How Argentina recovers from its economic crises

7th May 2020

By Ignacio Portes

How Argentina recovers from its economic crises

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Economic crises can mean something of a different scale in Argentina. The growth periods can go higher than elsewhere at times, but the downturns often also reach lower.

Take Brazil as a comparison: according to World Bank data, the Latin American giant had recessions as most do, but never saw a year in which the economy shrank by more than 4 percent in contemporary history, a figure that was breached eight times by Argentina in the same period. 2015-2016 was also the first time with two consecutive years of contraction since Brazilian numbers are available, paling next to Argentina’s 1998-2002 recession, while unemployment never reached the peaks of near 20 percent that Buenos Aires has been known for either.

Argentine crises often come with a more traumatic dimension. Their sheer size turns them into milestones for those who went through them, recalling the 2001 corralito, the 1989 hyperinflation, the 1981 credit crunch or the 1975 Rodrigazo as war stories to tell their kids, hopefully readying the coming generation for the next time the ground opens up below.

Up and down, left and right

In their academically popular book on Argentine economic history, “El ciclo de la ilusión y el desencanto”, Pablo Gerchunoff and Lucas Llach speak of cycles in Argentine economic policy in which plans are first seen as smart and successful, but ultimately sink as they show their shortfalls.

In “El Péndulo Argentino”, a 1983 text which still works prophetically today, Marcelo Diamand argues that “popular” and economically heterodox governments take turns with “illustrated” and orthodox administrations in Argentina, but all of them end up failing in their own ways amid a pendulum-like cycle.

“Popular” governments are more nationalist and focus on income distribution and full employment through “social spending, nominal salary hikes, subsidized rates, and price and exchange controls”. These policies often lead to “an euphoric expansion in industry and commerce at first”, but are usually followed by fiscal and commercial worries. Inflation rises, supermarket shelves start looking emptier, the Central Bank runs out of foreign currency reserves and a balance of payments crisis ensues.

At this point, influential people create an “illustrated” alternative, backed by international finance and academia as well as local media and big business. Their response to the balance of payments crisis “emphasizes order, discipline, efficiency, budget equilibrium, savings, investor confidence and the virtues of popular sacrifice”. Policies “favor agricultural exporters, while real salaries drop and monetary circulation is drained” from the system. After moderate recessions and devaluations at first, financial capital comes in and brings a partial recovery in wages and a slowdown in inflation, which is seen as proof of success. But at some point confidence is lost and a stampede ensues, with out of control devaluations, recessions and salary losses.

Though Diamand’s text was written four decades ago, it seems to perfectly describe the transition between the popular Kirchnerite decade and the rise and fall of the business-friendly alternative in Mauricio Macri.

A history of crashes

What Argentina’s different political projects and macro-economic policies have in common is a lack of foresight about the long-term consequences of what they are building.

The price controls and public subsidies of General Perón and Minister Gelbard in 1973 ignored how key products could go missing and deficits would accumulate with time, eventually ending with the shock of the 1975 rodrigazo austerity program.

The 1976-1983 dictatorship’s bet on stimulating credit by touting that the country was now an investor safe haven thanks to the elimination of the left ended with a brutal credit crunch in 1981. The middle-class lost savings as banks closed down, lost homes as mortgages turned unpayable, and an inflationary explosion (the highest up to that date in Argentina) slashed working-class salaries after Central Bank schemes to contain it proved unsustainable.

Raúl Alfonsín’s social-democratic attempt between 1983 and 1989 tried to recover the welfare lost in that era, but again the legacy of debt payments and the enhanced tactic of having the Central Bank issue debt to take liquidity off circulation ended up snowballing and exploding into the 1989 hyperinflation that forced the President to an early resignation.

After decades of currency disasters, President Carlos Menem said Argentina should give up its power over monetary policy and tie the Argentine peso to the US dollar instead. With that decision came a surge of privatizations to balance the budget, so that the country could live with zero money printing. This brought foreign investment and credit, but the new model ended in tears when the over-leveraged private sector found no response to a 4-year recession that ended up breaking the banking system. With little left in its coffers and the Central Bank’s hands tied by the 1-to-1 convertibility, the state had to default on its bonds, seize savings and exit the currency peg in traumatic fashion shortly after the turn of the century.

