Argentina's market-enforced crisis
Argentina's market-enforced crisis
Monday, February 18, 2002
Argentina's tumultuous December - in which a general strike by unions against a brutal budget lead to days of demonstrations, the storming of the Presidential Palace, the desperate helicopter flight out by its then-resident and a succession of five presidents within a week - was the outcome of an irresistible force, a populace which had had enough, meeting a (seemingly) immovable object, the grand edifice of the "global economy".
The popular revolt was provoked by an economy in collapse, in its fourth straight year of recession with no end, and only more misery, in sight.
But Argentina's economy didn't collapse under its own weight; it was knee-capped. And blame principally lies thousands of miles from the Presidential Palace in Buenos Aires, with economists and policymakers in Washington and bond traders in New York.
Not so long ago, Argentina was one of the "miracle economies" of Asia and Latin America at the centre of the "emerging markets boom", having seemingly fully recovered from a bout of hyperinflation in 1989 which included scenes of workers taking home their pay in wheelbarrows.
In 1991, the then president, Carlos Menem, agreed a multibillion dollar deal with the International Monetary Fund.
The Washington-based IMF would back a plan to kill the hyperinflation by introducing a currency board and "pegging" the peso at one-for-one to the US dollar.
In exchange, the Argentine government would embark on an economic program which included one of Latin America's most extensive privatisation drives, the opening of the country's capital account, to allow free flow of capital in and out, and strenuous efforts to balance the state budget.
Officially, at least, the program was a success. In the boom time of the early to mid-1990s, Argentina was the destination for enormous sums of foreign capital, as overseas firms, particularly from Spain, bought the newly privatised assets and banks and pension funds spent up big on Argentine stocks and bonds.
But the country's A+ rating in the capital markets came at a price.
Firstly, in order to run the peg, the Argentine government had to convince the world that the peso really was as good as the US dollar. That meant building up enormous reserves of greenbacks - and that meant debt.
Most of the country's current US$132 billion public debt was taken out as loans, either from the IMF or directly from international bond markets, to fill the US dollar reserves.
Secondly, while the peg ended hyperinflation, it also ended the Argentine government's ability to set its own monetary policy. Instead, interest rates in Argentina were those set on the US dollar by the US Federal Reserve.
This was fine so long as the economy remained on the up and up, but of course it couldn't and didn't.
In 1997-98, the outlook for all the "emerging markets" turned bleak. The currencies of Thailand, Indonesia, South Korea, Malaysia, Russia and Brazil all collapsed like skittles and suddenly Western capital markets, once so keen, were now anything but.
Like many of the "emerging markets", Argentina's financial flows dried up, its foreign debtholders' demands to "pay up" increased and its economy went into recession.
In 1999, a decision point arrived. The Peronist Menem was replaced as President by the Radical Party's Fernando de la Rua. This could have been a time for a change in course.
But the IMF wouldn't allow it. Instead, the fund insisted, de la Rua must under all circumstances do three things: maintain the peg and avoid devaluation, keep paying the debt owed to foreign bondholders and, to fund this, balance the budget by implementing austerity measures.
In so doing, the IMF ensured that Argentina could not emerge from recession.
Unlike neighbouring Brazil, which devalued its currency and then slowly recovered, Argentina's overvalued currency meant its goods and services sold abroad were uncompetitive and the orthodox solution - export your way out of crisis - became impossible.
Further, in a recession, the logical thing for a central bank to do is to lower interest rates to encourage investment. But with its peso pegged to the US dollar, Argentina could do no such thing - its interest rates were set by the Fed and, in 1999 at the height of the US boom, they were heading upwards, not downwards.
Meanwhile, the austerity measures dampened domestic demand, worsening the recession.
But economic recovery was not what the IMF was most concerned about - it was acting to protect the interests of the foreign investors.
The fear of a renegotiation of the debt, or even a default on it, was obvious enough. Not only would the dollar-value losses for Wall Street traders be considerable, but it might encourage other crushingly indebted countries to follow a similar path.
But the IMF also opposed devaluation, concerned that under popular pressure the government might move to protect working- and middle-class families from devaluation by reimposing certain forms of capital controls and slugging the big banks and industrials (which is indeed exactly what the new government of Eduardo Duhalde is doing).
The only solution, said the IMF in 1999 and then again at the time of a new loan package in December 2000, was austerity, each round deeper and more bitter than before: public servants would have their pay cut 13%, the pension system would be restructured, outlays to the provinces would be cut.
Needless to say, the program was deeply unpopular. After his party received a drubbing in October congressional elections, the president announced that he was going to give foreign bondholders a "haircut" by renegotiating the premiums paid on a wedge of debt. Wall Street went ballistic, calling it tantamount to default.
When economy minister Domingo Cavallo travelled to the US to meet US Treasury and IMF officials seeking support for the renegotiation plan, he received short shrift; they'd already decided to back the bankers. On December 5, the IMF indicated that it would hold up payment of a tranche of its loan package, in apparent displeasure at the plan.
The pressure was reaching breaking point: on the one side, the IMF and Wall Street demanding austerity and payment on time and in full; on the other, a seething population refusing to countenance further austerity.
De la Rua could not hold - and didn't. He resigned on December 20. The new government has already devalued the peso and looks set to renegotiate or default on most, if not all, of the US$132 billion debt.
Argentina's crisis is but the latest of a non-stop series of crises in the "emerging markets" and, unless the IMF unexpectedly reverses course, it won't be the last (Turkey is already struggling).
But unlike the crises of 1997-98, which were in large part the result of blind speculation by capital markets followed by a suffocating IMF policy "cure", Argentina's was not only predictable but even engineered.
This was a crisis caused not by market panic but by market discipline - and, as devastating as it was and as hard to believe as it sounds, the IMF was not the major villain. That role went to the Western banks who own some 40% of Argentina's debt.
The story of the 1990s for the "emerging markets" was the story of their emergence into the big league. While most Third World countries simply aren't allowed into the international capital markets, and are entirely dependent on the IMF and other multilateral institutions for funding, the likes of Argentina, South Korea and Mexico were allowed in.
While the sums of money that were thrown at them were previously unimaginable, the price has been murderously high - the bond markets have proven even harsher taskmasters than the IMF.
When bond traders have been unsatisfied with the pace of Argentina's austerity program, they haven't sent negotiating parties to threaten, as the IMF has. They've simply jacked up the interest premiums they demanded on new debt issuances.
On July 11, for example, they turned a routine issuing of US$850 million in 91-day treasury bills into a disaster, by demanded 14% premiums, up from 9% only two weeks earlier. The government got the message and quickly announced further austerity measures.
The Argentine crisis has shown the growing direct power of the international bond markets to bend nations to their will, even if that means dire social and economic crisis. That spells bad news for the world's peoples.
The good news is that the Argentine crisis has also shown something else which is even more important: that, faced with a popular rising, international capital has proved to be not as immovable as it thinks it is.