Reasons for Argentina's repeated debt crisis
Due to the strong US dollar cycle, rising US interest rates and the spread of trade protectionist policies, emerging market currencies have been under pressure. The collapse of the Turkish lira in early August further caused panic in emerging currency markets, and the pressure of the Argentine peso to depreciate continued to increase. As early as May, the Argentine government had asked the International Monetary Fund for help and finally reached a $50 billion flexible loan agreement, of which 15 billion had been issued in June.
The Argentine central bank’s “rescue measures” were difficult to achieve, and the president’s reassurance turned into a flash crash. From May to August, the Central Bank of Argentina raised the benchmark interest rate from 27.25% to 60%, and promised to maintain it until the end of the year. In addition, Argentina has already dumped its foreign exchange reserves when necessary. On August 30, it sold 330 million U.S. dollars in foreign exchange reserves. Last week, it sold more than 1 billion U.S. dollars. Since the beginning of this year, Argentina's central bank has sold more than 13 billion U.S. dollars in foreign exchange. Currently, Argentina’s foreign exchange reserves have been sold. It is already less than 53 billion U.S. dollars (IMF 15 billion loans were received in June). The Argentine central bank's rescue measures have not been able to reverse the decline of the Argentine peso, which has been in a downward trend in general. On August 29, the President of Argentina, in order to appease the market and avoid excessive consumption of foreign exchange, promised through a televised speech that he would survive the crisis smoothly and smoothly, but hoped that the International Monetary Fund would speed up the provision of follow-up financial support. With the current low level of international investors' risk appetite for emerging market assets, any unfavorable news at the level of confidence and fundamentals may cause their own vulnerability to be infinitely magnified. Therefore, this information was interpreted by the market as a distress signal, thinking that the speech reflects that Argentina is facing a new round of debt crisis. If the International Monetary Fund does not quickly support it, Argentina may not be able to achieve debt refinancing in the future. The first appearance of the crisis in Argentina has aroused widespread concern from all walks of life in the market.
This is not the first time that Argentina's economic fragility and poor currency performance have occurred. In history, Argentina experienced two full-scale debt crises in 1982 and 2001. Analyzing its characteristics, we mainly attribute it to the interaction of three internal key factors, namely the prevalence of populism, industrial structure defects, and political corruption that have led to poor sovereign credit records. First, from a political perspective, the national governance system of the entire Latin American region has fallen into a poor populist trap, and Argentina is one of the typical representatives. The masses of people go on strike at every turn, are only interested in the current short-term social welfare, and do not support economic policies that focus on long-term economic development. Second, the superior geographical and climatic environment and mineral resource endowments make the life of Argentine people comfortable, and the people are not interested in the development of the country's industrial system, which makes the Argentine economy vulnerable to climatic factors and changes in external demand. Third, the historical lessons of domestic political corruption and the repeated "abandon the ship and flee" when senior government officials are facing crises have made the Argentine people highly distrustful of their own government and currency, further exacerbating their populist tendencies. Under the superposition of the above three factors, the Argentine economy has been in a fragile state for a long time, and economic growth is difficult to sustain.
(1) The first factor is populism. Its origin can be traced back to the era of the Peron government. In 1943 (While in World War II), the Argentine government took place in a military coup. At that time, Minister of Labor Peron succeeded in taking office by relying on the power of workers. By mediating labor conflicts, raising wages, and improving workers' welfare conditions, Peron quickly gained further support from workers, but this also made the Peron government begin to face the problem of over-reliance on the power of workers. In order to meet the requirements of the middle class and the working class, the Peron government has implemented deficit spending while abandoning layoffs in industries in various countries. Enterprises and governments can only transfer the swelling deficit to the next year, and debt management is out of control. Since then, the labor forces within Argentina have become accustomed to using mass strikes to threaten the government. The populist welfare policy initiated by the Peron government has deeply kidnapped Argentina, and the ever-increasing public expenditure has increased the fiscal deficit and promoted inflation. In order to save the economy and curb inflation, the Peron government implemented a policy of freezing workers’ wages to create deflation, but this also led to nationwide strikes and turmoil. Peron was overthrown and fled abroad in 1955.
