by Patrick Gillespie
By the time it finally opened two decades later, the Palace of Running Water was a symbol of spent ambition. With its imported European terracotta tiles and stained glass windows, the waterworks illustrated the excesses that had wrecked the Argentine economy and almost brought down the global financial system.
The story of what came to be known as the Barings Crisis of 1890 is studied by economic historians as the biggest sovereign debt meltdown of the century. But for Argentines, the fallout reverberates outside the pages of textbooks; for the same elements of boom and egregious bust lie at the root of the country’s economic and political upheaval to the present day.
Argentina has spent 33% of the time since 1950 in recession, according to a World Bank report released in May. In global terms, that is second only to the Democratic Republic of Congo, which endured two major wars, three military coups and numerous regional conflicts over the same period. By comparison, Argentina’s larger neighbor Brazil has seen recession for 12% of that time.
Argentina’s perennial volatility is once more front and center as President Mauricio Macri bids for re-election in the wake of a currency rout and a massive $56 billion bailout from the International Monetary Fund. With presidential primaries due on Aug. 11, the vote is shaping up to be a dramatic contest over the country’s economic future.
While polls suggest the race is too close to call, investors clearly favor Macri to enact the reforms they see as needed to steer the economy out of recession. They have concerns that Macri’s main opponent, Alberto Fernandez, wouldn’t be the moderate president he contends, fears magnified by his choice of running mate, the populist former president, Cristina Fernandez de Kirchner. For his part, Fernandez, 60, lambasts Macri’s economic stewardship and says he’s happy to not be “Wall Street’s candidate.”
Fernandez has Julian Diaz’s vote. Diaz, 37, the owner of three restaurants in Buenos Aires, says he’s backing “Fernandez-Fernandez,” not so much out of political conviction as what he sees as economic and social necessity.
Custom is down and Diaz says inflation means his prices have risen “exponentially”: a cafe con leche costs 80 pesos ($1.80); a year ago it was 55 pesos. He’s reduced the number of staff on the payroll through attrition and put on hold plans to expand, waiting for the election outcome.
“We can’t think about developing the country with poverty rising, violence rising, where the social gap is widening, where there’s no consumer spending,” Diaz said at his Los Galgos restaurant three blocks from the palace. Argentina’s crisis is cyclical, making it “unbearable,” he said. “There’s always another crisis coming.”
The turbulence can be traced back to the last decade of the 19th century. At the time, Argentina was cashing in on farming of its abundant plains, the Pampas, and a wave of European migrants relayed home the opportunities to be had. Opulent mansions, Parisian boulevards and Utopian plazas were sprouting up in the capital. As work was about to begin on the Palace of Running Water, plans were drawn up for the Teatro Colon, still one of the world’s best opera houses.
English bank Baring Brothers and Co. was only too happy to join the rush, and bet big on Argentina. But something had to give, and as the economy slowed in 1889, Argentines sniffed a crisis and rapidly exchanged their pesos for gold, causing the currency to tumble. Drought, a failed coup, rising inflation and strikes drove foreign investors away, and by early 1890 government leaders couldn’t stop the tailspin.
The tipping point came when Barings failed to float a bond in the London market for the Buenos Aires Water Supply and Drainage Company—contracted to build the Palace of Running Water. Soon after, Barings notified the Bank of England that it was on the verge of collapse due to its exposure in Argentina, and it had to be bailed out. The following year, 1891, Argentina’s economy shrank 11%.
Barings “simply lent too much money, they went too far,” said Eugene White, a professor at Rutgers University and author on the crisis. “The party got too raucous—they didn’t take the punch bowl away.”
Many of the elements of the Barings Crisis—mounting debt, a currency rout, bailout and even drought—have echoes in Argentina’s current recession. Its economic woes follow a well-worn path: It spends more than it earns, relying on dollars from grain sales and forcing the government to rack up debts to cover the purchase of imports, and once investors sour on fronting more money, a vicious domino effect ends in misery. Little wonder it’s had 61 central bank chiefs in the 84 years of the institution’s existence.
Yet that cyclical nature of Argentine life means some voters are willing to give Macri more time. Natalia Perrotta, 32, a doctor at a public hospital, has cut back on spending and vacations, but she doesn’t blame the president for her belt-tightening. “In Argentina we’ve always had ups and downs in the economy,” she said. “And because of that I don’t consider what’s happening now as new.”
The warning signs are again flashing red: The IMF sees a 1.3% contraction for 2019, with inflation ending the year at some 40%, and “significant downside risks” to its outlook, notably political uncertainty.
The upshot is that many Argentines have little faith in politics, policy or the peso. The proof? They have some $350 billion in savings stashed abroad, more than at home, according to Miguel Kiguel, head of consulting firm EconViews and author of a book on Argentina’s economic crises.
“The lack of confidence comes from the fact that every few years there’s a major devaluation or high inflation, and the way to protect yourself is to go into dollars,” said Kiguel, a former chief of advisers in the Economy Ministry in the 1990s.
When governments change, the policy whiplash is often dramatic. Argentina went from seven presidencies in the early 1970s to a bloody, right-wing military dictatorship that ruled for almost eight years until 1983 and sent the country into a war with the U.K. Then came a pro-business government in the 1990s, populist administrations from 2003 to 2015, and finally Macri’s market-friendly presidency.
Macri, 60, a former civil engineer, put Argentina’s global comeback at the heart of his program after his predecessor Kirchner presided over currency and capital controls, tampered with official statistics and refused to pay back debt holders. But lately Macri’s been fighting populism with populism, freezing prices on food items, mobile phone bills, electricity, gas and public transport. Fernandez, an adherent of the populist Peronist movement founded in 1946 by then-President Juan Peron and his wife, Eva, accuses Macri of mismanagement, and advocates for generous welfare spending. The first round vote is on Oct. 27, with a runoff planned for the end of November if necessary.
Gerardo della Paolera, 60, an economic historian who co-wrote a book about the Barings Crisis, believes more turmoil is inevitable regardless of who wins: Argentina will need to restructure its debt once the IMF cash dries up in 2021, he says. Like many Argentines, he’s trying to prepare his family, knowing how this story ends. His adult children love Argentina and don’t want to leave, but he doesn’t see a future for them in their own country. “I push them to go abroad,” he said.
Diaz, the restaurant owner, is left to lament his country’s lost opportunity.
“Always when I pass the Palace or Teatro Colon, it symbolizes to me what Argentina could have been,” he said, sipping a coffee. Argentina has “so many wonderful things, but at the same time it has instability and a lack of predictability,” he said. “Here, we don’t even know what’s going to happen tomorrow.”