Argentina is in the news these days with speculations about the possibility of debt default, yet again.
The country does not have enough foreign exchange reserves to make repayments and interests to the $40 billion IMF loan and the $70 billion of Argentine bonds held by foreign bond holders.
When I asked an Argentine amigo (friend), he shrugged his shoulders and told me that he had seen the movies of debt and default many times before. According to him, the current crisis is nothing in comparison to the catastrophic economic, political and social collapse of the country in 2001.
It is in this context of yet another Argentine debt crisis that I read the book “And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina” by Paul Blustein, a Washington Post staff writer. He was a first-hand witness to the Argentine crisis when he was posted in Buenos Aires in 2002. He has done extensive research and interviewed IMF, Argentine and US officials as well as the bankers. He had already written a book, The Chastening: Inside the crisis that rocked the global financial system and humbled the IMF, following his coverage of the crisis in Asia, Russia and Brazil in the 1990s. With such deep expertise, he has brought out the role of Wall Street and IMF in the Argentine financial crisis in 2001.
The primary responsibility, of course, lies with the Argentines themselves. It was the Argentines who made the crucial decisions and took the money happily from Wall Street and the IMF. The Argentine government spent more than they should have, taxed less than they should have and borrowed more than they should have. In 1991, they started the Convertibility system of 1:1 fixed exchange rate of peso with the dollar which lasted for a decade. This system should have been used as an anaesthesia for a short period to fix the system and move on to a sustainable long term exchange rate policy. There was no way for the Argentine peso to maintain its parity with the US dollar in the long term. It was a no brainer, as the Americans say. But the Argentines kept up the system beyond its expiry date and paid a huge price. In 2001, the economy collapsed accompanied by an unprecedented political and social crisis.
The Wall Street and IMF are equally responsible for helping the Argentine addiction to debt. In the 1990s, Wall Street hyped Argentina as a success story, encouraged the country to issue bonds and sold them in the international financial market. Argentina was one of the biggest bond issuers in the world during the period 1997-99. At a time when Argentina’s indebtedness was mounting in the late 1990s, the Wall Street bankers lauded the country as a paragon of the developing world and poured money in, lulling the government into complacency.
The Wall Street firms whose analysts peddled optimistic reports were generally the same ones collecting fees from bringing Argentine government bonds to market—a business that generated nearly $1 billion for big securities houses during the period 1991–2001.
A little over a year before Argentina’s default, J P Morgan, the firm that brought more Argentine bonds to market than any other, sent clients a report taking issue with pessimists worried that the country was destined for bankruptcy. The report’s title was “Argentina’s debt dynamics: Much ado about not so much.”. The basic thrust of that report was that fixing the fiscal problem was essential but that a modest adjustment would enable the country to avert default.
In March 2001 another Morgan report said: “The government’s capacity to service its debt this year is not in question...We believe that the fears of abandoning convertibility are overdone and point out that devaluation is not a policy option due to the limited benefits.”
ABN-AMRO assured its clients at the end of June 2001: “Argentina has neither devalued its currency nor defaulted on its debt obligations and we continue to believe that neither scenario is in the cards.”
“A Bravo New World” So proclaimed the title page of a report on Argentina and other Latin American markets that Goldman, Sachs & Co. sent to clients in January 1996. The report hailed Argentina “for adhering to the prescriptions of the Washington Consensus and keeping the peso tied to the dollar through thick and thin. President Menem and Finance Minister Domingo Cavallo not only did not retract their promises but accelerated their economic reform efforts. For Argentine citizens and for those investors who were willing to believe in those promises, the benefits are now becoming apparent.”
The investment firm of Dresdner Kleinwort Benson assured clients that they should not worry unduly about Argentina following countries like Thailand or Indonesia into turmoil. “Argentina has come through the first phase of the Asian crisis with flying colours,” the firm said in a June 1998 report, and this was “no coincidence". The economic fundamentals are considerably stronger than three and a half years ago. The decade of reform has strengthened Argentina’s economic foundations dramatically and the asset prices should rebound as the market once again is impressed by Argentina’s capacity to overcome a difficult global financial period.”
The 1998 award for “Issuer of the Year,” bestowed by Latin Finance magazine, went to Argentina, which issued large quantities of bonds. Were it not for Argentina, the magazine said, many emerging-market investment bankers “would probably have been twiddling their thumbs” that year, because the currency crises in Asia and Russia had caused capital flows to dry up to the markets they usually served. “Argentina above all other issuers, both sovereign and corporate, was the bankers’ saving grace in 1998,” the magazine said.
Besides optimistic analyses, another factor propelling the excessive amount of capital to Argentina was Wall Street’s system for rating the performance of professional money managers. The system created bizarre incentives by rewarding money managers for investing heavily in the bonds of emerging-market countries that already had lots of bonds outstanding. Put more simply, the system strongly encouraged people who controlled huge pools of money to lend to countries with huge piles of debt.
