Argentina's Collapse

CRASH 2008-09 -- first wave

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Argentina's Collapse

Argentina’s experience in the years 1999 through 2005 could well be our future

Wikipedia, with additions by jk

http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002)

The Argentine economic crisis was part of the situation that affected Argentina’s economy during the late 1990s and early 2000s. By 2005 the GDP was still less than the pre-crash period.

The IMF policies are good for the globalizers—terrible for the country that adopts them (including the US). Over and over again there are crashes. Below is an account of one crash. Even after modest recover, wages have been cut, the number living in poverty has trippled, the social safety net has been shreded, and such basics as water and electricity have steeply risen in cost due to foreign ownership.

Origins:

Argentina was subject to military dictatorship rule with periods of alternating weak, short-lived democratic governments. During the Reorganization Process (76-83) a neoliberal economic platform was introduced and thus huge debt was later lost through mismanagement, the Falkland /Malvinas Islands War, and state takeover of private debts {a process similar to what has happened in the U.S.} Inflation was over 10% per month.

In 1983 democracy returned, but the neoliberal platform continued. Additional loans were accepted in an effort to stabilize the currency through a new currency the Austral. But the state eventually became unable to pay the interest of this debt, and inflation reached 200% per year by July of 1989 and rose to 5000% by December. Following the neoliberal platform, employment remained strong, but earnings fell by almost 50%. {Given the low wages and lack of regional cheap labor, there was a lack of influx of workers and outsourcing of job, like in the U.S.}

The next President, Antonio Erman Gonzalez ran on a populist platform, but coninuted the neoliberal IMF policies of removing trade restrictions, labor protection and benefits, and the privatization of state companies including the telephone, energy, and water services—the same platform has been adopted for the U.S. Imports rose recreating a trade deficit. Argentina continued to borrow though the IMF. Dergulation of the financial system resulted in massive unsound dispersement of funds through loans[i].—just like the U.S..

During the economic collapse, many business owners and foreign investors drew all of their money out of the Argentine economy and sent it overseas. Thus instead of reinvesting in the economy, and stimulating growth, for example, foreign corporations pulled their return out of the country. As a result, many small and medium enterprises closed due to lack of capital, thereby exacerbating unemployment.

In response to the hyper inflation, in 1991, 10,000 australes was pegged at one dollar. Furthermore, any citizen could go to a bank and convert his australes to dollars. The austales was replaced by the peso. As a result inflation dropped. This fix of course required more foreign loans in the form of dollars so that the currency could be pegged which thus created an international debt whose interest rate, around 16%, sucked the government dry. More dollars were sucked out of the country by an imbalance of trade founded upon the lifting of tariffs. Money was leaving Argentina principally through three causes: 1) money going to safer foreign lands (mainly the US); 2) interest payments to the international banks; and 3) imbalance of trade. For these reasons a shortage of pesos developed, and thus the provinces in response issued their own currency. In 2001 in a response to worsening conditions there was a run on the banks. The government in response then froze all bank accounts for 12 months, allowing for only minor sums of cash to be withdrawn. Riots ensued.

The government faced with civil unrest and huge debt payments, defaulted in no less than $93 billion. The peso which had been fixed 1-to-1 was in January of 2002 allowed to float. The peso rapidly lost value; inflation rose to 10% for April, then the government pegged the peso at 4-to1 dollar. As a result unemployment soared, buying power and salaries fell, businesses closed, and imports became unaffordable.

The devaluation of the peso made Argentine exports cheap. Soy prices were high on the international market. Soy became Argentina’s export. High prices of imports created a favorable balance of trade for 2003. After a severe reduction in the GDP, starting in 2003 growth returned. Wages for factory workers had fallen from $4.03 in 97 to $2.12 in 03. Wages started to rise in 03 so as to keep up with inflation, which has been held to under 20% since 03-though it will exceed 20% for 08.

The government, which is pro-business, has failed to address the disparity of income or institute land reform. The top 10% receive income that is 31 times that of the bottom 10%. Some reform was based upon force (riots and takeovers). Many workers at these enterprises, faced with a sudden loss of employment and no source of income, decided to reopen businesses on their own, without the presence of the owners and their capital, as self-managed cooperatives. Worker-managed cooperatives businesses ranged from ceramics factory Zanon, to the four-star Hotel Bauen, to suit factory Brukman, to printing press Chilaveert, and many others. As of 2007 there are still thousands working in self-managed cooperatives. Some businesses have not been legally purchased by the rokers for nominal fees, others remain occupied by workers who hve no legal standing with the state.

