Lessons learnt from Argentina’s financial crisis
Argentina’s debt default, devaluation and subsequent recovery is, along with Enron’s fall from grace, the biggest financial story of the decade.
Even now, four years on from the height of the crisis, the manner in which Argentina collapsed continues to astound. In the 1990s Argentina was the darling of both the IMF and the international capital markets. It could do no wrong. By May 2002, however, it had become a pariah state – its economy was shrinking fast, the banking system had collapsed and the government was unable to pay back its creditors on $81 billion of debt.
This was the crisis that Roberto Lavagna and Guillermo Nielsen stepped into as economy minister and finance secretary respectively. Although they didn’t realize initially the severity of the situation, they soon did. Their first task was to restore stability to the financial system and to regain the trust of the Argentine people. Only then could they begin to negotiate with their creditors.
It is a measure of how well they fared that today Argentina is growing at a fantastic rate, that its banks are making a profit again and that the GDP warrants created through the historical debt exchange, completed in May 2005, are among the hottest securities in the emerging markets asset class.
Undoubtedly Argentina was lucky. The peso’s devaluation meant that the country had a competitive currency on which to base its recovery. And many investors wanted to draw a line under the crisis, no matter how disappointed they were with the final terms of the restructuring. Still, Lavagna and Nielsen had to walk a tightrope: one false step and Argentina could have gone down a path from which it might never have recovered.
As Nielsen reveals in this month’s cover story, Inside Argentina’s financial crisis, the obstacles in his and Lavagna’s path included the IMF, the World Bank, certain creditor groups, members of the G7 and several investment banks. In a remarkably candid account, Nielsen reveals in particular how poorly equipped the IMF was to handle the crisis. Its senior staff lacked the necessary diplomatic skills to get Argentina’s officials and, most important, the Argentine public on side.
But more than that the Fund failed to grasp the realities of the situation. Although Argentina was a crisis on many different levels, above all it was a human tragedy. People lost their jobs, their savings and their homes. Yet the Fund’s economists remained committed to a rigid set of policies and never displayed sufficient flexibility to allow confidence to be quickly restored to Argentina. They failed to understand that running a country is very different from running an Excel spreadsheet. Whether or not the Fund has learnt its lessons will only become clear when the next crisis occurs but IMF chief Rodrigo Rato has a big job on his hands.
As for Argentina, the country is in a far healthier state than anyone could have imagined four years ago. The economy grew by more than 9% in 2005; this year the figure is expected to be 6% to 7%. And although investment levels remain relatively low, fixed investment jumped 30% last year. Still, threats to Argentina’s recovery loom large. The biggest is Argentina’s traditional bête noire: inflation, which is now in double digits. The government’s decision to expand monetary policy and maintain a weak exchange rate is therefore risky.
The other issue Argentina will have to resolve is how to appease the holdout creditors. So far the government is sticking to its guns and is refusing to reopen the debt exchange. That’s fair enough. But something has to be done. If the government is unable to reach agreement with the holdouts, all the progress that Lavagna and Nielsen made could yet be derailed.
We have an insider's account, by Guillermo Nielsen, until recently the Secretary of Finance in Argentina, about his tenure there and specifically about the fraught negotiations the country had regarding its debt with the IMF, investment banks and bondholders. The account is written exclusively for us. It goes into unseen detail about the negotiations, the people involved, and it gives it both barrels.