Cry All You Want
We recall a meeting, back in the ’90s, with Mr. Carlos Menem.
“Can investors rely on Argentina’s commitment to keep the dollar and the peso linked together?” we asked.
“Absolutely,” replied Argentina’s president. “We would never give up the peso-dollar link. It is too important to our economy. Without it foreign investors would leave and the economy would collapse.”
Five years later, Argentina cut the peso loose from the dollar. Foreign investors fled and the economy collapsed.
What lesson can you draw from this narrow set of facts? If you say, ‘politicians can’t be trusted,’ you are merely stating an obvious, universal truth, like ‘public toilets stink.’ But do they stink more on the pampas than, say, in London or New York? That is the question before us.
We begin by posing other leading questions: can investors depend on the money custodians north of the Rio Grande more than they could depend on those south of the Rio Plata? Why do people do things they oughtn’t do – because they are stupid or because they are just bad?
Today, Argentina is a mess. But it is an adulterated mess. The restaurants in Buenos Aires are still full. The beef is tasty. The women are pretty. The weather is nice. But so distrustful of Argentina’s public finances are investors that you could earn as much as 70% yield on a peso bond – the implied yield at today’s heavily discounted prices. If everything goes according to plan, you will get your money. But the 70% yield is a measure of how often things don’t go according to the plan. Investors here are used it. It is as if they got on a flight to Sao Paulo and ended up in Cordova or Brisbane. Or they turned on the hot water and got molasses.
It is these adulterations that make an investor’s lot so treacherous. Argentina’s main source of revenue is agriculture. Farmers are blessed by nature and cursed by politics. Nature gives them the richest, flattest, best-watered dirt in the world. With these advantages under their feet, a fair sun overhead, and a hugely expanding population around the world, agriculture on the pampas should be as easy as rolling tourists in Buenos Aires or selling stolen autos in the ghetto. Instead, the farmers go broke. Why? Math…and popular democracy. For every lonely hick on the pampas, there are 10 voters in the big city eager for other peoples’ money. That’s why farmers pay 40% export tax on their products to the feds in Buenos Aires and as much as 30% more to their local governments. By the time the tax collectors are finished with them, they are out of business.
But even at this level of public larceny, the feds are still faced with a crisis. The country doesn’t have the problems of North America or England. It was spared the credit crunch by its own incompetence and the collective misjudgment of lenders all over the world. Instead of giving credit to people with little of it, they lent to people with too much. The problem here is not the credit crunch, it is a cash crunch. Local economists say the trouble will begin in late June when the government won’t be able to pay salaries. Then, the country may enter another crisis – similar to what it went through in the period of 1999 through 2002. In anticipation, the ruling husband and wife team, the Kirchners, have pushed the elections forward 4 months, hoping to be re-elected before the voters catch on.
When a big guy in a dark alley says, “I don’t want to hurt you…” it is time to run. But the Argentine parliament offered a similar assurance to citizens in 2001. A law was passed guaranteeing that bank deposits would be protected.
A few days later, the bankers revealed that they lacked the funds necessary to keep up with depositors’ withdrawals. Meanwhile, the government needed to refinance its debt…but investors, growing wary, demanded higher and higher rates. In the end, depositors and lenders were hurt after all. The government froze bank accounts and defaulted on its foreign debt. By the time the accounts thawed out, the peso had been cut loose from the dollar and both lenders and savers had lost about two-thirds of their money.
There are times, we conclude, when despite the best of intentions, people do naughty things. Carlos Menem and Ferdnando De la Rua are probably no dumber or badder than Barack Obama and Gordon Brown. Both might have preferred not to freeze accounts or to devalue the peso. Likewise, Barack Obama and Gordon Brown might rather keep their currencies strong…reduce their fiscal deficits, honor their nations’ commitments at home and abroad, and join the community of saints. Maybe they will succeed in these things. But what trapped Menem and De La Rua was the relentless logic of debt and popular democracy. Mr. Menem fixed the peso by gluing it to the dollar. But there were other things that needed glue too. The urban voters, for example. They still needed their fixes of bread and circuses. And those cost money. Mr. De la Rua’s deficits ran to 5% of GDP. The weight of them finally came down on the gauchos’ necks like a guillotine. But 5% seems like a problem from another era. In France, the fiscal deficit for 2009 is expected to be over 8%. In Britain, it is nearly 10%. And in America, the feds’ excess spending will equal 13% of GDP.
As far as we know, Mr. Obama speaks no Spanish. Whatever mischief is forced upon him, it will have to be declared in English.
Enjoy your weekend,
The Daily Reckoning