A credit boom that went bust
By Ignacio Portes
Herald Staff
Thursday, March 24, 2016
One of the longest-lasting legacies of the military dictatorship’s economic policy was a massive rise in Argentina’s foreign debt, part of which the country is still struggling to pay off following multiple crises, restructurings and defaults.
Although much of that debt was initially issued by the private sector, the military government nationalized it in 1982. By the time the dictatorship fell, foreign debt had risen by roughly 400 percent according to some estimates.
The story of foreign indebtedness can be traced back to the Organization of Petroleum Exporting Countries (OPEC)’s decision to limit oil production levels in 1973 in order to raise the price of crude, creating massive windfalls in producing countries which then started to look for places to reinvest their profits.
That money was known as “petrodollars,” and it poured into Latin American countries just as dictatorships that opposed controls on capital flows took power across the region.
Massive capital inflows came into Argentina at cheap interest rates, and a handful of government policies ensured those loans remained profitable at the expense of the state’s coffers even if hardly any of it was used for innovative, productive projects.
‘La tablita’
The wave of private indebtedness was highly speculative, a fact which was encouraged by the Junta’s policies.
The Economy Ministry created a scheme of scheduled mini-devaluations, known as “La Tablita de Martínez de Hoz” — named after the ministry’s head José Alfredo Martínez de Hoz — which allowed investors that had garnered dollars from abroad to sell them on at a profit the day after each depreciation, with no risk involved.
In between each mini-devaluation, money could be kept in fixed-term peso deposits that were also hugely profitable, with the government offering high interest rates in a bid to contain inflation. When each new devaluation approached again, the original capital invested in pesos, plus the extra interest rates, were turned into dollars and multiplied again, even if that money financed no productive investment in the meantime.
The cycle became known as the “bicicleta financiera,” or “financial bicycle”, due to its circular nature. But though it was a great business for many individual investors, for the economy as a whole the bike was stationary at best, producing little growth and a strong recession by the time Martínez de Hoz was forced to quit.
Bailouts
In the end, the profits were coming out of the coffers of the country’s Central Bank. The monetary authority had even decided that if a bank went bust or an investing strategy had failed, it would bail out those who could stood to lose money.
With those guarantees in mind, credit-fuelled financial bets kept growing with little public scrutiny over their quality, and in 1982 the Central Bank ended up nationalizing all the debt that private agents had taken on while playing system’s speculative game. The reasoning for the bailout was that a collapse of the banking system would have been far worse.
Although several corruption-laden schemes also contributed to the growth of public debt, with military officers in charge of public companies suspected of siphoning off money borrowed from abroad into their pockets, most of the massive growth in debt under the dictatorship can be explained by public bailouts of private businesses.
The nature of the bailouts was highly questionable, with several economic historians arguing that debt nationalization had so little supervision that the Central Bank took all companies’ claims at face value, without questioning if the debt the state was taking off their backs was even real.
Legitimacy
When the dictatorship ended, inquiries over the legitimacy of the debt — which proved to be hugely troubling to the new democratically-elected government — became inevitable.
Raúl Alfonsín’s first Economy minister, Bernardo Grinspun, initially tried to push for a continent-wide effort to discuss whether those loans taken on by unelected regimes should be paid off by the people, but the effort proved too grand an idea amid more immediate economic concerns and the rejection of other governments. Such an idea was soon forgotten.
A similar attempt today is seen as nigh on impossible, as several democratic governments have accepted the terms they inherited, have taken on more loans, have renegotiated agreements and more.
Yet the scepticism of Argentines about foreign debt, its usefulness and even its legality can be much more easily understood — especially after looking at the way in which much of it began.
@ignacioportes