Argentina has a very unique economic history. I really recommend And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina for the 2001 crisis and A Brief History of Argentina for the entire history.

Economic Crisis In Argentina

In the 1980s there was extreme inflation that harmed Argentina’s economy. Inflation was greater than 1,000 percent in 1989.¹ Peronist Carlos Saul Menem the former governor of La Rioja was elected in 1989 and was handed a struggling economy. Domingo Cavallo was appointed Minister of Finance in 1991. The Agentina stock market soared on the news of his appointment. That same year to stop the inflation Domingo Cavallo peged the peso to the dollar. The peso was equal to the value of the dollar. The printing of more money had to be backed with dollars. This convertibility plan stabilized the currency, which brought down inflation.

The early and mid 1990s brought a major change as the economy grew exceptionally well. Gross Domestic Product per capita was up an extraordinary 44% from 1991 to
1998.² Gross domestic product is the overall value of products and services in a country. It is an indicator of the strength of the economy.

Argentina like many other Latin American countries in the early 1990s had been reforming their economies around a free market approach, which resulted in massive international investment and economic growth. When Menem was asked in an interview in 1989 about why he was promoting free market forces he replied, “Economic stagnation! Argentina is powerful in raw materials, food, energy, and human resources. We must liberate these resources and open our doors so foreign capital can help us grow.”³ Part of Cavallo’s economic agenda was to privatize industries like utilities and the YPF national oil company that were previously state owned. Convertibility was the highlight of the change, however, the combination of coinciding changes including free trade, privatizing industries and reducing the national debt were responsible for success in the 1990s.⁴

With those new initiatives the country experienced robust trade and foreign investment. The money was coming in because Latin America was opening up with economic reforms that stimulated trade across borders. Private industry now benefited from freely moving capital. A few things set this up. In the late 1980s average tariff rates were dropped from 45 percent to about 10 percent.⁵ This brought great import growth in the early 1990s.⁶ The lifting of international trade barriers allowed for more money from imports to make its way into the country. Menem also strengthened trade relations with Brazil, Chile, Bolivia, Uruguay and Paraguay by getting rid of taxes on trade with the Mercado agreement. Also, Argentina was a recipient of the Brady Plan that first began in Mexico in 1989 and gave banks liquid bonds instead of illiquid loans that brought an end to the debt crisis from the banks viewpoint.⁷

Argentina was not alone in seeing a large increase in foreign investments in the 1990s. All Latin American countries had a big increase in money inflow in1990 and 1991. The continent averaged $8 billion a year in money inflow in the 1980s. This rocketed to $24 billion in 1990 and $40 billion in 1991.⁸ Argentina’s administration certainly was not hesitant about taking advantage of this. Just as president Juan Peron in the 1940s and 1950s had spent the countries money on successful public programs; Menem spent to, but on credit. The difference with Menem and the effects on the country was the severe consequences that came from spending on borrowed money. His administration planned for the future as if the future could only bring more prosperity. The consequences of a recession on the countries realistic long-term sustainability were not appropriately addressed in the boom years.

The country went through tough economic times beginning in the mid 1990s. In 1994 the tequila crisis upset Latin America and Argentina. With it the Mexican peso devalued and 18 percent of deposits in Argentine banks were withdrawn in fear.⁹ It was thought that the Mexican devaluation would spread. The Argentine administration weathered the economic downturn and resulting 2.8 percent drop in gross domestic product well. They stuck with convertibility, raised taxes and there was a recovery in 1996, which carried on to 1998.¹⁰

In late 1998 the world economy took a bad turn in 1997 with Asian economies in crisis followed by Russia defaulting in 1998. Following the Russian crises, Chile’s currency depreciated 45 percent against the dollar from 1998 to 2001. The depreciation in Argentina’s real exchange rate was only about 14 percent. This was due to the fixed exchange rate.¹¹ It means the adjustment in the currency in Argentina should have been more like Chile’s instead it was less healthy as a result of the convertibility system. As a result of the capital markets meltdown, “private capital flowing to major Latin American countries which had totaled about 5 percent of their collective GDP during the boom period of 1997 to mid 1998, shriveled to less than 1 percent of their GDP by mid 1999.”¹² This had a big impact. Argentina was in recession by 1999. With less money available, Argentina struggled paying down the deficit. Because of this Argentina had to pay higher interest rates on their bonds and as the risk of investing in Argentina climbed so did the interest rates and the financial burden on the country. The good times came to an end. It was not the first time that money moved in and then out of Latin America. Big periods of money coming into Latin America in the 1920s and 1978-81 resulted in crises and money moving out in the 1930s and 1978-81.¹³ Greed and fear ultimately moved markets.

