Don’t Cry Argentina...

You’re Depressing the World Market.

What happens when a government hits the wall and can't pay its creditors? Ask Argentina.

Argentina has done a darn good job of mocking its etymology. In December 2001, fiscal problems drove the country to riot in revenge, causing the declaration of martial law and the dumping of two presidents from office.

This is what happens when a country cannot pay its bills. And, although Argentina’s situation is different from our own, we should give thanks that our country is not named after silver, because with the recent and bushy administration in charge, the loom of our own economic crisis is not as vague as our squinted eyes are blurred.

Argentina, like the United States, is richest in natural and human resources, but financially speaking, the country has been a yoyo pond.

Consider the late1980s, when Argentina was faced with a “hyperinflation” of 200% a month. This, my friends, is the kind of inflation where you grocery shop in the morning because by nighttime things will cost more.

Argentina responded with several policy changes in enforced by the
International Monetary Fund, including pegging the peso to the dollar and making trade rules more liberal. The country also started to borrow (heavily) from the IMF and other international banks, hoping to keep its budget intact until the reforms took hold.

The plan worked pretty well for a while. Argentina saw strong economic growth and started getting noticed as an economic model for others. But when the world market’s farm products softened and currencies in other Latin American countries fell through, Argentine were left marketless. 

This of course led to a recession, cutting tax revenues to the government. The IMF and international banks told the country’s officials to get on a strict government austerity plan, but with unemployment at 18%, this was postponed until 2001. This led to the devaluing of the peso by the government which slashed the country’s budget dramatically, including a move to cut old-age pensions and use the money to pay international debts.

The country's credit rating sank and there was a national run on banks, with Argentines pulling $1.3 billion out of their accounts in a single day. Dozens were killed in street protests so serious that the government imposed martial law, froze bank deposits to stop the run, then defaulted on more than $141 billion in foreign debt—the biggest loan default in history. The recession that followed was brutal.
More than half of the population was in poverty between 2001 and 2002. Unemployment hit nearly 21% and the economy contracted by 11%. Contrary to this, in the 1982 United States recession, the most severe in recent years, the economy shriveled to 1.9% and unemployment reached 9.6%.

Almost a decade later, Argentina is working its way out of the corner. The government has paid off its IMF debt early, after an elaborate debt-swap deal that left its international creditors getting 35 cents on the dollar. Unemployment has fallen, and the economy is growing at a healthy 8%. But Argentina’s overall debt still totals nearly 90% of its GDP

The burden to Argentina has been immense, with tens of
thousands of citizens reportedly leaving the country to find employment, more than quarter of them below the poverty line.

With a bigger economy outstanding in its diversity, and with the dollar as a standard currency for international banking, the United States has advantages over Argentina; it may be a stretch to compare the two countries. Argentina also had to borrow (and repay) its debt in U.S. dollars while the value of the peso was in free fall. It’s debatable whether the IMF's advice led Argentina into blind alley, something that is not probable in the United States.

But, that doesn’t mean the United States should pretend history doesn’t exist. The point to remember is that the national debt—that abstraction that lives on the computers of big banks—became very real to the Argentine people. The debt cost them real cash and real jobs because their government mishandled it. And that absolutely could happen to
us.



Sources
International Monetary Fund Country Report 05/236, July 18, 2005.

“IMF Executive Board Concludes 2006 Article IV Consultation with
Argen tina,” International Monetary Fund Public Information Notice No.
06/93, August 9, 2006 <www.imf.org/external/np/sec/pn/2006/pn0693.htm>.

Bureau of Labor Statistics, “Employment Status of the Civilian Noninstitutional Population, 1940 to Date,” U.S. Bureau of Economic Analysis.

National Income and Product Accounts Table, www.bea.gov/bea/dn/nipaweb/TableView.asp#Mid>.

BBC News, “Argentine Restructuring Success”,– March 4, 2005.

Mark P Sullivan, “Argentina: Political and Economic Conditions and U.S.
Relations,” Congressional Research Service, October 12, 2006.



rena silverman