What we can learn from Argentina
By
Bill Bonner Oct 31, 2008
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Last week, at the annual convention of America's mortgage bankers in San Francisco, protestors used bullhorns to heckle attendees; they demanded a moratorium on foreclosures. Meanwhile, south of the Rio Plata, a mob formed in Buenos Aires too. Their gripe was that the government of Cristina Fernandez de Kirchner was grabbing their pension money. "No way," replied the Queen of the Pampas. We are just going to "rescue" it from the wicked capitalists. Like a dobermann rescuing a hot dog, the Argentinian government will swallow $26bn worth of private pension funds. The federales say they are taking the money into protective custody. It will just "disappear", say protesters.
Compared to the Argentines, the American mob is a bunch of naïve chiselers. At least the gauchos can tell the difference between self-delusion and grand larceny. The average cab driver in Buenos Aires knows more about financial crises than Bernanke, Brown and Paulson put together. His training comes neither from Keynes nor Smith. The great British economists may have laid out their theories of political economy, but they left some important holes. Argentina's presidents have filled in the blanks. But what the typical Argentine has learned, the British and the Americans are about to discover for themselves.
Leaving Argentina, our cab driver tried a familiar gambit. Hearing a foreign accent, he said: "my meter is broken... but the fare to the airport is always a flat 200 pesos". On the pampas, no self-respecting taxi driver gives a sucker an even break. But then, rarely do governments or markets, either. "What is the message that the government is giving to the people today"? asks Argentine economist, Roberto Cachanosky. "That it is ready to take their revenues and their savings with no limit... and also, that they will continue to give out information and make announcements that, to say it gently, have no connection to reality."
"The only secure retirement is one backed by the state," said a member of the Peronist party, proving Cachanosky's point. As the country approached bankruptcy in 2001, its leaders followed the traditions of all Peronists, Democrats, Tories and National Socialists when they get themselves in a jam. First, they lie. Then they steal. Retirement benefits were cut 14%. And then, by devaluing the peso, they cut them about 66% more.
Argentina has a parallel system of privately-owned pension accounts. Those are the ones now being nationalised by the Kirchner government. Set up in 1993, these funds must invest 60% of their money in Argentine bonds. Naturally, bonds backed by the Argentine government are not necessarily the strongest credits in the world. Argentine peso bonds – like pensions – are adjusted for inflation, but the government lies, with a measure of inflation that is less than half the real 30% rate.
As to the dollar bonds, it steals. In 2001, it defaulted on $95bn worth of loans made by overseas lenders. It didn't settle up until four years later – stiffing the foreigners for 70%. Now the government is in trouble again; it must make a big payment to overseas lenders in 2009. Its main exports – soybeans, gas and oil – are down about 50% this year. And the country has more public debt than when it defaulted seven years ago. That's why the private pension accounts are being seized; the government needs the money.
Things have a way of disappearing in Argentina. After World War II, hundreds, maybe thousands, of Nazis arrived in Buenos Aires from Europe, never to be seen again. Whether people are wanted by the law, or not wanted by the lawmakers, they have a way of vanishing. In the 1970s, when the generals running Argentina wanted to get rid of their opponents, they called on the old Nazis to help 'disappear' thousands of them. Money disappears too. More than half a century ago, Eva Perón posed as an angel. She set up charitable organisations to help the poor and personally handed out Christmas gifts. After the holidays, she went back to her tricks – making the money disappear from the charitable funds and re-appear in her Swiss bank account. And then, after her spirit gave the world the slip, Evita's own corpse disappeared. People wondered what had happened to the husk of her, until it was retrieved by Juan Perón 16 years later.
Señora Fernandez is a practised magician too. Her recent acts of larceny have included disappearing the profits of the nation's farmers, first by preventing them from selling on the open market and then by imposing a confiscatory tax (later withdrawn) on exports. "Nationalising private pensions is theft," said Juan Domingo Perón himself. The Peronists say they are only acting in the public interest – like the US Treasury and the Bank of England. We would never have done this had there not been a worldwide financial crisis, they explain.
Cachanosky continues: "The question that many people ask themselves is: what rate of interest do you need to compensate for the risk of keeping assets within the reach of a government desperate for more funds?" Answering Cachanosky's question, today you can buy 8.28% Argentine bonds at 22 cents on the dollar – giving you a yield of 31%. By comparison, a US ten-year Treasury note, at less than 4% yield, looks like a broken taxi meter to us.
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