In the first of a three part series on Argentina, we examine the country’s economic nightmare as it presents itself to government policy makers, a set of impossible choices. Part II will look at the potential of an Argentine economic collapse to destabilise world markets and create a new political crisis for George W. Bush’s war administration, and Part III will report on the resistance movement in Argentina.
Argentina and the world crisis
Tony Blair visited Argentina on 1st August, days after the Argentinian government had announced a new round of spending cuts that would reduce state salaries and pensions by 13%. Blair welcomed the move as “a very significant step forward”. The British Prime Minister was accompanied on his Latin American tour, which also took in Brazil and Mexico, by senior representatives from the British multinationals BOC, Rothschild NM bank, armaments manufacturer BAE Systems, Jaguar cars and three oil companies – Enterprise Oil, Shell and BP. Why is British finance, along with its counterparts in Washington, so deeply concerned? Argentina is wobbling on the edge of an abyss.
Two aspects of Argentina’s crisis make it a particularly potent threat to the world economy.
First, Argentina has carried out the US/IMF programme in full. Its private banks, for instance, have been completely restructured and most have become subsidiaries of imperialist (mainly Spanish) banks. Argentina has thrown open its doors to foreign capital, taking the extreme measure of tying its currency to the dollar, hoping that the supposed elimination of currency risk will make Argentina more attractive than its neighbours as a destination for foreign investment.
Second, more than $90bn of Argentina’s $155bn total external debt ($130bn state debt and $25bn owed by provincial governments) is owed to private bond-holders, accounting for around one quarter of total “emerging market” bond debt. And it is precisely the bond markets which provide the most efficient conduits for the spread of contagion – an outbreak of asset destruction in one national market provokes investors to flee in panic from unrelated markets elsewhere. “Argentina sneezes and Poland falls out of bed – that’s pure contagion,” says Avinash Persaud.
From crisis to catastrophe: Argentina’s economic nightmare
Argentina is currently locked in a dramatic and doomed struggle to avert a devaluation of its currency and a default on its debt. Government policy makers are torn between the two.
On the one hand economy minister Domingo Cavallo warns that default “would result in a meltdown of the financial system”, yet default is inevitable unless the 3-year recession ends and strong export-led growth resumes. However, Argentina’s recession is not about to end, it is deepening. It is not suffering from its own business cycle but from the spreading world depression.
Argentina’s capitalists, crippled by high interest rates and shrivelling markets, aren’t investing, while the toiling majority are making new holes in their belts. So, growth would have to be export-led. This is inconceivable without a sharp devaluation of the peso.
Yet Argentine capitalists are even more frightened of devaluation than they are of default – after all, soaring interest rates mean they’re already in effect frozen out of world capital markets.
The threat of default
President De La Rua, in an impassioned Independence Day speech on 10th July, justified the cancellation of school dinners and pension benefits with this argument: “How can we say we are independent if we have to turn to loans for our children’s meals at school or our grandparents’ social coverage?”. Argentina’s rulers are taking extreme measures to avoid default on debt repayments. Argentina has to pay $9 billion to service its debt this year alone. Since they cannot borrow money, government and provinces can only spend on education, public sector wages etc. what’s left after debts have been serviced. This is the “zero deficit” policy, adopted at the end of July 2001.
The Open Veins of Latin America…
Spanish banks dominate Argentina’s banking sector. “ BSCH [Spain’s largest bank in terms of assets] recently predicted that it would earn $1.5bn in net profits [on total investments in the region of $16bn] from Latin America this year… almost two-thirds of its net income will come from Latin America this year.”
Financial Times, 18th July 2001
To zero the deficit, the government decreed an immediate 13 per cent cut in public sector wages and pensions. Across the country public and private employers, unable to pay the reduced wages, are closing down and throwing thousands into unemployment. Others are paying their workers with IOUs.
The savage austerity measures provoked a furious response: “Protestors and unionists in Argentina blocked highways, shut banks, university faculties and government offices and marched on congress yesterday… tens of thousands of state workers in the capital and regional centres are protesting against proposed 13 per cent cuts in some salaries and pensions… The backlash to the austerity effort has unnerved foreign and local investors, who fear social unrest will hold up implementation of the measures".
A few days later, the Financial Times warned “Even if the executive does push through the latest austerity measures, the social backlash and reduced spending power… will do nothing to break the vicious cycle of high interest payments and zero economic growth, which is strangling the country.”
The threat of devaluation
Why are Argentina’s capitalists so keen to maintain the dollar peg? Until the past few months, no force within bourgeois politics has questioned the peg since it was put in place in 1991. Even though the peg signified the formal surrender of Argentina’s economic sovereignty, the idea that one peso was worth one dollar was a source of pride. But, with its pegged currency, Argentina has become more and more uncompetitive with each devaluation of a rival’s currency. The peg is now blamed for the severity of Argentina’s three-year recession; the strongest evidence that devaluation is inevitable and near is the debate that now rages within Argentina on whether to undo the peg.
The ten year-old “hard peg” was supposed to shield foreign capitalists investing in Argentina from all currency risk – the risk that a devaluation of the peso would decimate their investments. It made it impossible for Argentina’s government to print money, and was therefore credited with ending hyperinflation, which, at one point in the late 1980s, reached 17,000 per cent.
However, the lenders of loan capital never really believed in the permanence of the hard peg, which is why peso loans always came with a much higher interest rate than loans of dollars. But borrowers tended to be more trusting, and so they ignored currency risk and took out their loans in dollars.
This is why a devaluation of Argentina’s peso would be catastrophic, bankrupting all those whose income and assets are in pesos but whose debts are in dollars. This is why Argentina’s capitalist government shrinks from doing what Mexico did in 1994 – devalue its currency, thereby boosting exports while causing imports to shrink. Sharply lower real wages and lower asset prices would then induce private capital to rush back, into a poorer, more export-oriented country.
Analysts disagree about how much the peso will fall when the inevitable happens. The rush to buy dollars for debt-servicing could cause it to decline by 80 per cent. Argentina’s capitalists are terrified. Many have got out while they can, in effect forcing the IMF to finance flight capital.
Some wealthy Argentineans remain major lenders to the government, expressing not patriotism but greed for the risk premiums to be extracted from their compatriots . The smartest have exported their capital to London or Madrid or New York, and then reinvested it via a US or Spanish bank. They are much more likely to get any bail-out money that’s going.