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Tuesday, 18 December 20:30 (GMT -05:00)



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Argentina: waiting for another default and learning bitter lessons of open economy


 

Argentina usually stays in shadow. But when it comes to light it means that something is about to happen, the Association of Traders and Investors of Latin America under Masterforex-V Academy explain. This is what happened in March 2011 when according the “Business Insider” rating Argentina became 3rd on the list of 18 potential bankrupt countries. Greece comes 1st, Ireland comes 2nd.
 

 

Surprised?
·         20 years ago the IMF considered Argentina to be an ideal, continuously citing it as an example of openness and successful economic development for Russia, Ukraine and Belarus.
·         100 years ago Argentina was the richest country in Latin America and was among TOP 10 successful countries of the world (before WW1 the GDP per capita was higher than in Germany, France and Italy). In Europe they used to say “as rich as an Argentinean”.
·         Today it is Latin America’s 3rd economy (after Chili and Brazil) and 2nd largest country in Latin America in terms of territory (after Brazil).
·         It has richest reserves of natural recourses per capita (only Canada and Australia can compete with it) and fertile land.
·         It is a G20 member.
 
Is Argentina the biggest loser of the 20th century?
According to the Association of traders and Investors of Latin America under Masterofrex-V Academy, Argentina has a reputation of being a country of eternal default and almost the main loser of the 20th century. A long time ago the country could compete with the UK, US and Germany and Russia. But now it almost turned into a Third World country.
Over the last few decades it has seen 4 defaults (both external and internal) and went through 3 hyperinflations and 3 currency reforms.
In 2002 it was hit with the most severe sovereign debt default in history ($132B out of $180B of the net public debt).
However, it’s been a long time since then. In 8 years the country’s economy grew by 70% while the pace of the economic growth was a “Chinese” one – 8% per year. Nevertheless, some analysts from Masterforex-V, Business Insider, Stone Harbor Investment Partners, The Daily Reckoning consider Argentina to be number 1 on the list of the countries that are about to announce a default: billions of dollars of foreign investments keep being withdrawn from the country.
 
Bill Bonner, editor of the conservative economic bulletin called The Daily Reckoning, says that Argentina is the future reflection of the entire global economy and the US economy in particular. Indeed, the Argentinean example is rather instructive for borrowers, lenders and investors.
 
What lessons can be learned from Argentina’s difficult past?
 
Argentinean “soap opera” of defaults.


 

 

 

After the euphoria of 1991-1998 called “the Argentinean economic miracle” the national GDP started rapidly declining: in 1999 - 3,4% increase, in 2000 – only 0,5% increase. There was hyperinflation (over 5000% per year). At the very end of 2001 Argentina was hit by the most severe financial crisis in its history.
 
So, what did really happen with the Argentinean economy? Who was responsible for this?
Some experts put the blame on the IMF and, indirectly, the US. Carlos Menem who was the president at that time initiated a series of neoliberal reforms proposed by the IMF. In the 1990s Argentina was an exhibition of the IMF’s achievements, its child and boast. It was supposed to become a model not only for the other countries of Latin America but also for the countries of the ex-USSR.
Others assume that the neoliberal model itself is not the reason for the crisis. The thing is about the way it was implemented (neoliberal extremes).
 
Argentinean reforms: lessons
Let’s consider the main vector of the economic changes made at that time and their consequences:
·         Total privatization in one of its most extreme variants. Argentina became one of the most open economies in the world, which means that everything that used to be national (energy sector, oilfields, most state-owned companies and banks) was sold mainly to foreigners (28% of the Argentinean economy was bought by Americans). The domestic market was open for foreign products, the import rates were dramatically lowered, international companies got much easier access to the economy.
Here are the results:
ü The import grew as the imported products became cheaper than the domestic ones.
ü The local manufacturers went broke. Thousands of enterprises were closed as they failed to compete.
ü The profits were sent abroad.
ü The budget deficit was growing, making the government borrow new loans.
ü The GDP was rapidly declining in volume.
 
·         The “narrowing” of the country’s social responsibility despite the long-term Argentinean tradition. The authorities were ready to freeze the pension fund accounts in order to narrow the budget gap.
 
·         Argentina’s export-oriented economy has been greatly dependent on the export of a certain amount of products. As many years ago the most exported products are crops and meat, which makes the Argentinean economy very sensitive about any changes in the global markets. At that time the Argentinean export was rapidly declining. As a result, the balance-of-trade deficit reached 10% of the national GDP.
 
