentina itself. However, the crash was just round the corner and the crisis had predominantly stemmed from debt. Once the credit markets stagnated, the markets disintegrated.

What followed was a sequence of misjudgments that caused the economy to shrink by another 28% resulting in an inflation of 41%, unemployment that accounted for 25% of the workforce and the depletion in real wages by 24%. Subsequently, 50% of the population fell below poverty line. At every stage, Argentina’s economic recovery was challenged by the moves made by its own politicians as per the reports published by Jim Saxton. The budget deficit was 2.5% and the gap between tax receipts and outgo had to be reduced. However, tax cuts could not be made since the majority of it was owed to a minority party.

Instead Argentina decided to raise taxes and signs of recovery became easily apparent by December 1999. The tax increase resulted in amplification of recessionary trends. The deficits also expanded in tandem, since state spending became unmanageable and tax take dwindled in a faltering economy.

In both countries, assertion of credibility overtook policy making. As far as Argentina was concerned, the government propped a termination of dollar peg because of the prevailing convertibility crisis. This frightened the markets and borrowing costs escalated. The same fate lies in store for Britain in the coming December, leading to abandonments of deficit targets and debts of Osborne.

Another interesting thing about the crisis in Argentina was that, it was entirely driven by the public sector enterprises. During the six year tenure that spanned from 1994 to 2000, the net debt escalated from $43 billion to $58 billion even as the net private sector assets grew from $22 billion to $29 billion.

In Argentina’s case, it was the government that was interfering in the Argentine Banking System that damaged the private sector, making credit impossible. And, launching monetary policies with the sole desire of satisfying the bond markets made matters worse. The interest rates in Argentina were artificially inflated in a bid to support the local currency, which led to the dollar as well as dollar/euro pegs. When it comes to Britain, the QE is represented through more direct interferences. Both these excesses are detrimental, especially in the long run because it does not allow the government to keep checking gradual advances in government debts.

Britain’s problems are also linked to the public sector. However, Britain and Argentina are two different nations and a country like Spain could perhaps be a better comparison. As technocratic interference increases, this could be the best time to bear in mind the past lessons of a faltering economy.