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Thursday, March 06, 2003

Argentina: the Agony Continues

Judging by this news of the supreme court decision, the Argentine population is still in a state of denial about what just happened to them. Deeply as I sympathise with all those people who have lost a sizeable chunk of their saving, with only 10 billion dollars in reserves it is impossible to see how the peso deposits could be re-converted into dollars, even by the best intentioned government in the planet - which of course Argentina hasn't got. One of the problems with having deeply corrupt politicians is that you become paranoid. I am sure many of those who were outside the court banging drums and cheering believe that the money is still there, in dollar denominated assets held by fat-cats in New York. In part they may be right, maybe Argentina's reserves were systematically transferred abroad by groups of unscrupulous insiders taking advantage of the ridiculously overvalued peso. And in part the responsibility for this lies with all those international politicians and financial institutions who allowed that situation to continue. In particular I would fault the IMF for extending the 40 billion dollar credit in January 2001. This must have been one of the worst calls in recent memory, and it cannot have been purely coincidental that it coincided with a change in US presidency (ie no-one wanted problems in just that moment). But the consequence was a lethal dose. Argentina limped on with an untenable situation, extracting sacrifice after sacrifice from an already weary population. What this meant was that when the real crisis came, as it inevitably had to, all the half-way reasonable politicians were already totally discredited, and Argentina was handed over to the group of cynical demagogues who now have their hands on the tiller.

What unfortunately has to happen now is that the Argentines have to pass from denial, pass from anger, and move on to reconstruction. This is going to be difficult given the lack of obvious strategic direction. They can no longer rely on commodity exports to deliver the standard of life to which they aspire. Argentina, like much of Latin America seems to be suffering from an economic version of identity loss, and that is very dangerous in a world which is moving as fast as the present one. A few years out of touch could prove decisive (call it butterfly economics, or sensitive path dependence , or whatever).

What then can they do? China seems to be standing full-square in the path of converting Argentina into a manufacturing hub. Global services in Spanish, perhaps, Argentina, after all, has one of the most educated middle classes in Latin America. But for that, or any other forward looking opportunity to become a reality they have to let go of the past. In addition, to convince myself that high vaue global Spanish services could work I would need to be more convinced of Spain's economic future. More convinced that is that Spain's inclusion in the euro-peg wasn't going to end up as yet another Argentina re-run. For this I feel is the most preoccupying aspect of the Argentine tragedy, where are we learning the lessons? If, as I keep arguing, part of the problem stems from an over-appreciation by those responsible for international economic policy of the importance of underwriting financial institutions externally, and an underappreciation of the importance for economies with inflationary tendencies inbuilt, like Argentina and Spain, of internal policy flexibility, then I cannot but expect that we will witness more 'Argentinas' . By the way, has anyone else noticed what has been happening in Bulgaria lately?

Argentina's highest court today ordered the federal government to repay money effectively seized from depositors when officials converted the value of bank accounts held in U.S. dollars to that of the Argentine peso. The ruling sent cheering demonstrators to the streets of the capital in hopes that the decision would restore all dollar bank accounts frozen when the government defaulted on its international debt. The Supreme Court decision applies only to $247 million in bank deposits held at the state-controlled Banco Nacion by the provincial government of San Luis, which challenged the federal government's decision a year ago to eliminate the peso's parity to the U.S. dollar. The peso has lost more than two-thirds of its value since then, now trading at about 3.2 pesos to the dollar. But economists and lawyers said the ruling could open the door to litigation forcing the cash-strapped government to repay all depositors who lost money as a result of the conversion. "Never again will the rights of the citizens be trampled on," said Nito Artaza, a comic actor who leads a grassroots organization of depositors seeking to recoup funds lost in the government conversion. "Property is inviolable." It was unclear how many depositors are affected by the ruling. Rafael Baer, a Buenos Aires economist, said that the restored debt could be a severe blow to a government that already has defaulted on more than $100 billion to its creditors. "If all the deposits are restored the impact will have a value to the government of [about] $2.5 billion," Baer said.

The link between the value of the peso and the dollar has played a role both in this country's nearly decade-long boom during the 1990s and its sudden financial collapse two years ago. Then-President Carlos Menem's decision in 1991 to tie the value of the peso to the dollar, making the peso freely convertible on a 1-to-1 basis. That prevented the government from simply printing enough money to pay its bills, thereby averting hyperinflation. The result was a boost in foreign investment and a currency so strong that middle-class families were able to afford such first-time luxuries as European vacations. But when investors began to sour on the Argentine economy and stopped pouring their money into Argentine coffers, recession followed. The government found itself unable to pay its crushing debts and in December 2001 announced the largest government default in history. The following month, President Eduardo Duhalde ordered all bank deposits held in U.S. dollars converted to pesos, a cost-saving measure that saw many depositors lose much of their life-savings. The chain of events since then has helped trigger a deep economic crisis. Nearly a quarter of the workforce is jobless and banks here have since become fortresses, some guarded around-the-clock by police or armed security guards to protect against angry and sometimes violent depositors who stage daily demonstrations outside many banks here. Last September, one woman doused herself with gasoline and set herself ablaze inside a bank when she was denied access to her savings.

Protesters erupted in cheers and chants outside the Supreme Court after the verdict was announced today. "At last we have justice in Argentina," said one jubilant woman, her hands held triumphantly above her head. "This is wonderful," said Alicia Lemme, governor of San Luis, who led the province's challenge to the conversion of its deposits in court. "We fought for this and this is an excellent result." The court ruled 5-3 in favor of Lemme, declaring essentially that the government's devaluation of the peso was an unconstitutional seizure of private property. Dozens of depositors have won similar verdicts in lower courts but today's decision sets the stage for broader sanctions. "We must keep fighting to build a new nation always under the Constitution," Lemme said.
Source: Washington Post

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