 
·         The dollarization of the economy. The Argentinean Peso was pegged to the US Dollar as 1 to 1 (parity). It is obvious that the Peso currency rate was overrated, which resulted in the following:
ü The domestic products became expensive and noncompetitive.
ü The export became unprofitable, making the public debt grow.
ü The country became vulnerable about any changes in the markets of capital. The USD strengthening in the mid 1990s made the Argentinean economy even more noncompetitive.
ü The private sector got assess to loans (70-80% of them were lent in USD). Argentina was expected to become the 1st country in Latin America to abandon its national currency in favor of the US Dollar.
It cannot be said that all the efforts were made in vain. Thanks to tough money and credit policies the authorities managed to overcome the hyperinflation in a couple of months. However they had to borrow from the IMF and the World Bank in order to maintain the prices. Numerous experts believe that the IMF’s main mistake was the fact that the Argentinean Peso was strictly pegged to the US Dollar. It was exactly what the IMF insisted upon until the very collapse of the Argentinean economy.
·         The Argentinean economy was highly dependent on foreign loans, which made the country more vulnerable. In this connection it would be appropriate to cite some facts, which need no comments. At that time the authorities managed to attract $40B of investments but they had to agree to really wasteful conditions - no taxes for 10-25 years or no taxes for 5 years with further 80% tax rebates within the next 10 years. As a result during the mentioned period of time at least $280B of net profit was earned… and withdrawn from Argentina. Moreover the investments were mainly wasted while turning into “soap bubbles” in the financial and housing markets. The Argentineans were obviously living beyond their means. Thousands of families were moving to their own apartments and houses, buying cars and having vacations abroad. The government was easily creating new taxes. The external debt was snowballing. By 1999 it grew by 60%. The expenses connected with its maintenance increased from 2% of the GDP (1991) up to 10% of the GDP (1999). The IMF kept lending new loans to Argentina to help it pay off the old ones. Yet, sooner or later all the debts have to be settled. When the time came, the IMF rejected the request for new loans. Moreover after the 9/11 President Bush Jr. stopped massive investments in debt-ridden foreign economies. In other worlds, it is not accidental that Argentina is called the victim of the “debt pyramid”.
 
The Argentinean government had no other choice but to announce that Argentina had defaulted on its debts.
It should be reminded that the Argentinean default was amoral and led to serious consequences:
·         In 2001 the national GDP declined by 6%
·         The national currency lost 70% of its value. The deposits made by common people were frozen.
·         The salaries and pension payments were sharply reduced.
·         The common people and investors lost their confidence in the country as the outflow of capital became massive.
·         The currency reserves declined as well.
·         Many enterprises and banks went broke.
·         Millions of people (24% of the working population) lost their jobs.
·         Mass unrest and disorder.
 
The president had to escape. In a couple of days the country changed 5 presidents.
 



 

What is the Argentina of the 21st century?
In the 2000s the new Argentinean authorities cardinally changed the country’s economic policy:
·         The government strengthened its role in the national economy. Of course there was no massive de-privatization. Everything was reduced to the creation of some state-owned companies and an increase in the volume of public investments in the national infrastructure.
·         The introduction of the floating national currency rate.  After the devaluation the Argentinean Peso lost 2/3 of its value.
·         Protectionist policies. The government intensified the control over the import of a range of large-scale goods in order to protect the domestic producers.
·         Economic diversification. Even though agriculture, heavy and engineering industries are the country’s main economic sectors, considerable success was achieved in biotechnology, software development, fiber optics and the production of renewable energy sources (Argentina is the world’s 5th biggest producer of bio-fuel and the biggest exporter). The devaluation of the national currency and lower export taxes accelerated the export growth.
·         Budgetary discipline was introduced, thus giving a budget surplus within a couple of years.
 
In general, during the years following the default Argentina managed to achieve some economic growth, outpacing the eternal rivals – Brazil and Chili. The global financial crisis (the GDP declined by 2.5% in 2009) was not as severe as the local crisis of 2001:
·         In 2010 the GDP increased by 8.4% ($14700 per capita)
·         The average salary and the minimal pension are $800 and $245 correspondingly
·         According to the national welfare rating (Legatum, Oxford Analytica and Gallup World Poll Service) Argentina comes 41st, which is not bad.
It means that the Argentinean economy has survived the crisis. It makes the warning about a possible default by Business Insider even more unexpected for those who are not familiar with Argentina’s problems.
 
 
The results failed to come up to expectations.
What are Argentina’s weak points that make various analysts give gloomy forecasts about its future?
·         Political instability. On the face of it, the country has no significant political problems. After the continuous series of military takeovers and changes of power the county managed to restore democracy. Christina Fernandez was elected the Argentinean President after her husband Néstor Kirchner. It was believed that he was a shadow president and was going to return to power. But eventually he died from a heart attack last autumn. The next presidential elections in Argentina will take place in October 2011. Taking into account intense political polarization there is high probability that the internal political struggle in the country will be aggravated. Moreover many analysts expect a wave of protests and strikes across Argentina (it should also be noted that the local labor unions are rather powerful and influential). This uncertainty makes investors cautious.
 
·         Corruption and bureaucracy. According to the Transparency International rating, Argentina comes 105th in terms of corruption (i.e. lower than Brazil, Columbia and Mexico). It should be noted that Argentineans do not face corruption in their everyday life (policemen and officials don’t take bribes there). But the higher authorities are said to be knee-deep in corruption. For example, the former president Carlos Menem was accused of tax evasion, multi-million bribes and illegal arms trade.
 
·         Raw-material-based economy. Argentina comes 9th on the list of the richest countries in terms of natural recourses. The country’s territory is rich in iron, copper, zinc, gold, lead, tungsten, manganese etc.). Nevertheless, the country’s main treasure is grasslands and fertile land (it comes 6th in terms of cattle population and 5th in terms of meat production per capita). It is a well-known fact that agricultural products make up ¾ of the entire Argentinean export. That is why they got used to their recourse-based economy and just missed the “scientific-technical revolution”. However, it becomes more and more obvious that Argentina’s recourse-based economy is not the right foundation to ensure its stable economic growth in the future. Nevertheless, Argentina’s investments in fundamental science and education leave much to be desired.
 
·         Imperfect taxation system. The taxes here are far from being low: income tax – 35%, tax for individuals 9 - 35%, VAT – 21%. The taxation system is rather complicated, with lots of privileges and loopholes. That is why Argentineans like to evade taxes (for example the degree of tax evasion for VAT is about 40%). In connection with a series of defaults, which provoked popular distrust to the government and banking system, Argentineans try to avoid bank services: they prefer to pay in cash and keep their savings abroad. Al this creates a shadow economy. Now it is clear why Argentina comes only 118th in terms of business conditions.
 
·         Inflation. The current rate is about 25% of the national GDP. The official unemployment rate is7.9%. But other sources say that the official data are underrated.
 
·         Lack of foreign loans and investments. In the 1st half of 2010 the direct foreign investments in Argentina was only $2,2B (for comparison sake, in Brazil - $17,1B, in Chili– $8B). The country has mere problems with borrowing foreign loans to settle the current accounts. In order to pay off the overdue debts in 2009 the government nationalized the assets owned by the pension funds, causing a lot of of rumors that the authorities were trying to avoid another default. Moreover, in order to be able to borrow new loans in 2006 Argentina had to pay off the net debt borrowed from the IMF. In the short run it is planning to settle accounts with the Paris Club ($7B), which will significantly increase the country’s net sovereign debt. So, Argentina will probably fail to avoid foreign interference in its national economy.
 

 

 

Dangerous tango… or the peculiarities of the national Argentinean mentality.
 
The image of “Argentinean tango” with its emotionalism is suitable for reflecting the peculiarities of one of the “whitest” countries in Latin America (over 85% of the population are the “white” descendants of Europeans)
These are some common traits typical of Argentineans:
Patriotism. For most Argentineans their country is the best and most precious in every aspect (from opera to football). They consider football a “religion”. The Argentinean football is the best. Diego Maradona is like a “prophet”. They are self-important and self-loving (especially it holds true for men), quite sociable, sometimes leisurely and easygoing. They can also be unreliable when it comes to keeping their words or coming on time. But they are not afraid of difficulties. Sabrina Caruso from Portfolio Personal (an Argentinean broking company) says that the list of the Argentineans’ merits is much longer than the list of their drawbacks, which should help Argentina to get new loans.
 
 
Basing on all the info mentioned above “Market Leader” and Masterforex-V Academy offer you to participate in a survey by answering the following question at the forum for traders and investors:
 
Can Domingo Cavallo’s reforms make the country flourish?
● Yes, they can.
● No, they cannot. This is a deadlock as the reforms are made in favor of tycoons, thus making common people poorer.


 

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