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Aug 1, 2019
Politics I Argentina Can’t Escape Its Economic Curse
by Patrick Gillespie
9-11 minutes
When it was commissioned in the 1870s, the
Renaissance-style building chosen to house a water treatment plant
in Buenos Aires was meant to project Argentina’s emergence on the world
stage.
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.
Bust and Boom
Argentina has spent more time in recession than almost every other nation Source: The Conference Board; World Bank
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.”
Julian Diaz at his restaurant Los Galgos in Buenos Aires. Photographer: Sarah Pabst/BloombergFernandez
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 Plaza de Mayo district of Buenos Aires. Photographer: Sarah Pabst/BloombergThe
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.
Natalia Perrotta stands in front of the Water Palace. Photographer: Sarah Pabst/BloombergYet
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.
Flight to Safety
Whether it’s the 1880s or 2010s, Argentines don’t save in pesos before a crisis Source: BCRA; della Paolera, Alan Taylor
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.
The Plaza Miserere subway station in Buenos Aires. Photographer: Erica Canepa/BloombergGerardo 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.”
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