Argentine politics abducted by populism is very unstable. As long as there is an economic recession and a decline in welfare, populist groups will start large-scale strikes. The domestic political situation under the surging populist trend is very unstable, and political changes will occur. In the past half-century, there have been frequent coups and government changes in Argentina as many as 29 times. Military governments and literati governments with left-wing, center-wing, and right-wing tendencies have all appeared on stage. For example, in just over a year before and after the first debt crisis, Argentina replaced 5 presidents (including interim presidents) and 7 economic ministers. After the outbreak of the second Argentine debt crisis, there was even a record of replacing five presidents in 11 days. The chaotic politics further exacerbated the fermentation of the economic crisis. So far, almost every force came to power because of the economic collapse under the previous government. After the new government came to power, it generally adopted strong repressive policies. Such suppression has a certain positive effect on stabilizing the economy, but domestic populism, which only focuses on short-term welfare, makes it extremely difficult for the government to further implement policies that contribute to the long-term sustainable development of the country’s economy.
Populist politics has affected macroeconomic policies, and unchecked social welfare spending has led to problems such as regular fiscal deficits, heavy external debt burdens, rising inflation, and long-term economic growth. In 1955, after the Peron government was overthrown, the new Argentine military government and the subsequent democratically elected government could only maintain the high welfare policy of the previous Peron government in order to appease the mood of populist groups and chose to continue printing money and borrowing foreign debts. . Until the eve of the 1982 debt crisis, Argentina's total foreign debt had reached 51.96% of its GDP. Subsequently, due to the appreciation of the U.S. dollar and the increase in U.S. benchmark interest rates, Argentina broke out in a sovereign debt crisis.
After the outbreak of the debt crisis, Argentina faced a more severe economic recession and continued inflation, as shown in Figures 3 and 4. In 1989, the new Menem government made a 180-degree turn in its macroeconomic policy, moving from nationalization to nationalization. Large-scale privatization, at the same time, in order to solve inflation, the government implemented a peg to the US dollar exchange rate system. The progress of privatization has allowed the Argentine government to obtain a large amount of fiscal revenue, but because these revenues are only one-off and most of them are used for non-productive purposes such as safeguarding social public expenditures, they have not been converted into productive investment. Therefore, the public The financial situation has not improved significantly as a result.
The side effects of privatization began to show over time. The first is the large-scale layoffs after the corporate restructuring. The unemployment rate in Argentina continues to be high, rising from 6.7% in 1992 and approaching 20% on the eve of the second debt crisis. With the completion of the privatization of most state-owned enterprises, the government's fiscal revenue began to decrease, and the government once again fell into a serious fiscal deficit. Under the pegged exchange rate system, the government can no longer solve the deficit problem by issuing currency as in the past, and has to borrow a lot of external debt to maintain expenditure. The total external debt has risen from US$68.6 billion in 1992 to US$150 billion in 2001, as shown in Figure 5. The latter is equivalent to 5.42 times of Argentina’s export income that year, and its share of GDP has also risen from 30% to 56%. What's worse than borrowing is that these borrowings are basically used to maintain the country's exchange rate system, but are basically invested in long-term inflationary social and public welfare expenditures, and even basic fiscal austerity policies cannot be implemented. Coupled with the IMF's continuous erroneous measures, Argentina's debt crisis broke out again.
