Asymmetrical Information

The people of Argentina have only themselves to blame for this mess. They are the one who worshipped Evita and her child rapist husband, Juan Peron.

Isn't it hard to believe that Argentina was an economically growing and dynamic country in the early part of the 20th Century? Most of the nations south of our border embrace idiot socialist policies. What more needs to be added? Gosh, do you think that Madonna might come to their rescue?

dear david,

i think that most analysts believe that the imf had a big role to play in all of this downturn. should we talk about that culpability, or is it more conveinent to lambast argentina alone? in any case, argentina isn't the only country that has spent money "like a drunken sailor" if you know what i mean...

Cas, cute, but there's simply no comparison. Argentina has debt outstanding to foreign creditors greater than its GDP, and that's before you count obligations to various world entities, domestic stakeholders it screwed during the devaluation, and sundry unfunded liabilities that are coming due, like, now. Nor do I think there is a reasonable argument blaming Argentina's current woes on the IMF; Argentina pegged its currency to a hard currency, and then proceeded to maintain the fiscal irresponsibility which had forced it to implement a currency peg to control the resulting hyperinflation. Unsurprisingly, this didn't turn out very well. I can't see how that's the IMF's fault, and people who are siding with Argentina against the IMF can hardly fault the IMF's past behavior; they essentially rolled over and played dead during the last round of negotiations, and Kirchner seems to have been assuming (as was I) that they would do the same again rather than risk such a big default.

A lot of people are confused about this era because of the "Evita" silliness. I'm afraid that Argentina had gone off the deep end long before the IMF even existed. One merely needs to read some history pertaining to the Peronist mindset. The reality is that Evita Peron was just a crazy goof ball who caused enormous damage to her beloved country. Far too many Argentinians were converted to the gospel of socialist economic salvation. They made their own bed--and now must sleep in it.

I have reluctantly come to the conclusion that the lefty World Bank and IMF-bashers are correct, though probably for the wrong reasons. I agree with them that we should simply disband these institutions.

If Argentina can't convince any bank or private investor to buy their bonds, Argentina would be much better off to face that fact right then. Institutions like the IMF and World Bank merely allow them to dig themselves much deeper into debt allow them to blame their problems on foreigners, rather than face up to their own fiscal responsibilities.

If the worlds' progressives think Argentina is worthy of credit, let them buy freely and openly buy their bonds. The unions have big pension funds that can easily buy Argentinian bonds if they are so inclined.

Kevin, you see the IMF and World Bank as enablers, IOW?

Lending money to entities, be they people, companies, or countries, who do not possess the qualities that make repayment a very likely outcome, is obviously a disaster for the creditor, and eventually beomes a disaster for the debtor as well. The most important quality for a debtor to possess is self-discipline. As lacking as that quality is in the U.S., it is completely absent in a place like Argentina, for a varietry of reasons. Absent revolutionary change, lending money to Argentina will come to no good end, least of all for the poor. I certainly have no easy solutions.

Just to correct one of your statements: Argentina's Debt to GDP was not greater than 100% prior to the devaluation of the peso -- it was running just north of 50%. The problem was the fact that the vast majority of debt was denominated in USD and not local currency making the devaluation that much more painful. That it is so large may well be a temporary fact: nominal GDP growth (more important to this calculus that real growth) will increase GDP in USD terms and the pending Debt Restructuring will likely see a 35-55% haircut on the face value of the bonded debt.

We should keep in mind that the debt was all denominated in USD due to a persistant belief that the Argentine currency board was going to be a permanent feature of the Argentine economy. During Cavallo's first term as economy minister he stated, and most investors believed him, that he would rather dollarize and burn all of the pesos in circulation on the steps of the Casa Rosada than engage in a devaluation.

The problem with such an outcome is that it would have locked in an unfavourable exchange rate which resulted primarily from:

1. the reevaluation of the peso in the early days of the currency board as inflation remained relatively high compared to trading partners... making the peso rich in other currency terms.

2. declining terms of trade for Argentine exports - witness the collapse of wheat, soy and other such commodities through the latter half of the 1990s. I would add that the USD was a particularly poor choice for the Board given that the US was not the main trading partner; was going trough a productivity boom while Argentina was not; and was appreciating in real terms against virtually all other major currencies.

3. the devalualtion of the Real in Brazil in 1999 which crushed Argentine exports to Brazil and made Brazil that much more competative. Brazil accounted for more than 30% of Argentine trade prior to that point.

