ARGENTINA: What caused the world's largest default?



"If I rob a bank, they throw me in jail. But if they rob me, then they say that's OK", screamed a protester who had joined thousands of others outside the office of Argentina's President Eduardo Duhalde on January 11 to demand protection from the country's tumbling economy.

The protester was pointing to the institutionalised theft that the Argentinian people have been subjected to for decades. The beneficiaries are Argentina's big corporations and ruling class, as well as the top corporations and governments of the richest countries.

Duhalde is Argentina's fifth president since December 20. On that day, President Fernando de la Rua resigned after a general strike and a wave of massive street mobilisations. Many more mass actions have followed.

In December, the partial freezing of US-dollar deposit accounts (in which most Argentinians' held their savings after the local currency, the peso, had been pegged to the value of the US dollar for 10 years) and the massive devaluation of the peso slashed Argentinians' purchasing power, hitting the poor hardest. Previously, both Argentinian and foreign-owned corporations had stood to lose billions as the Argentinian rich shifted massive amounts of capital overseas. This triggered bank runs by small depositors and a liquidity crisis among banks, hence the savings freeze measure.

Under pressure from foreign banks and governments, and the International Monetary Fund (IMF), on January 20 Duhalde reneged on an earlier promise to freeze dollar savings (but to eventually return them in dollars) while converting most loans to pesos. This would have inflicted major losses on the mostly foreign-owned banks, but now the common people will pay even more heavily for the economic collapse.

'Old' crisis

These most recent attacks came on the back of galloping unemployment (now 20%) and widespread underemployment, and vicious wage and pension cuts (a 13% cut in the public sector in July and more elsewhere). The economy has been contracting since 1998.

There have been sweeping social spending cuts for much longer, linked to the IMF's requirement for "tight fiscal management" — Argentina has been "bailed out" nine times since 1983. The fund's endorsement was often the basis on which foreign capital (mainly from the imperialist countries) invested in Argentina. The country followed IMF dictates so diligently that in the 1990s it was hailed as the fund's "star pupil". Its economy grew, amid gross inequalities and intense social contradictions.

Argentina's shaky economy is rooted in its dependent role in a world economy dominated by the imperialist countries. Although it is the third biggest economy in Latin America and trade is only 10% of its economic output, Argentina isn't immune from the perpetual current account shortfalls in its external balance of payments, a problem common to Third World countries.

Like many of its Third World counterparts, Argentina plugged these shortfalls by external borrowing, most of it in US dollars. The interest payments became crushing when the US raised its interest rates.

US interest rate rises in the late 1970s precipitated massive defaults on external debt by dozens of Third World countries in the early 1980s. Argentina was one of them, declaring a debt moratorium in 1982.

The imperialist banks, corporations and governments which were holding most of these debts were not going to let these countries not "honour" the debt. This was despite the bulk of the debt having been taken out by corrupt and unjust governments (Argentina, for example, was ruled by a military dictator between 1976-83, under which its external borrowing ballooned from US$8 billion to US$43 billion).

The creditors used access to their markets and other economic levers to coerce poor countries into "restructuring" the debts, often on the condition that they implement extensive privatisation ("market opening").

The drying up of foreign investment after 1982, and the Argentine government's recourse to printing more money to meet its spending needs, laid the foundation for Argentina's hyperinflation — up to 5000% in the late 1980s.

In the 15 years since 1975, which was the beginning of a long period of economic stagnation, inflation averaged 300%. Like in most Latin American countries, Argentina's economy contracted by more than 10% in the 1980s, amid serious capital flight and a sharp deterioration in its terms of trade. Rampant speculation by imperialist banks and fund managers, often targeting Third World currencies, greatly magnified Argentina's balance of payment problem.

The pegging of the peso to the dollar in 1991 provided a superficial anchor. It would have worked if Argentina's economy moved at much the same tempo as the US's. But it did not (and cannot), so when the dollar strengthened (from the mid-1990s), Argentina was hit hard and its ability to service its foreign debt was undermined further. The Mexican crisis of 1994-95 and Brazil's devaluation in 1999 made things worse.

New crisis

While Argentina's current account deficits have fluctuated between US$6.8-14.6 billion since 1996, its external debt has climbed from US$93.8 billion to US$147 billion (last September), equal to 50% of its gross domestic output.

In December, the Argentine government declared it couldn't service the debts any more. This default surprised no-one; the signs of distress were abundant and growing. For example, during 2001:

  • in January, a "standby" IMF loan was expanded to US$40 billion and brought forward, shortly after the Fernando de la Rua government agreed to more economic austerity and economic restructuring;

  • in mid-February, new spending overruns surfaced;

  • on March 2, economy minister Jose Luis Machinea resigned amid strong resistance to the IMF-imposed fiscal targets, a phenomena repeated since;

  • in June, the government "swapped" US$29 billion of existing debt for new bonds with longer maturities and deferred interest payments;

  • on July 11, a "zero deficit" plan was announced but quickly followed by two downgradings of Argentina's sovereign debt, sharply increased borrowing costs, massive capital flight and enormous pressure on tax revenue;

  • in August, 18.6% pension and other spending cuts were announced for 2002;

  • in early September, the IMF expanded its standby loan to Argentina by US$8 billion to "dispel concerns about" a debt default;

  • on October 29, the Argentine government sought a "voluntary" restructuring of all its bonded debt (about US$100 billion);

  • in early November, rating agency Standard and Poor's graded Argentine debt in "selective default" and Argentine borrowing costs rose;

  • in late November, the authorities placed a cap on deposit interest rates, more deposits fled overseas, bank liquidity dried up and bond market borrowing costs skyrocketed;

  • on December 1, wide-ranging controls on banking and foreign exchange transactions were announced, including a monthly limit on withdrawals from individual (not corporate) bank accounts;

  • later in December, the IMF stopped the release of US$1.3 billion tranche of an earlier loan to punish the Argentine government for "overspending".

The December 23 default and the January 6 devaluation of the peso marked the end of the dollar peg, which was replaced by a dual exchange rate arrangement.

Argentinian and foreign capitalists had plenty of time to shift their assets out of the country, and they did. Meanwhile, the Argentinian people watched helplessly as the value of their savings shrank and more jobs evaporated.

International class battle

Foreign capitalists are determined to defend their interests. In a thinly veiled threat, the European Union finance ministers on January 22 urged the Argentine government to "adhere to the principles of a market-based economy and avoid discriminating against foreign direct investors and creditors". US President George Bush and the IMF said they will help Argentina only if it presented a "sound" economic plan.

Some foreign banks even took out full-page advertisements in Argentine newspapers to blame the government for messing up the economy. This followed the mid-January dawn raids on foreign banks to investigate allegations that massive amounts of funds were smuggled out of Argentina shortly before the economic collapse in December.

The capitalists are trying to assert their "right" to make a profit, be it through exploitation, manipulation or speculation. They know that Argentina is a "high risk" country — and have been obtaining lucrative compensatory "premiums" — yet now that their investment risks are crystallising they are trying to offload the costs onto Argentina's people.

Refusing to be robbed further, Argentina's workers have engaged in eight general strikes since 1999. The extensive, though intermittent, street mobilisations since March 2001 exploded into spontaneous mass actions in December.

Meanwhile, fearing that Argentina will set a "bad" example for other Third World debtor countries and boost the international movement to cancel Third World debt, the IMF is frenetically seeking some sort of restructuring of Argentina's external debt. International solidarity activists should start gearing up for the coming campaign.

From Green Left Weekly, February 6, 2002.
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