Still haunted by legacy of the crash


A widespread lack of economic confidence remains among both Argentinians and foreigners, writes TOM HENNIGANin Buenos Aires

BEFORE ARGENTINA’S crisis, Santiago Dominguez worked with his father making leather saddles and harnesses in this horse-mad country. But then the storm of 2001 hit. As economic activity in the country ground to a halt, his employer was forced to cut his working week to just one or two days. Life was reduced to the basics.

“Food wasn’t a problem but there was nothing left over for anything else,” he recalls.

“You had no money to buy clothes or shoes with. You just had to make do with what you had. Our family didn’t take a holiday for over two years.”

But today he has a full-time job again working as a security guard.

With money in his pocket he says life is “10 times better” a decade on from the crash. After a long, brutal recession that ended in default, devaluation and depression in 2002, Argentina started to grow in January 2003 and has continued to do so ever since at rates usually associated with China, apart from a small pause in 2009 for the global financial crisis.

By declaring history’s biggest ever default in December 2001 and then forcing creditors to take a swingeing haircut on their investment in a restructuring deal in 2005, the government has freed the economy from the vice-like grip of servicing the debt.

Today, Argentina’s debt profile means it spends far less of its gross domestic product servicing the principal than neighbouring Brazil, a darling of the investment community.

With default came devaluation. Though devaluing the currency drastically reduced living standards, it did make Argentinian exports competitive again. It also spurred a reactivation of industrial activity as local companies were sparked back into life by the scramble to replace the imports Argentinians could no longer afford.

Nearly a decade on from default, the country’s trade balance has spent most of the intervening years massively in the black, the central bank’s vaults are bulging with foreign reserves and unemployment has fallen from more than 20 per cent at the height of the crisis to just 7.3 per cent at the end of last year.

A major pillar of this recovery is the global boom in commodity prices. Argentina has benefited hugely from voracious Chinese demand for its soy and the metals it is extracting from the Andes in ever greater quantities.

“The only reason why the Argentinian experience of default and devaluation worked is because exactly at the moment when Argentina defaulted the world turned and commodity prices started to go higher very aggressively,” notes Alberto Bernal, Latin American strategist with Bulltick Capital.

“At that point in time the situation changed. It was fate. If Argentina had defaulted and devalued and commodity prices remained low then it would probably still be in a very tough situation.”

Despite this great turnaround in economic fortunes Argentina is still to fully free itself from the legacy of the crash. A decade after default, the country remains shut out of international capital markets. Despite the eye-catching headline numbers there remains a widespread lack of confidence among both Argentinians and foreigners.

Many locals still remain scarred by the experience of a decade ago.

The crash cost 33-year old Silvina Mongelli her dream of becoming a doctor. She was in first-year medicine when she had to drop out, her family no longer able to afford college fees. Today she runs a clothing stall in a market in greater Buenos Aires and says that thanks to the boom putting more money in people’s pockets she will soon have enough money to buy her first house.

When she does, she will pay for it in cash, handing over bundles of US dollar bills which she is saving up at home. “I might get burgled but the banks robbed people’s savings in 2001,” she says.

“My family was lucky as we got our money out before they froze accounts and my dad has since put his money back into an account. But I think he’s crazy. I’ll never trust the banks again.”

Attitudes such as Silvina’s mean that the country’s financial sector remains puny.

Argentinians know that those who trusted in the banks ahead of 2001 were left poorer after the crash. Those who kept their assets abroad or in hard currency at home ended up better off after the peso’s devaluation.

“After devaluation those who had dollars could buy many things,” says economist Félix Peña. “People and companies with dollars in the parallel economy became much wealthier overnight.”

Today, about two-thirds of Argentinian bank accounts are in short-term deposit accounts.

Local banks are extremely reluctant to lend long-term. Getting a mortgage for a house is the dream of a select few. Credit as a percentage of GDP is negligible. As a result domestic investment lags behind economic growth.

This lack of confidence is also shared by foreigners. Despite growth that tops many of its neighbours, Argentina lags behind them in attracting investors from abroad.

“Within South America, Argentina is the second biggest economy but foreign direct investment is behind smaller economies such as Uruguay, Chile and Colombia. This gives you an idea of the view foreign businessmen have of the country,” says Jaime Krause, head of asset management at Capital Markets Argentina. In part, this ongoing lack of confidence stems from the deal in 2005 that restructured Argentina’s debt. This greatly reduced the burden of servicing it. But the unilateral nature of the restructuring offer in which the government presented bondholders with a take-it-or-leave-it haircut of about 65 per cent on their investment means a quarter of bondholders refused the deal.

This was too many to move the country out of default and allow a return to markets and the government still faces litigation from the holdouts.

Without access to capital markets the government has instead loosened monetary policy and is printing pesos to cover its expenditure and meet debt repayments as they fall due.

They can do so thanks to the inflow of dollars from commodity exports. But an increasingly loose monetary policy, allied to the lack of investment, is producing rising inflation. Most economists put it somewhere above 25 per cent a year, far outstripping economic growth of 9.2 per cent.

The government claims the inflation rate is only 10 per cent and has started fining anyone who publishes numbers saying otherwise while at the same time brokering pay rises for workers of more than 25 per cent.

Higher inflation – which impacts most heavily on the poor – means that despite the boom years and ever increasing government spending on social welfare Argentina is still struggling to bring down stubbornly high levels of poverty. The government claims just 10 per cent of the population is now below the poverty line. But few believe this figure.

Like the rate of inflation, the real number of the poor is much disputed. Independent surveys suggest between 30 and 40 per cent of the population are living in poverty.

Almost a decade on, calculating the long-term impact of the greatest economic crisis in the country’s modern history remains a hotly contested subject in a political system that lags far behind the economy in its efforts to recover from the wreckage visited on it by the crash of 2001.

TOMORROW: The impact of the default on Argentina’s institutions