That the currency board fell so out of favor came about partially from the facts above (which made it largely unsustainable from a purely terms of trade point of view) but also from:

1. a crisis of confidence vis-a-vis pegged exchange rates following Mexico, Thailand, Indonesia, Malaysia, Korea, Russia, Brazil... etc crisis from 1995 on. Argentina came under increasing pressure and interest rates (domestically and abroad for Argentine assets) became prohibitavely high - shutting Argentine out of the capital markets

2. a persistant economic slowdown and deflation which stemmed from all of the points above (which served to increase Argentina's debt/gdp while at the same time depressed revenues making interest payments an increasing burden).

6. rebellion of state (provincial) governments against additional fiscal tightening - to the point where some printed their own money (I have some patacones if you are interested) This severely weakened the currecncy board and undermined confidence further - deepening the cycle.

7. your supposed fiscal largess at the Federal level was a relatively minor problem - Argentina was simply unable to borrow any resources. Cavallo(II) adopted a strict fiscal rule whereby the government would only spend what it took in: the problem was that while this would have worked if the market had been willing to roll pending obligations coming due, the market was not.

Had Argentina dollarized the economy would have continued to contract (in nominal terms: deflation probably would have been the biggest adjustment) until relative prices reflected relative terms of trade and productivity levels between Argentina and its main trading partners.... this would have been a much longer and more painful process (and I believe would have led to default in any event)

The IMF bears responsibility for being a cheerleader of the currency board throughout the 1990s - even as other similar arrangements were collapsing. In addition the Fund continued to lend to Argentina up until the bitter end - sending confusing signals to the market. An earlier adjustment would have been less painful and better for everyone......

The Market bears responsibility by 1) lending to Argentina on the belief the IMF (et al.) would continue to support her (moral hazard here) and 2) being unwilling to engage in a proactive restructuring of Argentine obligations once the writing was on the wall. Due to this, the IMF has pusued its dream of a sovereign bankruptcy court through the SDRM (Sovereign Debt Restructuring Mechanism) which will take decisions that the market sould be able to willing to make... herein is a market failure.

Does anyone remember Russia's GKO exchange? Had investors participated Russia may well have been able to avoid the 1998 crisis altogether. A similar story appeared in Argentina and the market - in classic Prisoner's Dilemma mode - chose the wrong box.

I will avoid criticising overlending since that is merely the flip side of over-borrowing and a shared blame. But I will say the the emerging debt market is often swept up in irrational exhuberance and we had one in Argentina from 1993-2000.

Sorry to go on and on but you hit a sore spot....

Love the Blog

Enablers, yes, essentially. A country reaches the point where it no longer has any willing lenders. At that point public finances are difficult, but probably salvageable if the hard decisions are taken immediately.

Instead, in comes a loan shark. Rather than imposing draconian rates as a real loan shark does, it tries to impose a discipline that the debtor otherwise lacks. Since the political establishment in the debtor nation hasn't really accepted the need for it, they undermine it in opaque ways.

It also transfers the financial risk from willing lenders to unwilling taxpayers in developed countries. I don't want my retirement to depend upon Argentina's ability to pay its debt, so I haven't bought any Argentinian bonds in my retirement account. Yet Argentina's fiscal disease is now infecting our governments, too. Our politicians are now faced with the choice of writing off Argentina's debt and making the appropriate domestic sacrifices, or engaging in Enron-style accounting and deferring this situation to make social security look more sustainable than it really is.

This has done Argentina no favors, nor western taxpayers. And Argentina is only one of dozens in the same situation.

PaulD, I'm going to disagree with you on some points:

Argentina's debt wasn't dollarized because borrowers thought the currency peg was stable; it was dollarized because investors thought it wasn't, and (correctly, it turns out) were unwilling to bear the currency risk.

I'm aware that dollarization opened up substantial risks in the economy, including Brazil's beggar-thy-neighbor devaluation and growth that was out-of-sync with America's. However, the reason the economy was dollarized by proxy is that Argentina's previous behavior made everyone unwilling to trust it to fully manage its currency: inflation was out of control, and capital was scarce. With good reason, seeing as Argentina essentially destroyed its banking system during the revaluation, and is now stalling on recapitalization.

Argentinian debt was rather high at the interest rates the country was being forced to offer, especially considering its persistent deficits and the implied currency risk.

I don't disagree with you that there were many forces contributing to the ultimate collapse. But Argentina didn't have good choices: it could dollarize, or it could exit the capital markets and resign itself to hyperinflation, or it could mount the kind of credible war on inflation that causes massive short term pain of the kind it ultimately underwent anyway (see the 1981 recession; Weimar germany; etc.). There was no option 4: have everyone pretend that we're fiscally responsible and lend us money despite our history. Given those three choices, it's not clear that dollarization was the worst. And while Argentina's economy is growing right now, inflation is forecast around 13% this year, 8% the next -- which is if Mr Kirchner doesn't start running the printing presses to finance all his committments. You know what that means: no one's going to lend to Argentina in its own currency. Which exposes the country to exactly the kind of currency risk that pushed it into default in 2001.

