Comments (41)

Aug 30, 2018

Time for Lord Singer to raid that place again

Aug 30, 2018

lol. hes prob not up for the challenge this time around.

Aug 30, 2018

He certainly has the naval fleet for it this time.

Aug 30, 2018

Time to book flights to Buenos Aires for the next vacation!

    • 4
Aug 30, 2018
Erlking:

Time to book flights to Buenos Aires for the next vacation!

Flight to South America are less expensive then you think. I literally just booked a flight to Chile $1,100 round trip and hotels down there are cheap AF. I am staying at the Ritz for $300 per night.

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Aug 31, 2018

Is this a joke? As in, sarcasm I'm not following?

    • 2
Funniest
Sep 1, 2018
Link_REDev:
Erlking:

Time to book flights to Buenos Aires for the next vacation!

Flight to South America are less expensive then you think. I literally just booked a flight to Chile $1,100 round trip and hotels down there are cheap AF. I am staying at the Ritz for $300 per night.

Oh boy! What a deal!

    • 8
Aug 30, 2018

hmm maybe i'll have to return!

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    • 1
Sep 6, 2018

I had family in Argentina on vacation while all of this went down. Apparently hotels make you pay in USD atm.

Aug 31, 2018

Nothing surprising. An IMF guy successfully scammed his way into power again.

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Most Helpful
Sep 1, 2018

Argentina has a financial crisis every few years. I wrote my undergraduate and one of my graduate theses on currency crises in Argentina. The place is run like the rest of Central and South America--that is, as a kleptocracy. Before the First World War, Argentina was the 7th or 8th largest economy in the world. It's still a beautiful country, but it can't seem to get out of its own way. It benefited in the late 19th and early 20th centuries by waves of German. Italian, Irish and Spanish immigrants. And it still has some gorgeous architecture from the period, but you can't really get an economy going with the level of political turmoil they've seen for the past century. There have been several coups and more presidents and want-to-be dictators than anyone would care to remember.

The IMF and World Bank started issuing the country loans in the 1980s and 1990s. It was seen as something of an experiment. Surely, it had enough natural resources, population and development to really be a beacon for the rest of South America. But the country couldn't afford the loans. Initially it could, but a nasty combination of corruption and incompetence pushed its fiscal position out of balance. So what did the country do? It borrowed more, of course. And to provide investors some additional confidence, it created the 'Ley de Convertabilidad' (Convertability Law) that pegged the Argentine Peso 1-to-1 against the US Dollar. The problem with doing so was that it required El Banco Central de la Republica Argentina (BCRA, the Argentine central bank) to keep an American dollar in reserve for every peso in circulation. This wasn't such a problem so long as the country had a positive trade balance with the US (since it would naturally accumulate dollars), but became problematic when the country started running large trade deficits, at which point, to maintain the peg, the central bank had to start buying dollars on the open market or shoring up the convertability law through more loans. So it kept taking out more fucking loans. The currency should have revalued in 1998, but weak politicians and stubborn bankers from the IMF and World Bank kept trying to correct the country's debt problems with the exact same solution--more of the same thing that got the country into the position in the first place.

It's baffling to me where some people learn economics, because the consequences of these shitty policies were pretty obvious from at least 1995, the currency should have been allowed to revalue in 1998, the country should have pushed back some of its debt, and worked through an austerity program. Instead, the situation just kept getting worse through 2001 until the Peso collapsed and went from 1-to-1 against the US Dollar to 4-to-1 in a single day. There were runs on the banks, and 3-4 presidents in as many months. One of them (I think Menem or de la Rua) froze all private accounts in the country. You could only take out a couple hundred pesos (not dollars) from your accounts per month, but no one wanted pesos, so various regions of the country started creating fractional currencies not backed by the central bank. It was a complete disaster. When the Argentine supreme court said that it was not within the president's powers to freeze all private accounts, the President tried to fire the entire supreme court.

The country was never exactly a paragon of virtue and jurisprudence, but it devolved into a banana republic virtually overnight. It has been 17 years since that happened, and the country is in trouble again. They could fall off a cliff tomorrow, or as I suspect, they'll slowly make one blunder after another until they edge toward default. The IMF will probably make the same mistake they did last time and continue to grant them enough rope to hang themselves. And the Argentinians will take every inch they can get. Because of the last fiasco, I imagine there will be some lip service paid to the notion of remaking the same mistakes, but there is too much on the line with too little leverage to push a Greek-style austerity program on the country.

While I haven't been following the country's economic situation as closely as I once did, I imagine the request to the IMF wasn't made publicly until most other avenues had been explored, which means they went public to force the IMF's hand to show them what would happen in the markets if they didn't get the money. Now, the IMF is going to get pressured to do something to prevent a larger catastrophe. They will capitulate, and the situation will get worse for a little while before the country finally gets it shit together or shits the bed again. I'm betting on the latter.