To this day, populism is still prevalent in Argentina, and the populism formed by the huge labor organization has become a major burden for Argentina’s economic reforms. Especially before and after the election, it is difficult for a party that has not given sufficient social welfare commitments to win the election. According to data from the International Labor Organization, Argentina is still the country with the highest number of strikes in the world. In 2017, reports on labor and social conflicts showed that there were 778 strikes in Argentina, 53% of which were demonstrations. The reason for the discontinuation is shown in Figure 6. It can be seen that most of them do not care about the long-term effects of politics and policies, but only value whether their short-term interests are satisfied. On June 25, 2018, the Argentine National Labor Union (CGT) and other large and small unions (currently there are more than 500 protest organizations nationwide in Argentina) held a 24-hour national strike, banks, transportation, schools, The transportation system is almost paralyzed, and most office workers cannot get to work normally because of lack of transportation. According to estimates, the strike on this day alone caused Argentina's economic losses of up to 1 billion U.S. dollars. The request of the CGT board of directors is for the Macri government to completely change the current economic austerity policy and reach an agreement with the union to increase wages.
(2) The second factor is the economic structure. The Argentine economy has been caught in the "resource curse" for a long time, forming a primary product export-oriented development model. Argentina ranks eighth in the world in terms of land area and has a unique advantage in natural resources. Benefiting from the Pampas grassland (a large area of excellent natural pastures in the world), Argentina's animal husbandry has always been very developed. At the end of the 19th century, the European market's demand for agricultural products increased sharply. Argentina seized this opportunity and used advances in shipping technology and freezing technology to export large amounts of agricultural products to Europe. By the beginning of the 20th century, Argentina was known as the "world's granary and meat storehouse" for exporting a large amount of grain and beef, and its capital Buenos Aires was regarded as the "Paris of South America". In 1900, Argentina’s per capita gross domestic product (GDP) was half that of the United States, slightly higher than Finland and Norway, and close to Italy and Sweden. In 1913, Argentina’s per capita income was US$3,797, higher than France’s US$3,485 and Germany’s US$3648. Argentina became a wealthy country only by exporting animal and plant products (raw materials and primary processing). According to data from the National Bureau of Statistics of Argentina, Argentina currently uses 27.2 million hectares of arable land and perennial crops, accounting for 9.8% of the country's land area. The per capita arable land area is 0.77 hectares, which is among the highest in the world. The long-term pasture area is 142.1 million hectares, accounting for 51.2% of the country's land area. The irrigated area is 1.69 million hectares, accounting for 6.8% of the arable land area. The agricultural population is 4,287,800, accounting for 10.7% of the total population (2010).
In addition, Argentina also has relatively rich mineral resources, including oil, natural gas, copper, gold, uranium, lead, zinc, borate, clay, etc., most of which are located near the Andes on the border with Chile and Bolivia. However, the level of mineral development is low, and it is estimated that about 75% of the resources have not yet been explored and developed. Proved reserves: 394 million cubic meters of oil, 332.511 billion cubic meters of natural gas, 22.71 trillion cubic meters of recoverable shale gas, 27 billion barrels of recoverable shale oil, 825 million tons of coal, 300 million tons of iron, and uranium 7080 tons.
Thanks to the high-quality agricultural environment and natural resource advantages, the life of the Argentine people is quite comfortable, so they are not active in industrial development. Until today, Argentina's export trade is still dominated by animal and plant products (raw materials and primary processing) and ore raw materials, as shown in Figure 7. The extreme dependence on the export of primary products made the Argentine economy vulnerable to the external environment (for example, due to the blockade of air routes after the outbreak of the First World War, Argentina’s primary product export-oriented development model suffered a serious setback, followed by the Great Depression of 1929. Argentina’s agricultural and animal husbandry exports have been hit harder.) As well as changes in its own climate conditions (such as the drought at the beginning of the year, the soybean production in 2017/2018 was reduced by 20 million tons) and so on.
