Chile is reckoned to be the best organized country in Latin
America, so no-one was expecting any surprises when Santiago
was chosen to host the Inter-American Development Bank (IDB)
annual meetings in March.
It was expected that there would be lots of optimism about
Mexico and its investment-grade credit rating, optimism too
about the surprisingly smooth way in which the Peruvian
elections seem to be panning out, and positive noises about a
US soft landing and the way in which Argentina, with the help
of the IMF, was attempting to extricate itself from economic
It didn't quite work out like that. Chile did its bit, to be
sure: riot police vastly outnumbered the small groups of
foolhardy protesters, who were dealt with in typically
forthright fashion. But the US didn't manage to step up to the
plate: plunging stock markets and talk of forthcoming recession
got everybody worried about the rest of the hemisphere,
especially Mexico. One of the biggest worries was that far from
rebounding quickly, the US would have a "banana-shaped"
recovery. And Argentina had obviously thrown away the script
First the finance minister, Jose Luis Machinea, resigned a
couple of weeks before the conference was due to start, to be
replaced by economic hawk Ricardo Lopez-Murphy. Political
support for the new minister was never strong, and seemed to
evaporate completely on the Friday before the meetings, when he
announced $4.5 billion in budget cuts in an attempt to bring
some semblance of balance to Argentina's fiscal accounts.
The verdict came within a couple of hours. Every minister
belonging to the junior partner in the ruling Alliance
coalition resigned, plunging Argentina into a full-scale
political crisis. Suddenly, what had been unthinkable only a
few hours previously was now necessary: the ambitious Domingo
Cavallo would have to be brought back into government.
In 1991, as economy minister under former president Carlos
Menem, Cavallo devised the convertibility plan which fixed
Argentina's exchange rate. Cavallo came nowhere in the 1999
presidential elections and also failed to get elected mayor of
Buenos Aires. He may see the present crisis as an opportunity
to revive his presidential ambitions. Cavallo was in Santiago
on Saturday morning, but quickly flew back to Buenos Aires for
negotiations with president Fernando De la Rua about joining
Meanwhile, Guillermo Perry, the chief economist for Latin
America at the World Bank, was giving a presentation about the
effect of the US slowdown on Latin America. His conclusion?
"The farther away from the US, the closer to God". Mexico was
going to be hit hard, but South America was much less reliant
on the US economy continuing to boom. Perry, however, hadn't
built political turmoil into his economic models. Deutsche
Bank's head of emerging markets strategy, Jose Luis Daza, had
an unarguable rejoinder: "The further you are from the US," he
said, "the closer you are to Argentina".
For the rest of the conference, Argentina was the only topic
of discussion. Bankers clustered around the Bloomberg terminals
in the Hyatt, watching Argentine Brady bonds crash to new lows,
with the spread on the benchmark FRB bond widening out to 1,150
basis points over treasuries. The Brazilian real was dragged
down, forcing intervention from the Brazilian central bank and
casting doubt on Brazil's ability to make its 4% inflation
target for 2001.
Superlatives started flying. This was the most difficult
crisis Argentina had faced since convertibility, said Miguel
Kiguel, former Argentine finance under-secretary and now
president of Banco Hipotecario.
One day previously, Carlos Massad, the governor of the Bank
of Chile, had been shrugging off worries that the Argentine
crisis might spill over into Chile. Now, contagion was seen
everywhere: even possibly from China.
Development bank meetings often coincide with crises. The
difference at this meeting was that no-one could see a way out.
The Brazil crisis dominated the 1999 IDB meetings, for
instance, but the mood was overwhelmingly upbeat, with the
market trusting new central bank president Arminio Fraga to
work some magic.
In 2001, there is no obvious way past the Argentine
political impasse, and even if there were the country would
still have enormous difficulty financing its huge debt burden.
It's already been bailed out once: the market can't hope for a
second IMF package so close to the first. The rating agencies
started to draft their downgrade notices.
And even if Argentina's fiscal woes were magically to
disappear, there's still the fact that the country seems
congenitally unable to grow. Thirty months of deflationary
recession have depressed consumer and business confidence to
the point at which total credit continues to decline even in an
environment of falling interest rates.