    • 61
Sep 1, 2018

This right here is why I get on WSO. Well done, sir.

    • 4
Sep 1, 2018

Nice job

    • 2
Sep 1, 2018

I would read the shit out of your grad paper

    • 3
Sep 1, 2018

I wouldn't mind sharing it, but I no longer have a digital copy. It's also primarily focused on the game-theoretic models which describe currency crises, so it's not very readable (even for PhD economists and mathematicians, it would take some time to read unless they're already familiar with a few of the seminal papers in the field). It's one of the reasons I never finished my PhD--I got tired of writing dense material for an audience of a few dozen people. As it is, more people liked my earlier post than ever read any of my research.

    • 4
Sep 2, 2018
brotherbear:

Argentina has a financial crisis every few years. I wrote my undergraduate and one of my graduate theses on currency crises in Argentina. The place is run like the rest of Central and South America--that is, as a kleptocracy. Before the First World War, Argentina was the 7th or 8th largest economy in the world. It's still a beautiful country, but it can't seem to get out of its own way. It benefited in the late 19th and early 20th centuries by waves of German. Italian, Irish and Spanish immigrants. And it still has some gorgeous architecture from the period, but you can't really get an economy going with the level of political turmoil they've seen for the past century. There have been several coups and more presidents and want-to-be dictators than anyone would care to remember.

The IMF and World Bank started issuing the country loans in the 1980s and 1990s. It was seen as something of an experiment. Surely, it had enough natural resources, population and development to really be a beacon for the rest of South America. But the country couldn't afford the loans. Initially it could, but a nasty combination of corruption and incompetence pushed its fiscal position out of balance. So what did the country do? It borrowed more, of course. And to provide investors some additional confidence, it created the 'Ley de Convertabilidad' (Convertability Law) that pegged the Argentine Peso 1-to-1 against the US Dollar. The problem with doing so was that it required El Banco Central de la Republica Argentina (BCRA, the Argentine central bank) to keep an American dollar in reserve for every peso in circulation. This wasn't such a problem so long as the country had a positive trade balance with the US (since it would naturally accumulate dollars), but became problematic when the country started running large trade deficits, at which point, to maintain the peg, the central bank had to start buying dollars on the open market or shoring up the convertability law through more loans. So it kept taking out more fucking loans. The currency should have revalued in 1998, but weak politicians and stubborn bankers from the IMF and World Bank kept trying to correct the country's debt problems with the exact same solution--more of the same thing that got the country into the position in the first place.

It's baffling to me where some people learn economics, because the consequences of these shitty policies were pretty obvious from at least 1995, the currency should have been allowed to revalue in 1998, the country should have pushed back some of its debt, and worked through an austerity program. Instead, the situation just kept getting worse through 2001 until the Peso collapsed and went from 1-to-1 against the US Dollar to 4-to-1 in a single day. There were runs on the banks, and 3-4 presidents in as many months. One of them (I think Menem or de la Rua) froze all private accounts in the country. You could only take out a couple hundred pesos (not dollars) from your accounts per month, but no one wanted pesos, so various regions of the country started creating fractional currencies not backed by the central bank. It was a complete disaster. When the Argentine supreme court said that it was not within the president's powers to freeze all private accounts, the President tried to fire the entire supreme court.

The country was never exactly a paragon of virtue and jurisprudence, but it devolved into a banana republic virtually overnight. It has been 17 years since that happened, and the country is in trouble again. They could fall off a cliff tomorrow, or as I suspect, they'll slowly make one blunder after another until they edge toward default. The IMF will probably make the same mistake they did last time and continue to grant them enough rope to hang themselves. And the Argentinians will take every inch they can get. Because of the last fiasco, I imagine there will be some lip service paid to the notion of remaking the same mistakes, but there is too much on the line with too little leverage to push a Greek-style austerity program on the country.

While I haven't been following the country's economic situation as closely as I once did, I imagine the request to the IMF wasn't made publicly until most other avenues had been explored, which means they went public to force the IMF's hand to show them what would happen in the markets if they didn't get the money. Now, the IMF is going to get pressured to do something to prevent a larger catastrophe. They will capitulate, and the situation will get worse for a little while before the country finally gets it shit together or shits the bed again. I'm betting on the latter.

Great post. However I don't think a Greek style austerity will do anything positive. Mainly because Greece itself is going to have to maintain fiscal surpluses until 2034, then a ligher version until 2044, then another lighter version until 2054. Does anyone believe that there won't be global recessions until then? The big hope of the ECB, the European Commission and the IMF is that cheap liquidity will boost growth until then allowing Greece to repay its debts and stay in the Euro. The cheap liquidity is being hoarded in German banks anyway.

There's one point I particularly agree with you though and that's the insane fixed exchange rate, which is a crazy fetish of international institutions and it's destroying one country after another. Argentina is indeed the case and so is Greece.

