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The 2001 Default

Yes, you know the one. The infamous “largest debt default ever” in 2001 of Argentina, as an economic crisis brought the country to a standstill, cast 50% of the population into poverty, casting doubt on the neoliberal model once and for all. The one that brought about five presidents in two weeks, a mass capital flight, and televised violence of a country once at the cusp of being considered “first world.”

This most talked about crisis, one of many in the history of Argentina, is serving as a reflection for many Eurozone members in wake of Ireland, Portugal, Spain, most notably Greece…ok the list just keeps going. How does it really compare though? First off, the Eurozone, part of the European Union, is unofficially the largest economy in the world. Argentina, even in the boom/bust 90’s, is nowhere near such amount of wealth (also because it is one country versus 23). Besides these obvious size issues, Argentina did not/does not have the institutional strength that even some of the smaller countries enjoy.

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IADB and Argentina: Friends Again

As one of the founders of the Inter-American Developmental Bank, Argentina has both had a long positive and contradictory role with this institution. Owning 10% of the bank, Argentina committed $11 billion in 2010 towards projects throughout the Americas. The majority owner is the United States, with 30% of shares.

After its historic 2001 debt default and 2005 exit from membership in the IMF, Argentina has tried to settle its foreign debt with investors by swapping out the debt. This means that negotiations take place between the government and debt-holders in groups or individually, in negotiating a fire-sale like price in recovering some of the money lost during the default. For awhile, Argentina had settled many of its debts at around 63 cents on the dollar, meaning they would pay that much at a fixed interest rate. This was appealing to many debt-holders as they could recoup some of their losses.

The major political liability of the IMF debt was paid off the quickest, with return rates at a 70% discount (so around 30 cents of each dollar invested). In 2005 and 2006, the Nestor Kirchner government paid back the majority of these debts at that agreed upon discounted rate, with help from Venezuela. This was at the same time the Argentine economy was booming, with soy exporting and the low-cost peso making foreigners flock to soak up the undervalued deals present in Argentina. Venezuela kept buying more of the Argentine debt though, lending financing officially and non-officially to the Argentine government. With 93% of the foreign debt paid, Argentina should have had easier access to credit.

But, it hasn’t. Besides being still rated B by most international ratings agencies, many of the unaccounted investors are trying to still settle their scores. Many of these investors have been to court (more on this in a future post) to recover investments. Because of Argentina putting some investors (two Texas groups most notably), the United States began voting to block all funds intended for Argentina.  Well, Argentina blinked first. The IADB is granting $400 million in infrastructure loans to Argentina after the Argentines agreed to settle their debt with these firms. The loan is matched by $45 million from the local government.

It was obvious that these two companies (which perform infrastructure improvements) had political support in Congress and government. While the terms of the deal are not yet reached, they probably got more than other investors, as Argentina wants these types of loans to cover some of the vast infrastructure projects they are creating.

On again off again military intervention (Part 1)

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The economic situation of the country was disastrous.  The new president did everything he could to stimulate the economy; he tried to appeal to foreign investors to increase productivity, particularly for the petroleum sector.  The nation went from being a petroleum importer to an exporter. (Todo Argentina)  Frondizi also rendered economic and fiscal reforms, pursued capital investment, condensed taxes, restricted credit and got Argentina back on its feet. (Crow 1992 (1946), p. 846)  He brought inflation down to 14 percent.

It was a difficult government; the country was as always and this time Frondizi was caught between the Peronist and the military in regards to the conflict of Cuba and the United States.  Frondizi had an amicable relationship with Kennedy and also went as far as to sit down with Ernesto “Che” Guevara to see if he would mediate relations between the two countries. (Todo Argentina)  Ultimately, he satisfied the military by siding with the Americans in this matter.

In hopes to please the Peronist party, he allowed them to run for Chamber of Deputies (were they won 45 of 85 spots) and governorship (9 out of 14).  The military was in an uproar so they went on strike until they eventually forced out of the country.  Thus, leaving the military in-charge once more, until the following elections in 1963.

Dr. Jose Maria Guido, the vice-president of the Senate took over for the remainder of the term. (Todo Argentina)  Nevertheless, there was a military divided by the “blues” and the “reds.”  The “blues” who strongly opposed the Peronist were victorious under the command of General Ongania.

