Millions of Argentines are living this same illusion. They are like passengers on an elevator after the cable snaps, who know something is dangerously wrong, but can’t quite believe it will crash. Four months after defaulting on its national debt, Argentina is in free fall, with a shrinking economy bringing in too few export dollars to offer any hope of paying back its huge debts. The peso has fallen 67 percent, gutting Argentine savings and wages and leaving the banking system insolvent. The major foreign banks that dominate the system appear more likely to abandon Argentina than pour more dollars into the country. And Congress’s rejection of the painful bond-for-cash deal forced the resignation of Economy Minister Jorge Remes Lenicov, who had brought at least some sense of reality to the waffling Duhalde administration. Before the vote, Duhalde had bluntly warned that Argentina “is out of money.”
Can a country actually run out of money? Argentines don’t seem to believe it, but the answer is, in a practical sense, yes. Every nation that has fallen into default or forced devaluation in recent years, from the Asian tigers to Russia, has hit a point where it could no longer borrow on international markets, stalling the economy and government operations. With $12 billion in reserves and $140 billion in debt, Argentina is past that point. In fact, by this practical definition, Argentina is perhaps more desperately “out of money” than Russia or the Asians ever were, because its credibility is more seriously tarnished.
Here’s why: Argentina made bigger promises. It ended an era of turbulence and launched a brief period of growth in the 1990s by guaranteeing a rare level of currency security. It adopted a fixed-exchange-rate system called a currency board that legally obligated the central bank to back pesos with dollars and gold. Alas, the government kept spending without restraint, and by late last year did not have the dollars to back its pesos. In November, when the government forced foreign banks to accept shaky peso bonds in exchange for once valuable dollar bonds, it effectively breached its obligation. “Argentina is nowhere near bottom yet,” says Steve Hanke, a Johns Hopkins University economist who helped design the dollar-peg system. “The government has totally trampled the rule of law and property rights, trashed the banking system, and nobody is able to put anything serious together that even hints at a long-term solution.”
Of course, it’s not quite that black and white. The currency board appealed to Argentines in large part because it allowed them to effectively buy dollars at half price, a deal that tickled their vanity but was too good to last. Accustomed to seeing themselves as the elite of Latin America, it’s difficult for Argentines to accept that they are setting new record lows for disrepute in international markets. The combined effect of the November bond swap and devaluation cost foreign banks in Argentina billions of dollars, and they have now cut off Argentina entirely. But as recently as last June, the banks were still lining up to loan money to Argentina at 16 percent interest, a rate so high, it was a virtual admission that the loans were unpayable. “Everyone participated in this,” says Rafael Ber, a partner at Argentine Research in Buenos Aires. “The only people who can claim they are innocent are living in the shanty towns.”
There Argentina hangs, waiting for the crash. Duhalde reopened the banks for petty-cash deposits late last week and appointed a new Economics minister, Roberto Lavagna. But it’s too late for a soft landing. There have been recent civil disturbances in at least three provinces, where spending cuts demanded by the IMF would hit hardest, costing at least 400,000 jobs. With unemployment at 25 percent, the powerful provincial governors are unlikely to accept those demands.
The defeat of Duhalde’s bond-for-cash deal last week showed that Argentines aren’t willing to lose on their deposits, either. The likely alternative: printing money, which would only make matters worse, possibly triggering hyperinflation. Monthly income for an average family of four is now less than $200. One in two Argentines is living in poverty, and one in five does not have enough to eat. “We are heading for a period of semipermanent crisis,” says local economist Artemio Lopez. “We are deconstructing the social and political structure of a country that for 60 years was not typically Latin American.” Argentines enjoyed a lifestyle and a self-image that was, in many ways, European. When they hit bottom, they may have to give that up.
