I have argued for a long time that the world is now in a revolutionary period and that we stand on the threshold of a new epoch. There is a growing body of literature that is saying the same or similar things. That liberalism is dead and the powers that be are struggling to maintain their strangle hold on the geopolitical order. However there are cracks in the wall – and exciting suggestions that the Transnational Capitalist Class is loosing its grip.
Buenos Aires takes on the banks
24 February, 2005
What goes down does not always come up again – but it has in Argentina’s case. President Nestor Kirchner and his economics chief, Roberto Lavagna, have, in effect, set out to defy global financial gravity – and are showing that it can be done.
The outcome of the current attempt to restructure the country’s $103 billion debt represents the most daring act yet of defiance to conventional wisdom.
By proposing to default on nearly three quarters of the debt and ignoring IMF conditionality, Argentina would be driving a coach and horses through the international financial system.
Brazil and Mexico
The outcome will be keenly watched by other major debtor nations, particularly
Brazil, whose left-of-centre government under President Lula da Silva sympathises with Argentina’s position
Mexico, which does not – but whose, President Vicente Fox, may be succeeded by a much less pro-American figure.
The Argentines have bucked conventional wisdom not deliberately, but out of sheer desperation.
In 2002, following bloody riots that toppled President de la Rua and two successors, the country defaulted on its commercial debt and floated the peso.
There was nothing the banking community could do, because Argentina was bankrupt.
Under the accepted scenario of international finance, the country should then have been starved of credit, shunned by traders, risked having its assets overseas impounded and thus gradually grind to a halt – unless it accepted the stringent conditions laid down by International Monetary Fund and its creditors.
But Kirchner and Lavagna, relying on economic recovery – coupled with Argentina’s self-sufficiency in many essential goods – stared the international bankers down, and refused to divert funds from social programmes to pay the banks back.
New loans for old debts
Instead, they have offered a deal on their own terms – some $42 billion in new loans, with lower interest rates and longer repayment dates, in place of the $103 billion in old debt – a package worth about 25-30 cents on the dollar.
This represents a write-off of about $70 billion of debt, the largest default in history.
The banks have been given until late February to accept the offer – or face the prospect of a lower offer later on.
There is, in addition, the matter of some $23 billion in unpaid interest during the three years of suspension of debt payments. Argentina says it might pay a fraction of this – as a goodwill gesture.
After three years of getting nothing, many of the country’s creditors at last seem ready to settle.
Argentina needs some two thirds of them to do so to regain its international solvency.
The maverick policy has been formulated against the backdrop of economic recovery, which bankers said was unachievable in these circumstances.
In 2003, the country defaulted and devalued following a plunge in gdp of around a quarter as it tried to stick to debt repayment schedules, implement IMF medicines, cut social spending and maintain the dollar parity.
**The economy grew by 9 per cent in 2003. In 2004, it was still around 8 per cent and is expected to continue at 6-8 per cent for the next two years.
**Industrial output increased by 18 per cent
**Consumption rose by 38 per cent ? Car production doubled
**Unemployment fell, while investment jumped some 38 per cent
Budget and reserves
On top of this:
**The government achieved a 2.3 per cent budget surplus while not cutting back social programmes.
**Foreign exchange reserves grew from nil to some $18 billion.
**A trade surplus of $16 billion was achieved, with exports rising from 14 per cent of gdp to 23 per cent
Argentina’s success is attributable to the devaluation of the peso – adopted against IMF advice – as well as to improving prices for its commodities.
Populist policies of raising the minimum wage, pensions and pay levels also helped to maintain social peace.
The recovery owed much to the sound foundations laid by structural reforms under President Carlos Menem in the 1990s, which privatised many sectors and stripped away bureaucracy.
Problems remain – in particular, a culture of corruption left over from previous administrations, and low levels of investment thanks to the debt uncertainty.
But the predicted pariah status did not materialise.
Indeed, the government is now able to pledge no new default on entirely fresh lending and investment.
This contrasts with the past when investors were afraid of adding to the colossal debt overhang and becoming swept away by a default avalanche – new snow will take a long time to build up again.
If the current debt renegotiation is successful, Brazil, Mexico, Peru and others are likely to be considerably more robust in their attitude to the banks.
At the same time, the IMF’s authority to impose conditions as in the past is likely to be diminished in the future, certainly as far as Latin America is concerned.