Nor can I fault the international lenders for not essentially offering to forgive $100 billion in debt in order to forestall default. Argentina's in massive budget trouble just trying to meet its rather paltry obligations to the IMF.

Jane,

Your counter-points are half-right. Investors insisted on dollar-denominated bonds for two reasons 1) your point that there was some FX risk but also 2) that Peso bonds in the local market were subect to local jurisdiction and market convention and regulation -- these ran too great a risk of deafault (without any recourse, even the mythical recourse in NYC court on USD bonds) or illiquidity. Investors did understand that to devalue would be to default and rather than face the risk of a preemptive peso bond default, they insisted on USD international bonds under US law for this very reason.

In 1997 local Argentine interest rates were a mere 100 bps over prevailing US interest rates. Argentine bonds traded on par with(and at times tighter than) Mexican bonds in spread terms. Argentina had defeated inflation. At that time there was a window of opportunity to exit the arrangement. I agree with you as to the reasons the board was put in place in 1991 but it should never have been seen as a permanent solution. The Fund/BIS/UST et al (all the King's Horsemen as it were) could well have orchestrated an exit to a new regime.

There was an option 4 in 1997 and it would not have been all that calamatous. In 2001 there was another opportunity: the international public sector (name the institution(s) you wish) could have offered a tender for all outstanding bonds at a price significantly above the market price of approx 20 cents on the dollar (let's say 25 cents) on the proviso that those who engage in the swap sign exit consents allowing for the restructuring of any rump amount of outstanding bonds not tendered (a la Ecuador). That same indebtedness could then have been swapped to Argentina at the 25 cent level and at an interest rate of say USD Libor...... This would have cut the face amount of Argentina's bonded debt by 75% and reduced the interest burden by much more. Even assuming imperfect timing a similar excersize at 30 cents would still have had real meaning.

In exchange the Argentine government would float the peso and undertake structural reforms to make its fiscal situation sound.

Given that inflation has been relatively muted after the recent debacle (compared to the hyper-fears at the time) I think that this would have worked. This is no bail-out btw, it is burden-sharing (and I for one would add that the IMF should face some burden-sharing here as well). Some of us advocated exactly this at the time but no one in Washington was listening - in fact they were spinning tales as to how it could all work out ok......

What of the investors so robbed by this act? Screw 'em. At a price of 20-30 or so and spreads presumably in the multiple thousands investors should see a bad outcome in the making... and face it, almost everyone marks-to-market so they actually would have had a windfall in the exchange. Default had become inevitable. This would have saved alot of pain and time.

"A lot of people are confused about this era because of the 'Evita' silliness. One merely needs to read some history pertaining to the Peronist mindset."

David, have you ever seen the stage show of "Evita"? Andrew Lloyd Webber is the man who promised to leave Britain if Labour won in 1997. Evita's manipulation of the country and the bad outcome are the whole point of the show.

Argentines hate his musical with a passion. The movie tweaked the story to make Evita's motives look more noble. But Che still moans about the bankruptcy and the corruption.

“David, have you ever seen the stage show of "Evita"? Andrew Lloyd Webber is the man who promised to leave Britain if Labour won in 1997. Evita's manipulation of the country and the bad outcome are the whole point of the show...”

I did not see the original stage play, but only Madonna’s film interpretation. Still, you are the very first person I’ve encountered claiming that Andrew Lloyd Webber cast Evita in a negative light! He may have meant well---but I don’t believe that most people share your opinion. The incredibly beautiful song “Don’t Cry for Me, Argentina” alone did enormous damage. Hey, does anybody remember Leni Riefenstahl who just died in the last few days? She also insisted that her “Triumph of the Will” wasn’t intentionally a glamorization of the Adolph Hitler and the Nazis.

A recent photo showing a huge number of Argentineans protesting the IMF reminded me of Evita. These folks were indulging in self pity and scapegoating. They were blaming others for their own self inflicted harm. This nonsense must cease before Argentina can get its act together. And yes, David Perron is right on target to ask “Kevin, you see the IMF and World Bank as enablers, IOW?” I hesitate to speak for Kevin, but that’s how I look at the matter.

I'm quite certain about Webber's intentions with the show and how it is viewed by stage audiences and in Argentina. From 1980(?) to 1997, the message every audience took away was that Evita was a (forgive my language, but) Macchiavellian slut who used the people to destroy her country. "Don't Cry For Me, Argentina" is a political speech that shows her manipulating the crowds and crowing about it afterward.