Due to the slow start of local industries and the relatively slow development, the Argentine government implemented an import substitution model in order to protect the domestic "naive industries." Argentina's import substitution industrialization has certain shortcomings, especially when the government is strongly promoting trade protection policies. Due to the implementation of the import substitution model, the high trade barriers that have been erected have caused the country's "infant industries" (including state-owned enterprises and private enterprises) to face an environment where there is basically no external competition, and the cost of protection is high. For example, because the products of the enterprise are mainly for the domestic market, the "infant industry" does not have to do everything possible to increase labor productivity in order to participate in international competition, nor does it have to step up the research and development of core technologies in order to avoid elimination. As a result, the economic benefits of enterprises have grown slowly, and the overall industry has not developed well. Local industries cannot meet the needs of the Argentine domestic market, and they need to consume foreign exchange to import a large amount of finished goods every month, as shown in Figure 8. At present, finished products (sections 5-8 of the STTC, including chemicals, basic finished products, machinery and transportation products, and finished products mixed with equipment) account for 84% of Argentina's total imports, ranking fourth in the world. And due to tariff issues, the prices of most cars, chemical products and electronic products in Argentina are several times higher than those in the international market. In 2017, the IntegraGo consulting agency collected and compared the prices of more than 1,200 different products in 14 product catalogs in 43 stores in 7 countries and found that the average price of various electronic products in Argentina is twice the average price in the United States, compared with the average price in Chile. The price of similar electronic products is about 30% to 90% higher than that of Mexico, which is the lowest price of electronic products in Latin America, 78% higher.
(3) The third factor is poor sovereign credit history. For domestic and foreign investors, Argentina is a well-known "old man" among sovereign nations. Since Argentina declared its independence more than 200 years ago, there have been 8 defaults on foreign debt, and about 5 defaults on domestic debt. The most recent incident of Argentine government debt default occurred in 2014. On July 30, 2014, the Argentine government announced that it would no longer repay US$20 billion worth of government debt. Prior to this, the Argentine government had failed to pay approximately US$539 million in interest on time. The holders of these bonds are mainly hedge funds (such as Bracebridge Capital, NML Capital, etc.). After the Argentine government announced its breach of contract, its creditors initiated legal proceedings to sue the Argentine government. The U.S. court subsequently frozen the Argentine debt service account and did not allow it to issue debt again.
It was not until 2016 that the Macri government came to power and reached an agreement with these funds (called the *** fund by former President Christina), and Argentina agreed to compensate the plaintiff for 75% of the amount claimed. In the end, these fund companies received substantial returns. Among them, Bracebridge Capital will receive compensation of US$950 million, while the initial investment capital that year was only US$120 million-a yield rate of 800%. Although the benefits are amazing, in fact they have been playing games with the Argentine government for up to 15 years. If it weren’t for the Macri government’s coming to power, the stalemate might continue. Therefore, this risk is only borne by the “*** fund”, and it is difficult for ordinary investors. (*** Fund took advantage of the debt crisis in 2001 to snap up a large amount of Argentine national debt at low prices. ).
government
Officials and bankers also have poor credit records. In previous debt crises and capital flight, high-ranking officials often "abandon the ship and flee first", reacted most quickly, and prepared the most in advance.
Before the debt crisis broke out in 2001, some members of the government cabinet, including Economy Minister Avalo, were suspected of starting capital flight with foreign banks and wanted to transfer their property first.
According to a joint investigation by the Argentine court and parliament, the scale of capital flight before and after the debt crisis in 2001 reached more than 30 billion U.S. dollars, of which 20 billion occurred during the period when the government was preparing financial supervision, and more than 10 billion occurred after the implementation of financial supervision policies. The investigation revealed that there was a whistleblower within the government and internal and external collusion to assist in capital flight. The court later approved the arrest of a number of cabinet members and bank executives.
In August 2017, the Argentine National Daily (lanacion, Argentina’s second-selling newspaper) published an article showing that 43% of the personal assets of Macri’s cabinet ministers and other important officials are located abroad, and that these cabinet members have 17 years of experience. The amount of declared overseas assets has increased by about 50% compared to the same period in 2016.
Then there is the national currency that lacks credit-the Argentine peso. Since history, the currency of Argentina has been called the peso (Peso), which is derived from the Spanish peso silver coin like the US dollar. At first, it had a 1:1 relationship with the US dollar.
