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Argentina rothschild bailout 1890s

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The Bear's Lair: Don't bail out deadbeats
By Martin Hutchinson
Published 2/2/2004 2:27 PM
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WASHINGTON, Feb. 2 (UPI) -- The International Monetary Fund announced Wednesday that it had voted to release $350 million of a $13.3 billion program to roll over outstanding IMF loans to Argentina. That decision reportedly met with considerable opposition in the IMF's board, since Argentina is currently attempting to default on about 90 percent of its private sector outstanding debt, to banks and bondholders. The opponents were right.

There are few good guys here. The international banks and debt rating agencies allowed Argentina to borrow vast amounts of debt with a maturity as long as 20 years in the late 1990s, at spreads of 5 percent and more above the prevailing U.S. Treasury bond rate, on the ground that postponing Argentina's principal repayments well into the next century would in some way solve its chronic budget deficit problem.

Having around the same time been responsible for advising the finance ministry of the Croatia (which had a similar debt rating to Argentina) I can tell you that allowing the postponment of debt repayment so far into the future is asking for trouble in a system run by averagely irresponsible democratic legislators; they simply regard the debt as "free money" since its repayment will fall well after their own political careers have ended.

Croatia followed a quite different approach, borrowing for 5 or at most 7 years, in tightly controlled amounts, with close attention paid to the annual interest cost, both absolutely and in relation to U.S. Treasuries. Croatian finance minister Bozo Prka was running a budget close to balance, and he didn't intend to allow his more free-spending colleagues any more latitude than he had to (now there's a man President George W. Bush could use as Treasury Secretary in his second term!)

The International Monetary Fund and World Bank are at least equally to blame. They put a "seal of approval" on the misguided Argentine economic policies of the late 1990s, and provided an additional $20 billion bailout at the end of 2000, when it was obvious that Argentina's economic position had become unsustainable. In particular, they failed to provide adequate warnings of the progressive overvaluation of the Argentine peso, held artificially at parity against a strong dollar, while domestic interest rates remained artificially low because of the late 1990s surge in dollar money supply.

Had the peso been held constant against gold, currency-induced deflation would have hit Argentina several years earlier than it did, greatly reducing the size and unmanageability of the crisis. As it was, the surge in offshore holdings of dollars in the late 1990s served merely to fuel unsustainable consumption and cost inflation in Argentina. As Cristiano Ratazzi, head of Fiat Argentina, told me in late 1998, the Argentine peso had already become strong enough to price Argentine exports out of world markets, and Argentine cost levels were increasing by the month. Only for a limited period could this situation be kept in balance by frenetic international borrowing.

However, the greatest share of the blame must surely go to the Argentine people, and the class of politicians it consistently re-elects. Carlos Menem, the "free-market" reformer of 1989-1999, was in reality the thoroughly corrupt representative of a political party born in Fascism and sustained by the solid support of the particularly unattractive Argentine trades union movement.

President Roh Moo-hyun of South Korea is close to being thrown out by his electorate, for attacks on property rights of big business and the middle classes far less extreme than those perpetuated in Argentina by every elected government since the advent of Juan Peron in 1945. Yet these destructive politicians consistently get re-elected by the Argentine people. Even after international default and the partial seizure of Argentine middle class savings, the Argentine electorate in 2003 voted for yet another leftist in Nestor Kirchner, and gave the only free market candidate in the race, Ricardo Lopez Murphy, an almost derisory 16 percent of the vote.

The real secret is that Argentine leftism has produced a society that is not only far poorer and less educated than it should be, but is also grotesquely unequal, with a GINI (inequality) coefficient around 0.49, far higher than South Korea's GINI coefficient of 0.32. South Korea, impossibly impoverished compared to Argentina in 1960, is now after forty years of largely rightist government, much of it unelected, in terms of gross domestic product per capita around twice as rich. Argentine socialist politics produces high taxes, yet leaves the government starved of funds, with government revenues considerably smaller in terms of GDP than in Europe or even the United States. It also increases inequality, by providing subsidies and benefits to public sector workers and trades unionists, almost all of whom are substantially wealthier than the Argentine average.

Military government is not the answer. In Latin American history, for every Agosto Pinochet (Chile, 1973-89), enriching his country and leaving a long term legacy of decent and creative government, there are twenty replicas of Jorge Videla (Argentina, 1976-80), leaving a legacy only of mismanagement, corruption and brutality, or Leopoldo Galtieri (Argentina, 1981-82), engaging in military adventurism and leaving bankruptcy and disgrace.