Civilians regained power when Arturo Illia, alias “La Tortuga,” was elected president.  During his regime, Illia canceled the oil contracts and nationalized the industry; nevertheless, production quickly declined.  Here the seeming eternal war with the IMF and the World Bank begun, and he consequently printed more pesos and inflation rate rouse again.

Near the end of 1964, it was speculated that Peron was trying to make his way back from Madrid.  However, he was declared “persona no grata” and had to return to Madrid from Rio de Janiero. (Todo Argentina)    From this point forward, Illia’s government began to wither.  Peronist began to strengthen again so the military stepped in once more.

Capital flight four times greater compared to previous year

A report released today by the Argentine government found that capital flight during the third quarter was four times the amount compared to the previous year. There were $18.245 billion dollars in capital flight from January to September this year compared to 2010’s $9.169 billion. While some attribute this to the market’s uneasyness with the Presidential election, capital flight did not let up after.

This is spelling even more bad news for the government. Despite their currency controls money is still hemorrhaging out in dollars, which is 96% of the currency leaving the country. Presumably, this is going to banks in the United States or transferred first there for major corporations. The fact that only 3% were in euros says that either Europeans are trying to play the market in dollars right now, or that it is almost all an American-led process (perhaps both).

Market access and poverty

The richness of Argentina, with vast fertile lands, highly educated people, cultural weight, and a highly mobile population can be deceiving. Driving through Buenos Aires there are vast differences between the haves and have-nots.

This excellent study (in PDF) helps build a link between national and international trade reform and how they have impacted poverty. The author, Guido Porto, studied the effect of developed nations lowering tariff barriers with Argentina, and Argentina lowering their domestic tariffs for international imports. He found that poverty could be significantly reduced (anywhere from 3-18%) based on increased access to Argentine goods internationally. There would be a lowered effect if Argentina lowered its tariffs to imports, but still significant.

In theory, this would be great. Unfortunately, this will not happen due to many countries unwilling to allow Argentine goods into their markets, simply for fear of competition with domestic producers, or of their perceived bias towards Argentina being unreliable.

Continuing fallout from currency controls

As previously covered, the Argentine government decided a week after the national elections to restrict dollar access as a means to control capital flight. A month on, how are these controls effecting the economy?

Well, a week after taking effect, currency deposits fell 7%, and then a week later eased by ‘only’ falling 4.5%. More than $2.4 billion was withdrawn from bank accounts, and while the pace is slowing, this is probably due to people who could withdraw their money having already done so, leaving those who cannot.

The dollar-peso exchange rate, at $4.23 before the announcement, steadily rose and is now ‘stabilized’ at $4.30. The Argentine government was heavily selling its reserves to prop up the peso as to negate even stronger effects from the new measures. While the official rate is at $4.30, the informal dollar trading, measured by most reporting agencies and economic organizations, is now kept in tight fold. Of the estimated $500 million traded per day previously, only $350 million is now traded. These informal traders were inching the informal peso up to $4.79, but CFK’s right-hand man Guillermo Moreno has pressured traders, importers and exporters to bring it down to $4.40/.50.

People are clearly holding onto their money, preferably in dollars. Sadly, as predicted, the capital-flight dollar controls have ground real estate sales to a halt. This is because real estate in Argentina is bought and sold in U.S. dollars. With tightened access to dollars, the real estate market had no option but to slow down.

Still, the government is projecting a $9.5 billion trade surplus for 2012, and its tax collection rates have soared by 31.4% this year. The stricter tax code enforcement along with riding the good-time soy train helps keep propelling Argentina along despite the negative currency issues.

After Exile

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General Eduardo Lonardi was initially the man to guide Argentina through this de-Peronization period, by ultimately was replaced by General Pedro Aramburu who was more drastic in his anti-Peron measures.  We was in transitional power until the elections of 1958, but in this period he restored the constitution of 1853, gave back “La Prensa”, made the central bank autonomous, and made the Peronista party illegal. (Crow 1992 (1946), p. 846)

Arturo Frondizi who allegedly followed orders from Peron in Madrid was elected president.  However, he did not hold up his end of the bargain to continue Peronism.  Eventually, inflation was out of control with the peso at an exchange rate of five pesos to one American dollar and prices had increase by 114%.  (Crow 1992 (1946), p. 846)