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Sep 3, 2018

It's probably true that a long-term austerity program won't work in Argentina (or Greece for that matter). Even if there were no recessions during the austerity period, it's difficult to explain to future generations why they have to pay for the sins of their forefathers, so you lose the political will to maintain such programs over time. In the Greek case, there is a natural mechanism to break austerity--time. Too many young, educated Greeks have left their country. Repatriation becomes rarer as the years pass, and the economy suffers from the loss of some of the country's most employable young people. This depresses the long-run growth expectations for the country and makes repaying loans harder for the government as it collapses the tax base.

I think Greece should have probably exited the Euro, pushed back a lot of its debt, restructured the portions it couldn't push back, floated the drachma, and allowed its economy to heal more naturally. As much as anyone, Germany pushed austerity on the Greeks because it was in their interest to do so. No country has benefited more from the creation of the Euro than Germany. Averaging in a bunch of peripheral economies to the European Monetary Union has the ongoing effect of depressing the value of the Euro against major trading pairs (the USD, the GBP, the JPY). German goods are comparatively cheaper than they would otherwise be as a result, which supports its manufacturing sector and makes it costlier to purchase services from abroad (in turn, propping up its own business services sector).

In the short run, Greece would probably have felt more pain than it has. I suppose the austerity program's core purpose is to smooth the total economic hardship over many years so the country doesn't face a giant depression all at once. But that worst-case scenario is just that--a single scenario. It's difficult to prognosticate how likely such events are, but because there is such enormous disutility for the economy as a whole in several of the more dire cases, no one is willing to take the risk.

I have an enormous risk tolerance, so I might have rolled the dice. As it happens, my opinions on the matter are pretty irrelevant. Certainly, no one consulted me on the issue in any case. But I'd like to have seen the outcome in the alternative case. The doomsayers will claim it would have been apocalyptic, but there's no way to know for certain. At some point, I'm sure the Greeks will renegotiate for loan forgiveness. They'll have to wait another 5 or 6 years, though. After the next downturn (maybe in 2 years) and then a few years after that so we're on an upswing again. By that point, it won't be as politically disastrous for German and French technocrats to take a slight haircut on their Greek portfolio. Right now, the bailout is still to recent for Greece to get a better deal.

In Argentina's case, I have a harder time seeing a solution. The risks of attempting to force austerity on Argentina are great. In that situation, I might expect another military coup. People generally aren't willing to fall back to a lesser stage of development. Once they've tasted the trappings of wealth, that quickly becomes their new norm. And any politician seen as responsible for negotiating away the country's future to creditors wouldn't last long in any country, much less a South American one prone to dictatorships. As a result, I'm sure there are some who would double down on the country, and provide more loans. But that solution is unworkable.

The country needs equity, not debt. There is an argument that international institutions (perhaps intentionally, perhaps not) place emerging economies into debt traps. In some ways, this is a perverse form of colonialism without any corresponding development responsibilities. Senior creditors (in my opinion) generally care less about the workings of a company than equity investors since they're pretty sure they're getting paid back. Shareholders should be less certain of that, and should therefore take a greater interest in the firm's inner workings. I think the same is true in emerging economies. They need a 1950s era Marshall Plan, not more debt. But we don't have the surpluses or political willpower to do so.

As a result, Argentina will take more debt, the IMF will reluctantly give it to them. The debt will only provide a short-term band-aid to the country's problems, before creating more problems in a couple years. They'll keep making shitty fiscal decisions, never cure their problems, and the IMF will eventually reach a breaking point, stop providing loans, and the country to devolve into chaos before a totalitarian assumes power again. OR, we could try something different this time.

Who the fuck knows?

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Sep 4, 2018

+1 , cheers.

Sep 4, 2018

while I lived there I always told ppl that the history of their economy would make for a very interesting grad thesis, thanks for posting!

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Sep 4, 2018

I normally find the idea rather stupid for a country to "dollarize"--instead, it should clean up its fiscal behavior. With that said, isn't Argentina a good candidate for dollarization given the perpetual incompetence of its financial managers? Same thing for Venezuela.

Sep 4, 2018

Dollarization requires you to have enough dollars in your economy to replace your own currency. It means you outsource your monetary policy to a foreign power, and it means you constantly have to acquire dollars. If you read my explanation of Argentina's last currency crisis in 2001, they had effectively attempted to dollarize their economy years earlier, but the crisis ensued regardless. You may say that they hadn't fully dollarized their economy because the Convertability Law (see above) just pegged the Peso to the Dollar, but the effect of that peg was essentially the same as full dollarization (especially since the law required a USD to be held in reserve for every single Peso in circulation). That policy was a disaster, and returning to it makes little sense.

    • 1
Sep 4, 2018

One word summary: socialism. Happens every time.

Sep 5, 2018

Fantastic shit here.

Sep 4, 2018

top gun

What concert costs 45 cents? 50 Cent feat. Nickelback.

    • 1
Sep 5, 2018
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