In light of the public dissatisfaction, president De la Rua took office in the 1999 elections. De la Rua promised that he would fix Menem’s damage. De la Rua’s “new economic plan, the brainchild of the IMF, was supposed to lower interest rates and produce a boom by raising taxes, which was meant to reduce the government's deficit. Its timing was awful. World interest rates in December 1999 were on the rise.”¹⁴

The economic crisis was happening in De la Rua’s term. By the end of 2000 the culmination of the scandal and even after word of an IMF aid on the way the Argentine stock market index the Merval was down 24%.After the runs on banks and resulting limits set on how much they could withdraw citizens felt betrayed by the government. An indicator of this was blank and spoiled votes. Blank and spoiled votes in the 2001 elections for chamber deputies were 8% and 9%. Spoiled or blank ballots in October of 2001 were over 8 times higher than any year since 1991.¹⁵ De la Rua officials had bribed Senators for labor bill votes. The court dropped charges against all the senators accused. De la Rua’s approval rating fell from 70% just after he was elected to 15% in 2001.¹⁶ Mad crowds chanted, “Let’s get rid of them all.”¹⁷

De la Rua resigned in December of 2001 in the mist of massive uprest and 4 presidents would enter until Eduardo Duhalde settled in.¹⁸ It was the first ousting of a president without the military. After Duhalde’s appointment they got rid of convertibility, which dropped the value of the peso. Money fled the country and the banking system was a disaster.

The commitment by the country to stick with the dollar to peso convertibility system was helpful in its early years but set up a bad scenario. Argentina was borrowing dollars from overseas but could not print more dollars when it needed to pay interest to the bondholders.¹⁹ Abandoning the convertibility plan would have caused people who had loans in dollars to loose money.²⁰ The convertibility system handcuffed the government. It became difficult to deal with the countries deep deficit. Revenues from goods the country sold abroad were reduced by the high value of the peso. This was attributed to the convertibility system. Foreigners simply bought less from Argentina because they could get better prices elsewhere. If they had gotten off the peso to dollar peg they would have been able to avoid defaulting by printing more peso’s. The drawback of more peso’s in the system would have been inflation but it would have weakened the fear of default and avoided catastrophe.

The role of the International Monetary Fund is to prevent crises by monitoring and assisting countries and to lend money to countries in need. It seeks to foster the world’s financial system. International Monetary Fund policy and strategy are made two times a year by the Board of Govenors. The United States has huge say over these.²¹ When countries need help they are mostly in severe need of capital and are in a vulnerable position. These countries are often put into difficult positions. “Less-developed countries accept IMF prescriptions due to their weak bargaining power and acute financial need. .if a country rejects IMF policies it will forfeit its right to assistance from the World Bank. The World Bank does not offer credit to countries that don’t comply with IMF policy prescriptions.”²²



The Funds role was changing:
For countries with an IMF program in place, the Fund has direct input into the fiscal and monetary policy settings of the country. This was not part of the IMF’s original role. .as developed nations moved away from fixed exchange rates in the 1970s, much of the IMF’s original mission disappeared. Since the inception of the Debt Crisis in 1982 the Fund’s role has evolved so that today its role is managing crises in emerging markets countries and conducting the surveillance, financial assistance and technical assistance that aims to avert these crises.²³

In the case of Argentina the collaboration between the International Monetary Fund and countries officials was not productive. They also had different priorities. The country had priorities in its labor laws that protected workers but made companies reluctant to hire. The right of Argentina to maintain its convertibility system was harmful when it was possible that the Fund, which is supposed to be looking out for the countries best interests would have dropped the system if it had more power. In IMF documents say there was “concern about the limited progress implied by the labor market reform approved in September 1998.”²⁴ Labor reform was an issue that came up repeatedly and the two were not on the same page.

The amount of debt Argentina was carrying became a heavy burden as the payments on their bonds became dependent on unrealistic future growth of the economy. At a time when getting economic forecasts right the International Monetary Fund was making mistakes in export forecasts that had big consequences on the economies health and the countries ability to avoid default of its debt. “Through late 1998, exports were projected by IMF staff to grow at about 12 percent in 1999 and the debt to export ratio was projected to stabilize at 450 percent. In the event, export revenues declined by more than 12 percent and the debt to export ratio rose to 530 percent, bringing debt sustainability increasingly into question.”²⁵ “When private consumption and investment went into a sharp downturn in mid 1998, the economy could not plausibly have exported its way out of recession.”²⁶ Three fourths of annual export earnings were debt-servicing payments.²⁷ The possibility of continuing at these rates and avoiding default were very unlikely.