Something of a morbid mood was the order of the day: bankers
started placing bets on how long Lopez-Murphy would keep his
job, and the booze at the lavishly funded bank receptions
tended to get polished off long before the events were due to
finish. Even Argentine officials gave up any pretence that
there was anything normal about the situation, openly admitting
that they had no idea what was going on and that even if they
did, everything was bound to change in a matter of hours.
The temperature peaked, in more ways than one, at 3pm
Santiago time on Monday. Lopez-Murphy and De la Rua were
scheduled to give a presentation at Mapocho Station, the
convention centre housing the conference, and everybody in town
was determined to go.
Bankers who had flown down just for their own meetings in
hotels outside the city centre suddenly started casting around
for ways to gain admission to the conference proper. Television
feeds were set up, security was tightened.
By 2.30pm the seminar room where the presentation was due to
take place was already full to bursting; by 2.45pm the overflow
room, with its audio-visual link-up, was full as well.
That was bad news for the Argentines. Mapocho Station, a
former railway terminus, gets its grandeur from its lofty steel
roof, and is therefore almost impossible to keep cool during
the heat of the day. As bankers crowded into the seminar room,
shoving their way towards the video screens, the temperature
and humidity rapidly became unbearable.
Eventually, it dawned on the assorted crowd that
Lopez-Murphy was sitting at the table, alone and was about to
start speaking. As the cameras zoomed in, he launched into a
familiar litany: how he was committed to fiscal adjustment, how
convertibility was not at risk, how Argentina would never
default, and so forth. If the strength of any currency peg is
inversely proportional to the vehemence and frequency with
which its inviolability is asserted by government officials,
then Argentina's foreign exchange regime will not last
The bankers were getting restless. There was nothing new
here. Lopez-Murphy was simply going over the details of his
economic plan, and refusing to talk about the biggest worries,
which were political in nature: he didn't even mention Cavallo.
Lopez-Murphy was at a disadvantage in that he couldn't see most
of his audience, but that's hardly unusual for a politician. In
any case, he was losing whatever goodwill the delegates might
have borne him as they mopped their brows and further loosened
Things only got worse with the arrival of the president. By
this point, bankers were crowding into anywhere with a
television, giving a whole new meaning to the phrase press
room. De la Rua was exhausted, on the verge of having to be
physically propped up by his aides. Looking at him, there was
no doubt that the arrival of Cavallo would turn the presidency
into little more than a figurehead's office. De la Rua, like
his finance minister, stuck to economics, receiving only the
barest minimum of applause.
Hours later, the bankers - by now partying to the Gipsy
Kings at a concert organized by Credit Suisse First Boston -
learnt that the trek to Mapocho Station had been a complete
waste of time. Lopez-Murphy had resigned, and Cavallo had
consigned the new economic plan to the wastebin. Consumption of
pisco sours - the Chilean national drink - increased above its
By the following morning, the meetings still officially had
two days to run, but to all intents and purposes they were
already over. The Argentines and the bankers had flown to
Buenos Aires, and the markets were much more interested in how
much Alan Greenspan would cut rates than they were in whether
Argentina's Peronists would grant Cavallo the power to rule by
decree. Argentina had failed to resolve its latest, and
largest, crisis just as every banker and investor in the region
was gathered in the same place. The bankers will continue to
look for mandates, but the investors look as though they've
thrown in the towel already.
The only question now is how bad Argentina can get.
Investors aren't crunching fiscal numbers any more. They've
already moved on to trying to place a dollar value on Argentine
moral hazard: the fact that the international financial
community is desperate that its first poster-child not go the
way of Russia.
Cavallo will probably ask the IMF for more money, and no-one
knows what the answer will be.
Back in Chile, the authorities will remember the IDB
meetings of 2001 as the time when their best-laid plans were
comprehensively scuppered. Chile itself was all but ignored as
the financial community glommed onto Argentina, and the
financial community only saw bad news despite the attempted
emphasis on the good.
Next year, the IDB meetings will be held in Brazil. The hope
must be that in 2002 there will perhaps be more talk of
fruitfulness and less talk of bananas.