Living without banking

The majority of the population does without daily banking, mortgages, car loans, overdrafts or credit cards, yet the economy is booming. So is Argentina's cash-based example one we should be following, asks Jack Horgan-Jones

MIGUEL FELDMAN, a dentist in the wealthy Buenos Aires neighbourhood named for Argentine economist Manuel Belgrano, tells a story about helping his friend move house. He had been enlisted, along with his son, to set up the sound system.

“There was a speaker that didn’t work,” he says. “It worked at a very low volume.”

The pair tried in vain to adjust settings and rewire the speaker, but to no avail. Finally they removed the rear panel to look inside.

“Do you know what we found inside?” Feldman says. “Almost 300,000 US dollars cash.”

He tells me this story outside an ice-cream parlour near his office. While we talk, a client of his, a famous writer for TV, stops by. After greeting some adoring young fans with a kiss and a practised embrace, the writer pays Feldman roughly €200 in cash from a wad of 100-peso bills in his backpack. This money is owed for some recently completed dental work, Feldman explains.

After the matter-of-fact financial exchange the writer continues on his way.

Such is the reality of living in a country where only 39 per cent of the adult population has a bank account. Argentinians, by and large, conduct their lives without the assistance of daily banking, mortgages, car loans, overdrafts or credit cards. Judging by Argentina’s stellar economic performance in 2010 (reported growth of more than 8 per cent of gross domestic product), such a system has done the country little harm.

Argentinians have had a long and unhappy relationship with banks. Most recently they were badly burned during the economic crisis of the early years of this century, when banks shut their doors on customers to avoid a run on their reserves and the government converted dollar deposits at a rate of 1.4 peso to the dollar, a fraction of their actual worth.

"You'd probably find that a wide swathe of the population still has a healthy mistrust of banks," says Peter Johnson, managing editor of the English-language Buenos Aires Herald. "They plough savings into property . . . into wheels or bricks, or whatever."

One way to interpret all this would be to conclude that banks are not a prerequisite for a successful economy and that any difficulties in disposing of them are motivated by vested interests. Similarly, it would be enticing to draw a straight line from Argentina’s sovereign debt default in 2001 to the country’s economic success now, and conclude that the whims of international currency markets are best ignored.

There is evidence that the 2001 financial crisis affected banking activity in Argentina. Frederico Juan, an analyst with Buenos Aires-based financial analysts Banco Riesgo, points out that bank loans as a percentage of GDP plummeted from 24 per cent in 2001 to just 7.2 per cent two years later (see graphic, right). It seems that the systemic role of banking was being squeezed out.

However, as Juan explains, “prior to the crisis, the Argentine consumer did not have the habit of using basic banking products for their daily operations.

“The impact of the crisis can be summarised in a deterioration in terms of spread of banking system lending activities aimed at production, investment and long-term financing, but not in the consumer-oriented banking products and transactional operations.”

But there is more to this anti-bank dynamic than people power or a Pavlovian aversion to banks. Argentinians, explains Johnson, have an incentive to avoid banking, due to a huge black economy and an unwieldy system of taxation. “Any online transaction seems to be linked into our equivalent of the Internal Revenue,” he says. “Then you have the financial transaction tax, which the companies sector loathes. There is that pressure to avoid, or evade if you want.”

With the black economy making up such a high proportion of all economic activity it is difficult to get people into a system where everybody complies with the same law. “If you’re outside the system you don’t want to get into it, and if you’re inside the system you want to get out,” says Johnson.

Orla Treacy (25) is originally from Limerick but has lived in Buenos Aires for the past two years. She works in the city and says that the banking practices of expats are as erratic as those of Argentinians.

“I am fortunate enough to work in a global company, so everything I do as regards payment and banking is official and on the books,” she says. “But many friends and acquaintances work illegally, or en negro, for local schools, companies, magazines or agencies and affiliates for companies in the United States or Europe. Many employers come to arrangements with their employees whereby they get paid in cash slightly above the going market rate and they keep quiet about how much they get paid and by whom.”

Treacy adds that expat rent and purchases are made in cash and that “there are usually substantial discounts from landlords and shop-owners if dollar cash is on offer, as this allows them to also keep things en negro”.

Miguel Feldman says that “everything is black economy because the bank won’t give you loans”. He uses banks as little as possible and has a low opinion of them. He insists, however, that the situation is not one of honest bankers being denied the capital they need to work by a public which is loath to pay its way in society.

“I know people from the banks,” he says. “They made business with the government. They took money from the banks and said: ‘You give me the money and then I give you something.’ Always it is something like that. Common people, they couldn’t buy anything.”

Like many others, Feldman traces the difficult relationship between banks and populace back to Argentina’s disastrous engagement with vicious neo-liberal economics in the 1970s, a policy espoused by Friedmanite Chicago-school economists and enforced by the brutality of the military junta.

By destroying the apparatus of the state, this period created the foundations for today’s Byzantine financial structures. The era’s legacy is a majority who are mistrustful of government and a small elite who enriched themselves massively – and both groups are averse to conventional financial dealings.

The political middle ground between these interests is often negotiated by various waves of populist Peronist leaders, whose efforts to keep all sides happy often result in a good impression of the most acrobatic attempts to keep Irish parish pump politics in operation.

The government tries to compensate for lost income-tax revenue with punitive rates on those who do pay, and with high rates of VAT. Taxpayers are thus doubly discouraged from paying high rates of tax on income which has not had VAT paid on it, potentially alerting the tax man to extra-curricular earnings.

When the government’s revenue-raising measures fall short, it is not averse to massaging the figures itself, according to Peter Johnson. “Official figures are fiddled with, and we live in a sort of a virtual-type economic world,” he says. “It isn’t so much the laws as the unofficial manipulation of data that is the problem. With real inflation running close to 25 per cent, the official figure of 11 per cent enables the government to distort the real economy to suit its purpose.”

SO, WHICH COMES FIRST? Are the banks handicapped by a shortage of consumer deposits, and therefore unable to compete in an economy where they are undersold by a vibrant black market and a compliant public? Or are citizens withholding their savings because they are rightly suspicious of banks, corruption and cosy relationships between powerful elites?

The truth is probably somewhere in between, but the net result, says Johnson, is a situation where “you turn up with a suitcase of dollars and buy property in someone else’s name”.

The sharp end of this kind of practice was visible last year in the city of La Plata when Carolina Piparo, carrying $20,000 (€15,000) in cash, was shot and robbed. Piparo, who was pregnant, lost her baby.

In response, the central bank made it obligatory for banks to offer free basic banking services in an effort to shed more light on the black economy. However, most commentators agree that, in view of the fraught Argentinian relationship with finance, it is unlikely such measures will have a significant impact.

Like so much else in this country, what one can see on the surface in this matter is no indication of what is actually going on beneath.