The Wall Street traders and brokers make a living out of the up and down swings of markets. They make a killing when the swings are extreme. Argentina had one of the most extreme swings from 1991 to 2001. Having made money during Argentina’s boom period by bringing the country’s bonds to market, those same firms—albeit different departments—were profiting again by speculating on the bonds’ decline. The vulture funds made a killing by buying up the junk bonds cheaply and later blackmailing and suing the Argentine government and forcing them to pay the original prices of the bonds plus interest and penalty.
Blustein notes, “ The conduct of the markets in Argentina is redolent of the scandals that rocked Wall Street following the bursting of the stock market bubble in the United States. Striking parallels can be seen between Argentina’s crisis and some of the most notorious flameouts of recent years, such as Enron, WorldCom, and Global Crossing, in which major brokerage firms pumped up the companies’ securities prices, issuing bullish forecasts that were later seen to be tainted by self-interest”.
It is the same trick the bankers used to hype up and oversell the subprime mortgages before 2007 and caused the financial crisis. Just as the Rating Agencies gave triple-A ratings and mislead the investors, the Wall Street analysts and bankers praised Argentina as the best emerging market for investment in the nineties.
The bankers got even the thinktanks to sing the chorus with them. The Heritage Foundation, a conservative think tank that evaluates countries according to an “Index of Economic Freedom,” rated Argentina in 1999 as tied with Chile for the best policies in Latin America, and almost equal to Australia and Taiwan. (The criteria include the degree of government intervention in the economy, respect for property rights, extent of black-market activity etc.)
What was the role of the IMF?
IMF provided a kind of guarantee and cover to the irresponsible Wall Street lenders to Argentina. The lenders know that uncle IMF will come to the rescue of Argentina at the end of the day. And when that happens, the Wall Street bankers get the priority to collect their Argentine dues. If there is no IMF rescue, these bankers would never touch Argentina, knowing the country’s history. Thus the IMF has become an accomplice to Wall Street who profits from the Argentine addiction to debt.
During the presidencies of Nestor Kirchner and Cristina Fernandez Kirchner (2003-15), Argentina was ex-communicated from the international financial markets after the audacious and successful self- restructuring (against the advice of IMF and in defiance of the Wall Street) of the 90 billion dollar debt by 30 cents to a dollar by Nestor Kirchner. Argentina’s external debt was the lowest in this thirteen-year period since no one was willing to lend to the country. The Chinese and Chavez helped with some loans and the purchase of bonds. Argentina freed itself from IMF surveillance after paying off the IMF debt in full in 2006 ahead of its scheduled period. President Cristina rejected the claims of vulture funds and refused to settle with them even when they started blackmailing her and the country through legal and illegal channels.
In the 1990s, the IMF kept up a positive image of Argentina through its statements and lending even when some staffers of the Fund had raised the alarm several times. IMF chief Camdessus raved in a speech in 1997 in Buenos Aires praising the latest economic indicators of high growth and low inflation. “My friends, this may not be paradise,” Camdessus declared. “But the situation is far better than we would have dared imagine not so very long ago.” He invited President Menem to address the annual meeting of the IMF and World Bank 1998 saying, “ the experience of Argentina in recent years has been exemplary, including in particular the adoption of the proper strategy at the beginning of the 1990s and the very courageous adaptation of it when the tequila crisis put the overall subcontinent at risk of major turmoil...Notable, too, are the efforts of Argentina since that time to continue its excellent compliance with the performance criteria under our arrangements and much progress in the implementation of the structural reforms. So clearly, Argentina has a story to tell the world: a story which is about the importance of fiscal discipline, of structural change, and of monetary policy rigorously maintained”.
One would have expected Argentina, the IMF and the foreign lenders to have learnt some lessons from the unprecedented tragic crisis of 2001. No, they have not...They are at it again…"
The IMF extended a massive 57 billion dollar loan to Argentina in 2018, the largest in IMF history. Christine Lagarde, the chief of IMF, justified the unprecedented large loan saying that it was to bolster market confidence. But it was an open secret that the US and Wall Street encouraged the IMF to help out the market-friendly centre-right President Mauricio Macri to help in his campaign for reelection. But Macri lost the 2019 election to the anti-IMF Peronist party. The market did not gain any confidence and the IMF money simply disappeared into the usual Argentine labyrinth. The currency has kept up its momentum of rapid devaluation while inflation has remained high. Now Argentina is stuck with a huge IMF loan.
The Argentines have taken seriously the words of Camdessus that ‘Argentina has a story to tell the world’. The University of Buenos Aires has set up a “Museum of External Debt” which tells the story of Argentina’s addiction to debt. It displays documents and charts alongside a rogues' gallery of photographs of finance ministers and presidents who had leading roles in the country’s foreign debt. The IMF has a central place among the exhibits.
The US blames the Mexican and Colombian cartels as responsible for the American drug addiction and wages even a war to stop the supply of drugs, although it is a completely consumer-driven business. My Argentine amigo uses the same supply-side logic to claim that Pobrecito (poor darling) Argentina is a victim of the debt addiction caused by the Wall Street debt traffickers.
The author is an expert in Latin American affairs
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK
