There is a new book just out, by Paul Blustein, who wrote several books previously on the IMF and global finance. It is called And the Money Kept Rolling In (and Out): Wall Street, the IMF and the Bankrupting of Argentina. It describes mainly the events of 2001, culminating in the spectacular economic collapse there.
The book will probably not cause much of a sensation or even get noticed, especially compared with yet another installation of dreary globo-slobber that just congealed—The World is Flat by Tom Friedman. And yet the events described in Blustein’s book were truly important ones. Argentina’s meltdown wasn’t just a routine emerging markets crisis. It was the biggest sovereign default in history—more than $100 Billion went down the drain, far more than in Russia in August 1998. It was also the last nail into the reign of the "Washington Consensus" ideology, sending it into the dustbin of history—although you wouldn’t hear that from Washington politicians or IMF financiers.
There is more: throughout most of the 2001 Argentina invoked a strong sense of deja vu, as events there unfolded as almost exact copy of the Russian crisis of 1998. I followed Argentina crisis very closely—for reasons I’ll explain a bit later. The coming collapse looked clear to me a year before it happened.
Throughout the 90’s Argentina seemed to be about as opposite to Russia as a country could get. Russia was in a deep depression, with a collapsing economy, corruption and muddled politics. Argentina seemed to be on the very crest of the successful emerging market wave, the darling of Washington’s globaloony establishment. It played by all the rules. After the raging hyperinflation of late 80’s, the newly elected Menem government adopted the Convertibility Plan, tying the national currency, the peso, to the US dollar in 1-to-1 ratio, anchored by a currency board.
Argentina began a sweeping program of privatization and other market reforms. US-educated economists, such as Domingo Cavallo, the finance minister, as well as many other "young reformers" were at the helm. Money rolled into privatization deals and government bonds—there was international borrowing on a massive scale, at fairly low (initially) interest rates.
The Washington Consensus wasn’t just a conventional wisdom of the time. It was The Dogma, and a heresy was unthinkable. If you had any doubts, you’re just a fucking old commie, you just "didn’t get" the modern world—or so we were told.
The first cracks appeared in 1995, during the "Tequila Crisis" in Mexico, and later during the Asian crisis starting in mid-1997. Markets panicked for a while, interest rates shot up, the cost of borrowing increased. Not to worry: in 1995 the World Bank came up to Mexico with a big bailout package, markets stabilized, the party continued. More privatization followed, and the debt pyramid kept piling up.
The year 1999 seemed truly a millennial party. Dot-com mania was in full swing. Everything "wired" and "wireless," "digital," "connected," "global," was flying high and higher. Even wars seemed to be virtual-reality, as the bombing of Yugoslavia appeared back then. Russia in 1999 seemed "finished" for good. It just "didn’t get" the global economy—that was the wisdom of the time. There was incredible amount of gloating, masked with crocodile tears of sympathy. The remains of Russian economy were compared in size to Iceland or even Namibia. All this was heard from the same mob of annals that today squeal hysterically about a suddenly resurgent, menacing, evil Russia, back from the dead.
By early 2000 the bubbling NASDAQ market reached a nonsensical level. My wife and I both worked in hi-tech. We saw the amount of bullshit that was going on there, and had no illusions about it. We had a bit of luck: in early 2000 my wife sold a large portion of her stock options, a month before the whole thing began to collapse. It didn’t make us rich, but the take was still pretty nice—well in excess of her annual salary. After taxes, credit card debt and such, there was a bit remaining to invest. US markets were out of question—even before the stories of Enron and WorldCom hit the news it was clear to us they were based on massive fraud. Yet there was a place which promised much better and more reliable returns: post-crisis Russia. I am skeptical of stock markets in general, but internationally-traded government bonds had underlying intrinsic value and provided an excellent yield.
Putting all our available money in Russian Eurobonds, I began to follow an internet forum devoted to the emerging market bonds in general. This forum was a vastly different place from innumerable and mostly useless stock chats, scattered all over the web. It was a motley collection of pretty rich (compared to me) and interesting people—jaded, cynical, experienced, and knowing far more than the average guy how the world really works. We, "Colores," as was our collective name, had very different ideas, but were able to maintain amicable relations and productive discussions.
By late 2000 all our eyes were on Argentina, which was just entering a trap. Right after the Russian default, in September 1998, Boris Fyodorov, one of the "young reformers," invited the Argentinean wonder boy Cavallo to advise Russia on "sound economic policy" and particularly in setting up a currency board. How things changed since then… Already at that time, in the fall of 1998, they began to unfold contrary to expectations of the global plutocracy, and largely unnoticed by it. As thousands of expats rushed out of Moscow in the wake of the financial crisis, the real economy began to show signs of life.
It had nothing to do with oil—the prices stayed very low at least until late 1999. In fact the rebound had more to do with the very fact that the bums were out—all these consultants and advisors, bloated with condescension and self-importance, sure that only they could drag backward reluctant Russia into the modern world.
Something completely different was happening in Argentina. In the late 1998 a prolonged recession set in. The dollar/peso convertibility, hailed throughout 1990’s as an exemplary monetary policy, by 2000 turned into albatross, as the peso became overvalued and choked production and exports. The debt pyramid was spiraling out of control. There was little left to privatize. The influx of capital dried out. In short, Argentina at the end of 2000 had Russia ‘98 written all over it.
By then it was absolutely clear to me that a monumental disaster was slowly unfolding there. The IMF still visited regularly and announced new bailout packages. Markets cheered the second coming of Domingo Cavallo in March 2001, like in 1998 they cheered whenever "pro-western reformers" like Chubais or Kiriyenko appeared to be gaining ground and when they said all the right words for IMF and Wall Street consumption.
In April 2001 I made a public bet -in our Colores forum—a case of Argentinean wine—(with an Argentinean banker as counterparty) that Argy will default and/or devalue before the end of the 2001. Cavallo, just like Russian government in the spring of 1998, kept chaotically tinkering with taxes, trying to squeeze here and there from the lethargic economy. In May 2001 he performed his first major hat trick—the "megacanje," massive exchange of short-term bonds into new ones, with the longer duration and much higher coupons (interest rates), reaching 15%. This was purely suicidal—selling the future for short-term financial relief, piling up unbearable financial burden for years to come. It was also right out of the Russia-98 playbook. Russia’s "young reformers" government organized such bond exchange in June 1998, swapping short-term ruble obligations for long-term hard currency bonds with huge interest rates. Of course, global banks that underwrote these bonds (Goldman Sachs, etc.) raked plenty of dough. Even humble me joined in the pig-out, although later, buying them in February 2000.
These June 1998 bonds, in particular the 30-year ones, maturing in 2028 (called rf28 for brevity) achieved a legendary status since then. Issuing these bonds was a horrible policy for the country. They laid a burden of 12.75% interest payments every year, for 30 years to come. And yet, as Russia defaulted on its internal GKO bonds in August 1998, the Eurobonds like rf28 stayed current—payments on them never stopped. Their prices plunged—in September 1998 they traded at around 17% of nominal. With only three semiannual coupon payments one could recoup their entire price. Today they trade around 170—I don’t know if any country’s bonds ever traded that high, the Guinness book doesn’t keep track of that.
A debt from a loan shark, or high-interest credit card, is often ruinous for household finances. But at least for an individual there is a chance it may work in the end—in case of getting a good, high-paying job, for example, or another new source of income. On the country-wide scale this is ruinous, period. There simply can’t be a good ending. The rule of a thumb is that borrowing in dollars at 12% interest can be minimally justified only if the dollar value of the country’s economic output can grow faster that 12% in the future. For a country in a deep recession, with an overvalued currency firmly pegged to the dollar, there was absolutely no chance of that happening.
This is not something subtle—it is as blunt and simple reasoning as it can get. And yet such simple things were beyond the global bankers and "young reformers," who organized plenty such swindles, all over the world.
By the summer 2001 our internet forum became the most important venue for all things related to Argentinean crisis. We’ve had high-level representatives of Argy’s financial establishment trying to talk the thing up. Journalists from Buenos Aires newspapers showed up, pleading: "Can somebody explain what the fuck’s happening with our country?" Thousands of individual investors—Belgian dentists and Italian pensioners, as well as plenty of institutional moneymen, followed almost every word that was said there.
The situation continued to develop along the lines of the Russian crisis. Like in Russia before, Argentina was delaying and reducing wages for public sector workers for the sake of "fiscal responsibility" amid severe recession... Like in Russia, monetary asphyxiation resulted in proliferation of barter and fake currencies—coupons, veksels in Russia, patacones, lecoups in Argentina.
In August 2001 the Argy train seemed heading for a wall. Daniel Marx, the finance minister, flew to Washington, uninvited, to beg for more money. At first the globaloony brass even refused to meet him. People in our forum reported seeing him eating ice cream, alone and despondent, in a Dupont Circle cafe. Finally, after a couple of weeks of begging and groveling, IMF came up with a new bailout. This was already too much. The story, again, was almost identical to the last IMF loan to Russia in July 1998, which disappeared almost overnight. Meanwhile, Cavallo from a "miracle worker" became such an object of hatred that he was pelted by eggs even at his daughter’s wedding.
On September 11 the two towers fell. The huge shock seemed to smother all other problems with a dust cloud from Ground Zero. Barely a week after that we, Colores, had our first "official" meeting, at a posh Mediterranean resort town in Spain. In our long nights with many glasses of good Rioja on the hotel terrace, with gentle surf below, we discussed 9/11, the coming war, and the Argy crisis. The default and devaluation still seemed to me inevitable before the year end.
In November Cavallo organized yet another bond exchange. Now it was a forced one—with a net loss for creditors. Basically it was an ultimatum—if you don’t accept, we’ll default immediately. It still hadn’t saved him. By early December the situation became intolerable. Unemployment hit 18%. People lined at banks to withdraw their savings. Everything stopped working. City streets erupted with protests and looting, about thirty people were killed in riots. Finally, on December 24 the government fell. The new authorities stopped all foreign debt payments, and peso was formally devalued shortly after that.
After a sharp, painful contraction, Argentina is better today. The peso has stabilized, exports soared, economic output rebounded, contrary to predictions of "total collapse," just like in Russia’s case. The lesson from all these debacles is pretty clear—if you see somebody from Washington coming with "helpful advice" on economic policy, give him a good kick in the ass. And, judging by the sizes of Washington asses these days, you won’t be able to miss.