The Fund gave Argentina loans in exchange for their advice. One has to question the soundness of that kind of relationship and even the reason for the International Monetary Fund’s purpose when all it seemed to do was prolong a default and give inaccurate forecasts. In 2000 the Fund was looking for a recovery to start in 2001 and debt to GDP to fall.²⁸ Instead of recovery there was a collapse and the projections again proved to be to optimistic. Not surprisingly, in August of 2003 International Monetary Fund director Horst Kohler admitted that the fund made errors in Argentina.²⁹ In 2002 in some of the worst times for the country the IMF refused to grant rescue aid. One of the major concerns for the IMF was the government could not cut spending in the provinces and that it did not change its bankruptcy laws.³⁰

The growth of export revenue looked like optimistic forecasts in light of International Monetary Fund data on export growth in relation to gross domestic product. While Argentina’s gross domestic product was rising extremely well, exports in relation to gross domestic product lagged countries that started out in a situation like Argentina’s position after opening up international trade.³¹

Fiscal responsibility on the part of the government was a major factor. Deficits alone are a problem but compounded with running them up with borrowed money was the ultimate fiscal error. The amount of debt the government piled up hindered their ability to stimulate the economy during the recession.³² By the time the government became committed to reducing the deficit to avoid default it was to late. Cutting spending was of little consequence when they were loosing tax revenue and borrowing money was becoming more expensive from rising risk spreads.³³

Cavallo was appointed Economy Minister a second time in 2001 to save the country. He had to deal with the countries big deficit. Just before him Economy Minister Ricardo Lopez Murphy had a plan to cut public spending that did not go over politically. Aware of this Cavallo
Sought to cut the deficit by boosting taxes on transactions in the banking industry instead of cutting public spending.³⁴ The problem with his plan was the economy would have been better off with a decrease in spending than raising taxes.³⁵ Also,it promoted people to move their money to banks outside of the country and purchase in cash. He also increased the risk of banks by requiring them to take government bonds as reserves.³⁶

Institutions in the United States and Europe were feeding the fiscal irresponsibility of Argentina by doing the underwriting of the country bonds and making profits on fees. Companies like ABN-Amro were selling bonds while at the same time giving optimistic advice to investors. In June of 2001 ABN-Amro was saying, “Argentina has neither devalued its currency or defaulted on its debt obligations and we continue to believe that neither scenario is in the cards.”³⁷ The mega swap that delayed the government’s debt payments but increased the amount to be paid in coming years. It “ranks among the most infamous deals that Wall Street has ever peddled to a government.”³⁸ Just after the deal Argentina’s likelihood of avoiding default looked worse.³⁹

There are a couple points that highlight the potential of how the crisis could have been possibly avoided. The combination of Menem’s administrations reckless spending in the 1990s and apathy on part of the International Monetary Fund and administration are important. Addressing this in the years when policies that could have allowed the default and disaster to be avoided are crucial. Furthermore, the International Monetary Fund and international community having a more detached view should have tried harder to persuade Argentina to prepare for the inevitable. Even the most developed economies have contractions in their economies. Certainly, an economy like Argentina’s that was highly leveraged with debt that came from overseas was a potential disaster waiting to happen. This was especially true because the foreign investors were not committed because of the speed that they would loose their money in the event of default and devaluation of the currency that had already happened to countries like Mexico and Russia.

The previous catastrophes in other Latin American countries that had opened up to foreign markets like in Mexico, the Asian disasters and Russia did not sit well for the possibility of investors staying in Argentina. Changes in Argentina’s economic climate should have been dealt with prior to 1998 before the countries recession. In 1997 Argentina was in favor with the markets so they would have been able to maintain some kind of foreign money, at least for paying off current bond payments.⁴⁰ In 1998 Argentina was “Issuer of the Year,” a title given by Latin Finance because even in a bad international market they sold a lot of bonds.⁴¹ Argentine officials were not being realistic which is seen in a quote by undersecretary of finance, Miguel Kiguel, “Once you know the markets are there, and there is financing, you behave as if financing will be there forever.”⁴²

The recession and economic crisis had significant effects on daily life for the people of Argentina. Poverty was severe in the 2002 depression “reaching levels never previously recorded in modern Argentina.”⁴³ After the devaluation there were people called cartoneros who looked through garbage to recycle for pennies on each pound of material.⁴⁴ The unemployment rate went up to a never before experienced 22 percent.⁴⁵

