The consequences of default are still felt by those who lost savings after the devaluation
A DEVASTATING recession in its third year, unemployment and poverty climbing dramatically and a government forced into deep spending cuts but still reeling under massive foreign debt.
Not Ireland 2011, but Argentina a decade ago, heading towards what remains (for now) history’s biggest sovereign debt default.
Out in the flat, featureless sprawl of greater Buenos Aires, residents in the poor neighbourhood of Villa Centenario remember vividly the long, grim year of 2001 when their country inexorably slipped into the economic abyss.
“The factories had closed and there was no work. I had to try and get by selling what I could on the side of the street,” says Victor Soraire. “But as the year went on there was less and less money about. It took me a week to make what I used to get in a day. There was barely enough for food.”
All over what was traditionally South America’s most developed country people felt as if they were being slowly suffocated.
A botched attempt at restructuring the foreign debt in July only increased foreboding among creditors that the country could not meet its obligations. The 10-year experiment of linking the local peso at par to the ruinously – for Argentine exports – strong dollar had clearly run its course. But in a dollarised economy no one in charge was willing to engineer a break from the US currency for fear of sinking the financial system.
Conditioned by decades of recurrent crises, locals trusted in cash, more specifically dollar bills. They began to pull money out of deposit accounts, sparking a run on the banks. Short of options, the government froze bank accounts at the start of December 2001.
Furious, the middle class took to the streets. Banks had to clad themselves in corrugated iron to protect their windows from savers banging pots and pans demanding their money back.
Among the protesters was Buenos Aires pensioner Emma Cerpa: “When my husband died he left me US$24,000 which I had in the bank. It was all I had in the world and suddenly the government froze it. Of course I went to protest! It was terrible. I had to learn to economise down to every match I used.”
All through December the protests grew. While the middle class in Buenos Aires targeted the banks and the government, in poorer outlying neighbourhoods such as Villa Centenario residents started looting.
“People were running up and down the street saying, ‘let’s hit the supermarkets, the government’s falling’,” recalls Soraire. “So I joined them. We were desperate and didn’t know what would happen next. I took food but others took alcohol and anything expensive that they could hope to sell for cash. The police fired some tear gas but otherwise stayed away.”
In the city centre the police showed less restraint. By the time the chaos subsided several dozen people were dead across the country, president Fernando de la Rúa had fled office and investor confidence was shattered. Power passed to Adolfo Rodríguez Saá, whose week as president is remembered for his declaration before a cheering congress on December 23rd that Argentina would cease to service its US$132 billion debt.
“Default was part of a wider process,” says Marcelo Leiras, chief investigator at Buenos Aires think tank Cippec. “Most modern defaults can be seen not as choices but rather as checkmates when the government has no other options. Default is a very costly decision for any politician but sometimes there is no way out. Well of course there is always a way out: you can let 20 per cent of your population die.”
But if Argentina had decided not to pay the steep social cost of servicing the debt, it was still about to undergo a brutal experiment in autarky.
With no dollars left and cut off from access to financing, the peg with the US currency had to be abandoned and the peso was devalued in January 2002. Immediately, inflation rocketed and the already crumbling economy crashed even further, contracting another 11 per cent by the year-end. By then, more than half the population was living in poverty.
Selling caramelised nuts from his cart outside a Buenos Aires theatre, Juan Carlos Baldini remembers it all grimly.
“I lost my job and . . . my wife left me taking our son . . . the crash cost me my family. Eventually, I ended up on the streets, sometimes eating in soup kitchens. There was no work and no money circulating.
“It was terrible but at least you did not feel alone. In my neighbourhood many people were in the same situation.”
It was two years before Baldini could rent again.
“Many of the old lower middle class became the new poor,” notes Emma Galtieri, a sociologist who lectures on poverty at Belgrano University in Buenos Aires. “They were left desperate. Crises always hit the poor but this one also struck the middle class who had their money in the banks. People lost their savings and had to take their children out of private school and put them in public schools. Families rented or sold apartments and went back to live with their parents. People who had two cars had to sell one to raise funds. Professionals who lost their jobs had to open small stalls or drive taxis.”
Even those spared the worst of the crisis had their plans wrecked.
When the bank freeze was eventually lifted people who had deposited dollars got back devalued pesos.
“We were lucky in that we didn’t lose our jobs. But we were saving to help our children buy apartments when they left university,” remembers Miguel Ángel Conti. “But the crisis has set our plans back a decade. First they froze our account, then devalued it. Today we are still saving and our children are still [trying] to buy their own homes.”
In the financial chaos that followed default and devaluation plans for weddings, university, and life-saving operations abroad were disrupted.
Families unable to service mortgages in dollars on newly devalued peso salaries lived for years in fear that banks would seize their homes before finally the state stepped in with a subsidy.
The government says deposit holders eventually got their full savings back over time. Most did, even if for many pensioners it was too late.
But some are still waiting, Cerpa among them. “My niece got all her dollars back but all I got back was 9,000 pesos or about $3,000 at that time. Out of my original $24,000. So don’t tell me everyone got their money back.”
For a proud country of immigrants the shock to the national psyche was profound. “Many Argentines in 2002 found themselves having lost their past and unable to see a future,” says economist Félix Peña. “This is very ugly and this is why people were so angry. People felt shame with regard to the country. When a family loses its assets and feel the children have no future it is very, very hard.”
Of course, even in 2002 there was a future for Argentina. The 12 months after the December 2001 default marked the nadir of the Argentine crisis.
In January 2003 the economy finally began to grow again. Poverty started to decline as employment picked up, even if the long-term impact of the crisis is still felt in the economy and society today.
One of those to benefit from the recovery was Soraire, who after years struggling to get by as a casual trader managed to land a regular job in the unlikeliest of places.
Today he works as a manager in the same supermarket that he helped loot in 2001. “I didn’t tell the old owners when they hired me in 2005. But the new boss knows,” he says, smiling at the irony of it all.
TOMORROW: the long-term economic impact of Argentina’s crisis