This is why Madonna had to meet with the President of Argentina personally to request permission to film at the Casa Rosada. He was a Peronist, and the Peronists hated "Evita." Madonna softened the role to make it a lot more ambiguous and personally favorable to Evita. She wrecks the economy and makes herself rich, but she meant well and really liked poor people, and look at her hair!

I agree that a lot of Americans have only seen the movie version and probably don't remember much beyond "working people really loved her." I don't know how much their opinions matter, though. People who care enough to form an opinion about Argentina know the true story--or don't think about events of 50 years ago. When was the last time you saw an Eva Peron poster or t-shirt on a college campus?

Your comparison of Webber to Riefenstahl is off-base. Webber is a rock-ribbed Conservative who wrote about Eva Peron precisely because he could showcase his views about all that is wrong about socialism and fascism. He wasn't doing a straight-up biography.

I can't believe I'm presenting myself as an authority on Andrew Lloyd Webber, but there it is.

There's a lot of blame to go around on this issue. Here's a good article pointing to the role of Wall Street:

http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A15438-2003Aug2¬Found=true

“Your comparison of Webber to Riefenstahl is off-base. Webber is a rock-ribbed Conservative who wrote about Eva Peron precisely because he could showcase his views about all that is wrong about socialism and fascism. “

I may very well owe Andrew Lloyd Webber an apology. Still, a large number of people like Madonna came away with the exact opposite opinion concerning “Evita.” I’m sorry, but the beautiful song “Don’t Cry for Me, Argentina” inadvertently glorified her. Her legend grew exponentially because of this single song. Does anyone disagree with me on this point? I think (perhaps wrongly) that my contention is a slam dunk.

Does everyone have to miss the point about Argentina and other W3 countries? They are poor because they got no honest civil courts, no effective land title systems, stupid tax rates and ...'friction'.

Last is probably the worst. Planning rules, endless forms, costs and corruption for a simple transactions, delays, environmental silliness, no, no, no we cannot permit that business/transaction/building/factory in less than 6/12/18/180 months for less than 5/10/50 grand. And you got to hire a bunch of dumbass illiterate racial favourites of the day too.

What does currency and the IMF have to do with that?

Guess where the Democrats are working diligently to take you?

A friend from school lived and studied in Argentina for a couple years, and while there, married a national. One story he brought home involved door hardware: A brand new knob/lockset purchased right now is comparable to what you would have found in the states in the late 19th century, and yes, they even use skeleton keys. Reason? There is one doorknob manufacturer in the country, it doesn't like competition, it has "methods" of preventing it from arising, and corruption is sufficiently high to permit this arrangement to continue. No competition, no incentive to innovate, and so the knobs remain what they were decades ago.

Fiscal attitudes? A Latin American expert told me outright that Argentines will very happily spend other people's money in any quantity they can get it, and the aforementioned friend had a specific example of this mentality at work -- when he returned to the states, he and his wife saw their first child arrive sooner than expected. He was in the midst of schooling and only working part-time, she was working an entry-level job, etc. So, they went ahead and accepted public assistance for a few months but he was adamant on getting off of it as soon as they could rework their budget, no matter how many personal sacrifices and penny-pinching decisions would be required. She was completely mystified: If someone would give you free money, why would you not take it?

A second friend separately went to Argentina for a year of schooling and basically saw more of the same. It would seem the country has some extremely serious structural problems at all levels.

Yeah, I worked in Argentina briefly in the 90s as well. I assure you their problem is not any policy of the IMF, World Bank or Wall St.

Their economy defies description, being neither capitalist nor socialist. But all of it thoroughly nepotist and corrupt. The door knob story above is a good one, and pretty much typical of what you see there. People talk about the privatizations they did in the 90s. Yup, they transferred some thoroughly corrupt publicly owned industries to their friends and got thoroughly corrupt privately owned industries protected from any competition through various "methods", as anony-mouse says. And then they promptly blew any money raised through privatizations. Obviously you wouldn't reduce the debt.

And anyone who thinks this or that IMF policy would improve things for Argentinians, is, I think, quite misguided.

The best literary work available to explain Argentina is V.S. Naipaul's 1980 work The Return of Eva Peron. He doesn't discuss financial theory, but economics is a science of human behavior and believe me Naipaul is an acute observer of that.

BTW, one of the few third world vices that Argentina is not guilty of is racial preferences. This is because there are very few racial groups to discriminate against. It is actually the whitest country in the western hemisphere.

Useful Creditor info: Creditors recognize that people who enter a debt consolidation program are trying to repay their obligations in good faith. Creditors are more willing to extend favorable terms to such clients in the hope that they(the creditor) will avoid the significant expense of turning the account over to a collections firm or avoid an extended drawn out process if the account holder goes through the expense of declaring bankruptcy.

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