Following the irresponsible monetary policy of various Argentine governments after the war, by March 1967, the exchange rate of the U.S. dollar to the peso had risen to 1:350. In 1970, Argentina decided to issue a new peso to replace the peso, with 1: Recycle old pesos at a rate of 100. Then in 1983, the currency collapsed even more severely, and the military government finally decided to issue new new pesos and recycle the new pesos at a ratio of 1:10000. However, the currency was still devalued by a plunge. Then in 1985, the democratically elected government decided to abolish the new peso, issue a new currency Ostra (actually the peso was changed to another name), and recycle the new peso at a ratio of 1:1000. peso. Finally, in 1992, the Afghan government announced the release of new new pesos, with the recovery of Ostra at a ratio of 1:10000. In just half a century, the Argentine currency completely collapsed four times.
Uncontrolled inflation has also destroyed the domestic people's credit foundation for domestic currency. Since 2010, the annual inflation rate has been above double digits, and may reach more than 30% in 2018, as shown in Figure 9. At present, the Argentine people have begun to lose their basic judgment on the price of peso-denominated commodities in their daily consumption.
The dollar has long become the belief of the people in Argentina. Argentines basically have foreign dollar accounts. According to statistics from the U.S. Treasury Department in 2012, Argentina’s 40 million people hold about 1,500 U.S. dollars per capita, which is the country with the most U.S. dollars per capita in the world except for the United States. In comparison, , Brazil’s neighboring country is only $6 per capita.
"From a cultural point of view, Argentina is already a country highly dependent on the US dollar." Former Argentine President Cristina once publicly admitted. It can be said that Argentines have a deep-rooted idea about the U.S. dollar throughout their lives. They can only use U.S. dollars for savings and large transactions. The peso is only the second currency used for daily expenses. They have been instilled by their elders throughout their growth. An idea.
From the government to the currency, poor historical credit records make domestic and foreign investors alike, and it is easy to trigger a nationwide capital flight.
Outlook for the peso crisis
Argentina is still in a strange circle of history. First of all, it is difficult to cut public welfare and fiscal expenditures continue to expand. As shown in Figure 10, government fiscal expenditures currently account for 40% of GDP, and there are still 13 months before the general election. The Macri government seems to be less and less likely to choose to forcibly reduce public welfare expenditures. At the same time, Argentina's current account balance deficit is also increasing, as shown in Figure 11. It has reached 30 billion U.S. dollars in 2017, more than double the 14.6 billion in 2016.
Foreign debts continue to increase, the characteristics of borrowing new and repaying the old are obvious, and foreign exchange reserves cannot fully cover even short-term foreign debts. As shown in Figures 12 and 13, Argentina's short-term foreign debt has reached more than US$85 billion, while its foreign exchange reserves are less than US$60 billion. According to data released by the National Bureau of Statistics of Argentina (Indec), Argentina's foreign debt increased by nearly US$52 billion in 2017, an average of US$143 million per day. The main reason is the debt financing needs of the government and the central bank, of which 61% of the debt corresponds to the area of administrative expenditure. During his visit to Moscow in January 2018, Macri also admitted personally in interviews with the media, "Now we live on foreign debt."
The current external international environment continues to put pressure on international currencies in emerging markets. The continued strength of the U.S. dollar (see Figure 14) and the Fed’s expectation that it will raise interest rates twice during the year have caused the Argentine currency to continue to depreciate, and the pressure on foreign debt repayment has increased. Therefore, under internal and external difficulties, it is not difficult for President Macri to openly ask the IMF for assistance to speed up the issuance of follow-up loans.
The current depreciation of the Argentine peso is temporarily narrowed due to the statement of the IMF president (Lagarde said that it will reassess the installment arrangement of the financial rescue plan), but the overall situation is still in a downward trend, and the Argentine peso is still under pressure in the short term. In addition, the IMF abandoned Argentina before the debt crisis in 2001. This time there is still the possibility of tearing up its commitments. Therefore, in the medium term, Argentina’s debt default risk is still high. The main concern of all walks of life is when the crisis will erupt. , And what event was triggered.