The Kirchnerite decade was in many ways a backlash against Menem’s 1990s, so the state’s pendulum swung again towards higher spending, intervention and taxation, while the re-negotiated debt and the renewed possibility to print money meant there was more room for a loose fiscal policy. But with little ammunition saved for when the downturn came, the runs against the currency for which the country was once known for eventually returned, and the government had no good response to offer. Spending most Central Bank US dollar reserves, banning foreign currency purchases, trying price controls again and even faking inflation numbers could not stop the process.

As a new crisis loomed, the middle class overwhelmingly opted for a more market-friendly alternative in Mauricio Macri in 2015. But just like Diamand described in 1983, the initial boom in loans and financial inflows reversed in 2018 and led to an even bigger crisis.

When the levee breaks

Governments have a tendency to deny that the country is bankrupt. “Liquidity issues”, “short-term financing needs”, “stabilization plans”, “temporary shocks” and even “attempts to destabilize the government” are often argued by leaders, while policymakers scramble to contain job losses, inflationary spirals, debt defaults or currency devaluations with all the tricks in the book.

Eventually, however, the levees break and no words or containment measures can hide the problem anymore. 1989 and 2001 were such moments. And the country is now entering another time like those, which could prove even bigger.

Problems have only accumulated from the late days of the Kirchners, through the Macri era and now under Fernández. While media headlines and presidential speeches are focused on COVID-19, barely anyone is talking about what could lie ahead economically a year or two from now.

Defaults and hyperinflations

Going by previous crises, a couple of things are likely.

One is the liquidation of debts and assets. Argentine bonds and peso bills are basically tradable IOUs, separated by the fact that bonds yield interest while bills don’t. These debts have already seen their value start to drop like stones, but sooner or later a larger default and inflationary explosion will ensue. The same is true of assets linked to Argentina: stocks (already down 85 percent since 2018), savings (whose real value is also plunging) or real estate (which hardly anyone is buying) are liquidated to cover the outstanding debts, be them public or private.

Even if a temporary agreement between Argentina and debt holders is somehow found before this month’s default deadline, or if price and exchange controls continue to hold the official value of the peso for some time, the process will only end when these debts are dissolved through inflation, crammed down or paid with assets that remain, to the point that the country is no longer insolvent. A similar thing usually ends up happening with fiscal deficits, and with any taxes that went too high when the state was desperate for more funds: they are ultimately dissolved through inflation.

With a clean accounting slate, the country’s economy can return to growth and job creation at rates that surprise most. That was the case after the 1989 hyperinflation and the 2001 defaults, following which the country saw multiple years of close two-digits yearly GDP growth.

The cost of coming out

But the other thing that’s also very likely is that this process will come at a massive cost for almost everyone involved.

The hyperinflations of 1989 and 1990 put half of Buenos Aires under the poverty line, and those who lived through them still recall stories of lootings and fights for food in the streets. The 2001 financial crisis was solved through a bail in of banks, a devaluation of the peso from 1 to 4 per dollar, and one of the largest defaults in history. Investors were burned, depositors lost much of their life savings, and Argentines went through the worst recession and unemployment figures in the country’s history.

Only the very few who saw the long term economic weaknesses that policymakers missed or denied and managed to run through the door early escaped those crises relatively unscathed. And for the average Argentine family that was never even a possibility: living and working there made the punch to the face almost unavoidable. The discussion into how all these losses will be distributed will inevitably have to factor this in its terms, but even the most generous distributive approach will likely be insufficient for many.

So although there’s light at the end of Argentina’s tunnel, coming out the other side will require another test of strength and endurance, individual and collective, for everyone involved. Hopefully, this time the recovery will be built on grounds solid enough to avoid a new future repeat.

Ignacio Portes

Ignacio Portes is The Essential's General Editor. Former Economy editor at the Buenos Aires Herald, he has also written for publications such as Naked Capitalism, NSFWCorp and Revista Debate.