Developing nations like Argentina end up as recipients of larger nations hegemony. The International Monetary Fund is controlled by the largest economies. These nations are supposed to be the financial moral example for developing nations. It is ironic that not many years after the economic crises in Latin America and Argentina that the United States inflicted an economic fallout on itself. The fallout was in financial companies brought on by risky loans in the housing industry that were made during a period of maximum optimism and greed. Many of these loans were immorally misrepresented to homebuyers who could not afford payments. In 2007 the housing industry bubble burst and these high-risk loans called sub-prime loans wrecked the liquidity of major American banks and financial institutions. It spread into the overall economy. Just as Argentina needed injections of capital to maintain its payments and stabilize its banks United States companies relied on foreign assistance.

In 2002 Argentina was in need of United States aid and president Bush said the country needed to get a strong economic plan before any US aid would go.⁴⁶ Argentina needed U.S. aid to have any possibility of help from the IMF. President Duhalde intended to get away from U.S. policy and was given no ultimatum.⁴⁷ Economy minister Jorge Remes Lenicov in 2002 wanted an IMF aid package but the IMF demanded reforms be made before hand. Jorge said, "There are some reforms that have to wait until the waters are calmer. Don't ask us to do in April everything that we didn't do in seven years."⁴⁸ The IMF wanted to see reforms but,"State reform means firing people, particularly in the provinces," said Mr Remes Lenicov. In response to the IMF he also said, “At this moment of very high social conflict, can you announce that you're going to fire 450,000 people? Frankly, I can't. And I say to the IMF, if you are asking for that, you're crazy."⁴⁹ Jorge Remes Lenicov was “saying that further deep structural reforms in Argentina, which the IMF and the US Treasury are demanding as pre-condition for IMF lending, are impossible in the middle of a crisis. Postponing IMF lending until important reforms are carried out only deepens the crisis, which makes those reforms more difficult to implement.”⁵⁰

The economy began recovering in 2003. President Duhalde took office in 2002. After his appointment they got rid of convertibility, which dropped the value of the peso. The government did not allow people to take their money out of banks and there were protests just 3 weeks after he took office. Police killed two protestors and Duhalde rescheduled September’s elections to April.⁵¹

Eduardo Duhalde left office in May of 2003 and was replaced with the elected Nestor Kirchner. Kirchner ran as an opposite of Menem. He was elected governor of Santa Cruz in 1991. Over his 12 years as governor he turned around the province. In Santa Cruz in 1991 the deficit was 1.2 billion pesos and when he left there was a surplus, low poverty and unemployment and a growing economy.⁵²

Kirchner cleaned up the institutions of corrupted officials that the public had lost confidence in. He got rid of many military officials, set-up impeachment trials against Supreme Court judges, fired 52 federal police commissioners while fixing up the Buenos Aires police.⁵³ Many of those military officials had been involved in the Dirty War in the 1970s. The recovery process needed swift change and Kirchner provided it bringing credibility.

Kirchner did a good job with the economy. He was against using foreign loans to create near-term results. He refused to be a puppet of the International Monetary Fund. The International Monetary Fund also wanted rate increases on utilities but he did not want to compromise his program that was set up to foster growth in the country. “When a 2.9 billion dollar debt fell due in September 2003 he refused to dip into the central bank reserves to make a payment as the Fund had urged.”⁵⁴ Argentina was in default for that, however, a day later the International Monetary Fund gave a better bargain refinancing the 21 billion.⁵⁵

In dealing with the deficit Kirchner held out for a better deal than what bondholders were originally looking for. The government insisted on a payment of 30 cents to the dollar on its debt. The standoff with foreign bondholders lasted about 3 years. On March 3, 2005, 76% of Argentina’s debt holders took the 30 cents write-off.⁵⁶ The economy was stronger in 2003 and 2004 and “disdain toward globalization is on the rise in the developing world, in part because many countries that have liberalized their economies have experienced sub par growth, disappointing reductions in poverty, or financial crises.”⁵⁷

In summary, a combination of new free market policies in the 1990s coupled with insufficient assistance from the International Monetary Fund were the greatest factors in moving Argentina toward economic disaster. In fact, the final mega swap assured the countries ruin by making future payments on its debt impossible due to the higher rates. Policies that were set decades earlier by Peron and that were carried on by Peronist presidents like labor laws empowering unions were hard to reform. The greatest problem for Argentina was its reliance on foreign capital. The new neo-liberal strategy failed Argentina as it failed so many countries before. Fiscal responsibility was also a major issue. All of these factors combined with the inability to get off the convertibility system were paramount to the country. Cavallo’s magnificent work ending inflation, boosting the economy and propping the currency against the dollar in the early 1990s was not that great if it ended up eventually bankrupting the country. To much of a good thing is harmful. That goes for laissez faire economies to. Hot money continues to find newly formed markets and will continue to leave them on short-terms. As countries like China and Vietnam in 2008 and others in coming years continue to experience unprecedented foreign investment the wise investor should be cautious. The teaching in Argentina is that nations periods of economic expansion ultimately contract and it is best to be prepared, or at least not get to comfortable.