In 2005 the government of Cristina Fernandez de Krichner renegotiated the foreign debt, and received a bond with a face value of between 25 to 35% of the old bonds. However, the IMF refused to be part of this refinancing of debt. The IMF applied pressure and the Krichner government agreed in 05 to pay off in installments the debt to the IMF in the amount of $9,810 million.

It isn’t where Argentina is in 07 that vindicates the IMF economic shock system, but rather where it would have been if it and the western hemisphere would be if they followed a different cause. All around the world growth has slowed, and in Africa there is a decline. Now we are faced with another global depression.

[i] They call it fraud, but that is a deception. First outright fraud is minimal under the relaxed regulations. And what they call fraud is in most cases simply deceptive accounting used to hide the short falls when the bubble contracts. Those how are selling the removal of restrictions blame the failure of the market place on fraud.

South American Hyper Inflation

Based on article by Michael K. Salemi, professor of economics at University of North Carolina in Chapel Hill. http://www.econlib.org/library/Enc/Hyperinflation.html#lfHendersonCEE2-081_footnote_nt235. Modification by jk.

More-recent examples of very high inflation have occurred mostly in Latin America and former Eastern bloc nations. Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay together experienced an average annual inflation rate of 121 percent between 1970 and 1987. In Bolivia, prices increased by 12,000 percent in 1985. In Peru, a near hyperinflation occurred in 1988 as prices rose by about 2,000 percent for the year, or by 30 percent per month. However, Thayer Watkins documents that the record hyperinflation of all time occurred in Yugoslavia between 1993 and 1994.

What caused high inflation in Latin America? Many Latin American countries borrowed heavily during the 1970s and agreed to repay their debts in dollars. This caused a loss in faith in their currency. With the removal of government financial controls (as IMF conditions for these loans) their local currency was increasing replaced with dollars. Saving left the country for safer havens, mainly the U.S. Debt-service obligation of interest on the loans to international banking was typically 16%. Because of continued borrowing, all of these countries found it increasingly difficult to meet their debt-service obligations. The high-inflation countries were those that responded to these higher costs by printing money.

The Bolivian hyperinflation is a case in point. Eliana Cardoso explains that in 1982 Hernán Siles Suazo took power as head of a leftist coalition that wanted to satisfy demands for more government spending on domestic programs but faced growing debt service obligations and falling prices for its tin exports. The Bolivian government responded to this situation by printing money. Faced with a shortage of funds, it chose to raise revenue through the inflation tax instead of raising income taxes or reducing other government spending.

http://www.econlib.org/library/Enc/Hyperinflation.html & http://www.sjsu.edu/faculty/watkins/hyper.htm

The Ugly Politics of Financial Bailouts

Harold James, Professor of History and International Affairs at Princeton University, 10/06/08

The Washington Independent at http://washingtonindependent.com/10478/financial-crisis-hits-europe

The $700-billion financial-reconstruction package passed by Congress and signed into law last week is a key element in the stabilization of the U.S. financial crisis. But it has become a tremendous political problem. As have similar programs proposed in Ireland and Germany to deal with the increasingly dire state of European banks, many of which have substantial cross-border interests and activities.

These plans are all discussed in emotive terms: not a relief program, but a bailout. At stake are not troubled assets, but toxic assets. The transformation of financial tonic into a political toxin recalls not the well-managed Scandinavian rescue operations of the 1990s but some of the most tumultuous scenes from bank rescues in Europe in the 1930s.

The current U.S. package has clearly become a captive of the presidential and the congressional elections. Had they signed on to the original plan of the Bush administration, which they were campaigning against, Democrats would have discredited their claim that the administration helped create the country’s financial crisis. So they needed to add measures to the plan that would give it a different look–and then trumpet it as a Democratic achievement. That’s precisely what House Speaker Nancy Pelosi (D-Calif.) did in introducing the bill Sept. 29.

On the other side, Republicans had a tough time accepting the massive government intervention that would be put into motion by the reconstruction package. Their fervor was fanned by the law’s overwhelming unpopularity among the public. The result: The initial bill went down to defeat on what turned out to be Congress’ Black Monday.

