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Buenos Aires: freezing of bank accounts unleashed the people’s fury |
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When the end came, it was spectacular. On one of the hottest nights of the year in Argentina, nationwide protests turned ugly as riots and looting broke out, claiming at least 22 lives. During the night, the economy ministry was torched. The following morning, December 20, its unpopular head, Domingo Cavallo, was gone. Later that afternoon, the president, Fernando De la Rúa, followed suit. Argentina was left rudderless at precisely the time decisive leadership was required to help minimize the downside to its inevitable default.
Admittedly, that decisive economic leadership had not exactly been forthcoming from Cavallo or De la Rúa. The latter had become little more than a figurehead and the former seemed hell-bent on destroying Argentina’s financial infrastructure in his attempts to avoid default and devaluation.
Never mind that both had already occurred, more or less, by the time the government finally collapsed. The default really came as early as November, when the Argentine government took some $55 billion in sovereign bonds held by local banks and other domestic institutions and swapped them for lower-yielding loans. The idea was that the loans could be booked at par, in contrast to the bonds, which, marked to market, were worth little. This, it was thought, would shore up balance sheets, preventing bank collapses.
It didn’t. Argentines withdrew some $2 billion from their bank accounts on November 30, fearing that their money wasn’t safe where it was. Within three days, draconian capital controls had been imposed preventing withdrawal of more than $250 a week, or carrying more than $1,000 out of the country. Less than two weeks later, finance secretary Daniel Marx, the official chiefly responsible for debt restructuring negotiations, resigned, saying: “If the government has a problem and somehow spreads it out over the private sector, you contaminate growth possibilities. Capital controls is one of the issues.”
The devaluation can similarly be dated back to the introduction of those capital controls. Long before any official devaluation, Argentines taking their pesos to the town of Ciudad del Este, on the border with Paraguay and Brazil, could still get a one-to-one rate; unfortunately the exchange was not with the US dollar but with the Brazilian real. Convertibility – Cavallo’s 10-year-old plan to peg the Argentine peso one-to-one to the dollar – was over.
Argentina is not the sort of place where people use a lot of cheques and credit cards, and the new laws radically changed day-to-day life. Individuals with increasingly rare cash dollars find prices suddenly slashed; demand for big-ticket items has soared as Argentines give up hope of ever again being able to access the cash in their bank accounts. Better to spend it on a new car, goes the thinking, than have it disappear entirely. And with the cash-based informal sector hit hard by the capital controls, the only parts of the Argentine economy still working are the handful of exporters, such as Spanish-owned oil company YPF.
Analysts have given up all hopes of a quick and orderly resolution to the Argentine crisis. With Salomon Smith Barney, Deutsche Bank and Merrill Lynch as advisers, there was some hope that the country might be able to present a quick and orderly restructuring plan and get itself back onto a growth path within a few months. Now, however, all such hopes have been dashed. “Obviously, it is not going to be a controlled process any more,” says Peter Geraghty, portfolio manager at Darby Overseas Investors. “There is no elegant default, that’s for sure.”
With default and devaluation inevitable, what is needed is a coherent macroeconomic plan for 2002: one that maps out the route by which Argentina might once again achieve economic growth.
As Euromoney went to press, Argentina had neither president nor finance minister, and there were few guesses as to who might fill either post. Both are poisoned chalices: whoever takes over seems doomed to unpopularity and a place in history as the man who oversaw the biggest ever sovereign default.
The new administration will be able to lay a lot of the blame at the feet of Cavallo and De la Rúa. New York bankers, the sort of people one would expect to applaud fiscal austerity and a desire to pay foreign debt at any cost, in fact complained that the Argentines were closing out any option that would eventually promote growth, and working in exactly the wrong direction.
In mid-December, for instance, long after the widely applauded decision by the IMF not to disburse a scheduled $1.24 billion aid tranche, Cavallo was still seizing money from private pension funds and twisting the arms of the local banks in order to avoid a default. The IMF’s decision made Argentina’s finances unsustainable. But rather than save what remained of the economy, Cavallo seemed determined to ruin as much of it as possible before finally succumbing to the inevitable.
Cavallo’s successor has a huge yet ultimately simple task. For once, there’s little conflict between Argentina’s citizens, its bondholders and its multilateral creditors: all of them are looking for policies that shore up what’s left of the Argentine economy and set the stage for growth.
In order to achieve that, his first task will be to tackle the exchange rate regime head-on. Within the Peronist party, which is calling the shots, there is little consensus on economic matters. On the one hand, former president Carlos Menem wants to dollarize. Cavallo helped the country in the direction of dollarization before he resigned: in another self-defeating act, he forced all holders of peso bank accounts to convert them into dollars. The effect was to minimize the upside to any peso weakening: you can’t devalue the dollar against the dollar.
But few international economists, including the all-important ones at the World Bank and IMF, think that Argentina has much of a future if it dollarizes, no matter what the dollar-peso exchange rate used.
On the other hand, says Geraghty, “if they end up devaluing, the cure is worse than the disease.” With all debts, both public and private, dollar-denominated, a flotation of the currency could bankrupt the entire country at a stroke.
There are ideas in the official sector as to how such an outcome might be averted. In October, Ricardo Hausmann, the former chief economist of the Inter-American Development Bank, published an article in the Financial Times advocating de-dollarization of all debts in the financial system – essentially, turning dollar debts into peso debts by decree. The proposal was dismissed as being tantamount to default, and placing into jeopardy the trustworthiness of all Argentine entities. But such considerations become less pressing when you’re in default anyway. And there are ideas going around the IMF in which debts might be re-dollarized after the peso was floated, changing the principal amount at stake but retaining the other features of the securities.
Whatever happens, one thing is for sure. As Walter Molano, head of research at BCP Securities, says: “It’s going to be a very ugly process that we have ahead of us.”