Conversely, it is clear that with the present incentives in place, democracy doesn't work either. After all the IMF, naturally as a state owned institution sympathetic to socialist governments, has just rewarded the leftist Argentine government with new money after it has defaulted on no less than $90 billion of private sector international debt, as well as partially seizing (for the second time in a decade) the middle class savings on which the future of the country's economy must rest. Like ghetto kids discovering that drug dealing is more lucrative than entry-level jobs, the Argentine people are being taught yet again that public sector subsidy and private sector harassment are a reliable economic way forward.

There is a better way. Argentina in the nineteenth century was one of the most successful societies on earth, under the elected but oligarchic governments of Bartolome Mitre, Domingo Sarmiento, Julio Roca, Marcelo Alvear and others, from 1860 to 1930. Mexico, under the oligarchically elected dictator Porfirio Diaz (1876-1910) achieved economic success far in excess of any attained since that time. Derided by their populist successors, these governments had one enormous advantage over any that have succeeded them: they produced results.

It is probably politically and practically impossible to restrict the Argentine franchise in such a way as to recreate the benign Argentine oligarchy; the populist omelet has been in being for three quarters of a century and the oligarchic eggs are long broken. However, there is one other important difference between the successful Argentina of 1860-1930 and the failed Argentina of today: in the former period, there was no IMF.

Argentina in 1860-1930 was not without its international debt troubles; in particular it was responsible for the infamous Barings crisis of 1890. However, in 1890 there was no IMF to bail the country out. Instead, once the crisis hit, President Juarez Celman, accused of overspending and corruption, resigned, and Vice President Carlos Pellegrini assumed office, with the backing and financial advice of a team of international bankers led by Rothschilds, on a platform of stern retrenchment. Within months, inflation had dropped, the peso was stabilized, the economy had recovered and Argentina's international creditors were eventually repaid in full, with interest.

In the international banking system before 1914, leading London merchant banks and New York banks competed for the advisory and financing role for emerging markets, offering a menu of financial policy recommendations as well as money. Once the country chose a financial advisor, other banks then ceased to compete for the role, or for the country's bond-issue business. The system broke down in the 1920s, when Citibank and other New York banks became too aggressive in countries such as Peru, and provided loans without advice/guidance, thus causing over-borrowing and, ten years later, default.

In its original form, the system provided countries with a broad menu of financial policy alternatives to choose from, each backed by a different merchant bank. More important, because of the "no-compete" rule, a strategy once chosen could not easily be abandoned, and default meant banishment from international sources of finance. Thus, by providing a choice of policies and sanctions against bad behavior, the pre-1914 system was not only sounder than that today, it was also more likely to produce long term economic prosperity.

Until about 1980, we could have closed down the World Bank and IMF and returned to the pre-1914 financial system; the London merchant banks were still in place, and still had the necessary capabilities (although there would have been severe difficulties in 1945-65, during Britain's period of foreign exchange shortage.) However, legislative and market changes during the 1980s both destroyed the London merchant banks and ensured the dominance in the big international banks of short term traders over long term financiers. (It was not surprising that the private sector development finance capability disappeared, since the World Bank and IMF were providing subsidized competition in that role.)

Hence, today, closing down the World Bank and IMF and leaving their activities to the private sector would not work; there are no private sector institutions capable of taking up their role. Nevertheless, by defining the World Bank and IMF's field of operations much more narrowly, by restricting their ability to forgive debt defaults, by bringing private sector capital into their operations, and by ensuring that "space" is left for the development de novo of private sector development banks, over a 10-15 year period today's financial system can be reformed.

This will cause pain in the Third World, but it is necessary pain. To the extent that countries cannot be financed by the free market, they must radically cut back their spending and, if necessary be given grants by private and public Western charities to protect the weakest among their citizens.

It will probably take several decades for the Argentine electorate to learn their new lesson: that there is no free lunch, and that private sector development, and ironclad guarantees for private property, domestic and international, are the only way forward.

Nevertheless, learn the lesson they must, so that Argentina, and Latin America in general, can cease being a haven for sloppy Socialism that impoverishes its people, and can, on the Asian model, begin working its way towards true soundly based prosperity.


(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)


Martin Hutchinson is the author of "Great Conservatives" (Academica press, April 2004) -- details can be found on the Web site

Copyright 2001-2004 United Press International

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