Sources
1. Jonathan C. Brown, A Brief History of Argentina (Lexington Associates, 2004), 260.
2. Ross P. Buckley, “Re-envisioning Economic Sovereignty:Developing Countries and the International Monetary Fund, University of New South Wales Faculty of Law Research Series 24 (2007): 14.
3. Brown, 262.
4. Frederico Sturzenegger and Jeromin Zettelmeyer, Debt Defaults and Lessons from a Decade of Crises (Cambridge: MIT Press, 2006), 165.
5. Christina Daseking et al, “Lessons from the Crisis in Argentina,” International Monetary Fund 236 (2004): 14.
6. Daseking, 14.
7. Buckley, 5.
8. Guillermo A. Calvo, Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?(Cambridge: MIT Press, 2005), 21.
9. Paul Blustein, And the Money Kept Rolling In(and Out) (New York: Public Affairs, 2005), 28.
10. Blustein, 28.
11. Calvo, 155.
12. Blustein, 78.
13. Calvo, 22.
14. Steve H. Hanke, “The Americas:Who’s Killing the Peso in Buenos Aires?,” The Wall Street Journal, November 30, 2001, sec. A, 15. Eastern edition.
15. Blustein, 10.
16. Edward Epstein and David Pion-Berlin, Broken Promises: The Argentine Crisis and Argentine Democracy (Lanham: Lexington Books, 2006), 3.
17. Epstein and Pion-Berlin, 3.
18. Epstein and Pion-Berlin, 12.
19. Blustein, 10.
20. Epstein and Pion-Berlin, 7.
21. Buckley, 9.
22. Buckley, 2.
23. Buckely, 2.
24. International Monetary Fund, IMF Concludes Article IV Consultation with Argentina, (Washington D.C., March 11, 1999) 99/21.
25. Daseking, 11.
26. Ibid.
27. Ibid.
28. Blustein, 101.
29. Epstein and Pion-Berlin, 15.
30. Lea Patterson, “Argentina Fails to Win Fund Rescue Package,” The Times, April 22, 2002.
31. Daseking, 13.
32. Franklin Allen and Douglas Gale, Understanding Financial Crises (Oxford: Oxford University Press, 2007), 18.
33. Mark Allen et al, “The Crisis That Was Not Prevented: Lessons for Argentina, the IMF and Globalisation,” Fondad (Jan. 2003): 25.
34. Robert J. Barro, “Argentina's Cavallo May Not Play the Hero This Time,” Business Week, May 7, 2001,www.businessweek.com/magazine/content/01_19/b3731038.htm (accessed April 17, 2008).
35. Barro, Argentina.
36. Barro, Argentina.
37. Blustein, 66.
38. Blustein, 125.
39. Blustein, 125.
40. Bluestein, 44.
41. Blustein, 51.
42. Bluestein, 52.
43. Epstein and Pion-Berlin, 7.
44. Jon Jeter, “Scrap by Scrap, Argentines Scratch out a meager living. Laid-off workers survive as trash pickers" Washington Post , June 7, 2003.
45. Jon Jeter, Scrap.
46. Ron Hutcheson, The Philadelphia Inquirer, January 17, 2002, p10.
47. Hutcheson, , The Philadelphia Inquire.
48. Thomas Catan, “Argentina's economy chief urges IMF to ease demands,” Financial Times, USA Edition 2.
49. Catan, Argentina's economy chief.
50. Prof Stephany Griffith Jones, “Postponing IMF Loan Only Deepens Crisis in Argentina,” Financial Times, April 17, 2002, Letters to the Editor p18. London Edition.
51. Epstein and Pion-Berlin, 13.
52. Epstein and Pion-Berlin, 13.
53. Epstein and Pion-Berlin, 14.
54. Epstein and Pion-Berlin, 15.
55. Epstein and Pion-Berlin, 15
56. Epstein and Pion-Berlin, 15
57. Blustein, 12.