This transformation of a financial tonic into a political toxin is not new. President Herbert Hoover’s Reconstruction Finance Corp. of 1932 is now widely touted as a model for a government-support mechanism. It lent money to state and local governments, as well as to businesses, farms and banks, when other sources of financing had dried up. But it quickly became obvious that the money’s distribution was a payback to supporters of the government. The scheme became a huge political kickball.

During the Great Depression in Europe, financial bailouts were far larger and had far more disturbing consequences. Faced by a complete meltdown of the German banking system in the summer of 1931, the government of the Weimar Republic acted swiftly to manage the crisis. In retrospect, the strategy looks quite innovative. Indeed, many of its ideas echo those put forth just last week to relieve the current financial crisis in the U.S. Here’s what the German government did. First, it reorganized the banks, merging the country’s two weakest banks and injected public money into all of them. Initially, the government had sought private financial help as well; there were intense negotiations with the leading figures of the powerful Rhine-Ruhr steel lobby. But the country’s business leaders agreed to participate in the rescue plan only if the Weimar government kicked in more public funds and advanced them the money that they were supposed to invest in the recapitalization of the banks. Before Adolf Hitler came to power in 1932, the public owned large stakes in Germany’s banks. Second, the central bank pushed for the creation of an institution that would allow it to discount bills from banks that could not be traded because the interbank market had stopped operating. Finally, in December 1932, the government created a “bad bank,” to use Wall Street’s coinage, to take on its books all the financial system’s troubled assets that had no market and whose price was far below their par value. To secure the help of the “bad bank,” financial institutions had to show that “important economic interests” were at stake and that state funds had been used to support strategically vital enterprises.

The Weimar government’s financial rescue package opened the way for a huge — and hugely unpopular — bailout of Flick steel on Chancellor Heinrich Brüning’s last day in office. And, politically, it led to the charge that the government was engaging in the “socialization of losses” to benefit a privileged elite, a charge that became a central element of the turbulent electoral campaigns of 1932.

A similar–though more expensive and extensive–bailout in Austria produced equally crippling effects. The collapse of the Creditanstalt in May 1931 triggered the wider financial collapse in Europe, and the government’s answer was to take over the bank and eventually merge it with other weakened Austrian banks. The government subsidy amounted to 9 percent to 10 percent of Austria’s gross national product, an amount comparable to the projected costs of the U.S. government’s bailout of the financial system. Because the Creditanstalt held major stakes in most large Austrian firms, the government’s takeover of the bank meant that it was, in effect, running most of Austria’s businesses. The bailout was accompanied by massive corruption, the revelation of which became the stock-in-trade of the opposition Nazi movement in Austria.

The political costs of these bailouts — even when they seemed to have been implemented promptly and with high efficiency, as in the German case — exceeded the simple fiscal arithmetic. They injected the state into micro-level decision-making–on the health of particular enterprises and on the fate of individual bank directors, for example–that was bound to be contentious. But there was a far more dangerous consequence of the German and Austrian governments’ responses to their respective banking crises: They fanned the poisonous ideological anti-Semitism then current in 1930s Central Europe. In Germany and, more explicitly, in Austria, “aryanization,” first called “Germanization” or “Austrianization,” had set in even before the Nazis took power in the two countries, and the bailouts played right into it. In retrospect, Germany’s and Austria’s attempts to manage bank failures look like the catalyst of state domination, corruption and even racial persecution that would combine to form an ever more menacing force in the world.

There is a clear policy lesson to be gleaned from this terrible and extreme history. First, financial bailouts need to be depoliticized as much as possible. Second, this can best be achieved by formulating financial relief packages in general terms — such as raising the amount of bank deposits covered by the Federal Deposit Insurance Corp. — and not as assistance targeted to specific institutions that are politically or economically sensitive.

We should also remember that, however hard the contours of the bailout are in a national political context, the difficulties are greatly magnified when they relate cross borders. For this reason, an American rescue is a piece of cake compared to a European one.

Harold James, a professor of history and international affairs at Princeton University, is the author of “The German Slump: Politics and Economics 1924-1936″ and “The Nazi Dictatorship and the Deutsche Bank”

Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains."

Don’t miss the collection of Pod Cast links

Nothing I have seen is better at explaining in a balanced way the development of the national-banking system (Federal Reserve, Bank of England and others). Its quality research and pictures used to support its concise explanation set a standard for documentaries--at http://www.freedocumentaries.org/film.php?id=214. The 2^nd greatest item in the U.S. budget is payment on the debt.