“We are witnessing the First World popping like a bubble.” – Cristina Fernandez de Kirchner, President of Argentina
Last night I had dinner with an Argentine businessman at a small restaurant in downtown Buenos Aires. He’s involved in the development of shopping centers here in Buenos Aires.
I mentioned to him that I’d purchased a local newspaper earlier in the day at the Plaza de Mayo. An image of a jumbo jet made of U.S. dollar bills took up almost the entire cover.
I’d assumed it was about the U.S banking crisis. But after laboriously translating the headline and the first few paragraphs I discovered that it was an update on a brewing scandal sweeping across South America. Venezuelan president Hugo Chavez is alleged to have sent a suitcase of American cash to President Kirchner to help fund her Presidential campaign.
The accusations couldn’t have come at a worse possible time. I assumed the whole world would be fretting about the U.S. financial crisis. Just a few days ago Kirchner likened the entire mess to a bubble bursting across the First World. But the Argentine press and the people on the street do not seem particularly concerned with what is going on with the United States.
My associate casually explained to me that Argentina understands the U.S. financial crisis because they have already recovered from one. You see, Argentina’s banking system collapsed completely in 2001.
He told me, “In a lot of ways, it’s a similar situation. You have to understand, Argentina had a military dictatorship for a long time. During the 1970s and 80s acquired a big debt. Unemployment was 18%. Inflation soared to 210% a month.
“In 1983 we got our first democratically elected president in a long time. They tried various things to stabilize the currency, including fixing the value of the Argentine currency to the U.S dollar. So anyone could go to the bank and get U.S. dollars for their local money.
“People just started borrowing money, then cashed the Argentine currency in for U.S. dollars, travelled, and spent it on whatever. We had all these international debts. And we couldn’t pay them. And this is the similar to the United States.
“Basically, we had a party, and then when it was all over, they showed us the bill and our eyes went very wide because we could not pay it.”
My friend went on to explain how the financial collapse caused people to lose confidence in the local currency. They began withdrawing large sums and converting them to dollars. The government panicked and froze the bank accounts. For months, people did not have access to their own money. A bartering system quickly sprung up in its place. People met in the markets and exchanged a bag of apples for plumbing services.
It took a while, but it all worked out in the end. Although many of the details are different, the fundamental problem was identical to the situation now facing the United States. The Argentine government had no cash and the foreign currency reserves were not capable of providing sufficient liquidity. A “bailout” was not really an option.
Instead the Argentine government enacted a “controlled devaluation” of the peso. And the economy slowly normalized. Schools are open again. The army is funded. The poverty level has dropped from 35% in 2001 to 20%.Argentina has made some good progress since its financial collapse, but it’s still far from perfect.
For instance, the government still subsidizes basic food needs. There is an embarrassing wealth gap. The richest 10% of Argentines make 31 times more than the poorest 10% (call that “The Shanty Town Factor”).
Also, there is a major hangover from the Argentine banking crisis. Seven years after their assets were frozen, the currency was re-valued, and many Argentines lost fortunes, the Argentine people still do not trust the banks.
Less than 50% of Argentines have a bank account. My landlady here in Buenos Aires only accepts cash, and she refuses to take her earnings to the bank. Most Argentines pay for their houses in cash.
Outstanding mortgages are only 2% of the Argentine GDP. In the U.S. mortgages add up to $13 trillion, about 95% of the GDP.
“Capitalism only works if people believe in it,” my friend commented as we finished our wine. “When they stop believing, it falls apart.”
What can we learn from Argentina’s cautious response to the collapse of its own banking system?
It’s going to take some time, but the economy will recover. Even if the current situation plays out as bad as Argentina’s (which is probably the worst-case scenario) there is a light at the end of the tunnel.
It’s going to take a few years (and a lot of volatile swings), but we can’t forget that economies are resilient.