PRAISE FOR AND THE MONEY KEPT ROLLING IN (AND OUT)
"[A] vivid and intelligent case study of economic tragedy."
"Suspenseful... crisp prose accessible even to those who rarely read financial newspapers.... Paul Blustein deserves much praise for his stagecraft."
—The Weekly Standard
"An entertaining, insightful account of how in the space of a few years Argentina went from emerging market poster child to problem child in the family of nations.... Undoubtedly the greatest strength of this book is what it reveals about the inner workings of the IMF."
—The Buenos Aires Herald
"Mr. Blustein has built an admirably clear and cohesive—and important—narrative out of the tangled threads of Argentina's economic history. Even more impressively, he has made a page-turner out of a currency crisis, which surely ranks among the neatest feats in the very checkered history of business journalism."
—New York Sun
"A fine postmortem of the debacle... working from a colorful inside account of the decision-making processes of the IMF and international investors, [Blustein] does an admirable job of elucidating the complexities of international finance, currency reform and debt."
"Tells in exquisite and chilling detail the Argentine story of borrowing, boom and bust... a fascinating, well written international tale."
—Bloomberg News columnist John M. Berry
ALSO BY PAUL BLUSTEIN
To my children:
Nina, Nathan, Dan, and Jack,
whom I will always love unconditionally, even if they go to work on Wall Street
Prologue: Up, Up, and Away
THE CONCEPT of a "mission" to a foreign country may conjure up images of swashbuckling idealists—the sort who might be played in the movies by Jeremy Irons or Harrison Ford—tramping through tropical forests, accompanied by pan pipes, trying to convert the natives to the way of true salvation. In the case of the International Monetary Fund, however, missions typically involve teams of briefcase-toting civil servants with advanced degrees in economics, flying first class or business class to a national capital, shuttling between a deluxe hotel and the country's economics ministries and agencies, scrutinizing budgetary and monetary data, and sending reports by e-mail back to IMF headquarters in Washington, D.C.
The IMF mission that traveled to Argentina in November 2001 closely resembled the norm—at least in superficial respects. After an overnight flight to Buenos Aires, the six members of the IMF team were chauffeured to their usual hotel, the Sheraton, a towering modern edifice in a city gilded with broad boulevards, European architecture, and elegant statuary. As on previous trips, the team set up an office in the central bank and spent many hours in meetings at the Ministry of Economy, on the Plaza de Mayo, the fabled square that has been the scene of countless political protests, rabble-rousing speeches, and torchlight rallies during Argentina's turbulent past.
Heading the mission was Tomás Reichmann, an economist from Chile who held chief responsibility for Argentina on the IMF staff. Sixty-one years old, Reichmann had a gentlemanly demeanor; a former colleague described him as having "not a single confrontational bone in his body." He had accepted a job offer from the Fund in 1973, after receiving his Ph.D. from Harvard, because he and his wife did not wish to return to Chile, which had come under a military dictatorship. He had spent the bulk of his career in the Fund's Western Hemisphere Department and had been working on Argentina in various capacities since 1996. Missions to the country were old hat to him. At the half dozen or so Buenos Aires restaurants where he liked to dine while on mission, the waiters recognized him as a steady customer.
Technically, the mission had a narrow purpose—to conduct a review of Argentina's progress in meeting the terms of its $22 billion loan package from the IMF. Such reviews are conducted every few months on most IMF loans, and if this review were "completed" successfully, meaning Argentina's progress was deemed satisfactory, the Fund would disburse a $1.24 billion installment that was scheduled to be lent to the Argentine government in December.
This seemingly modest issue, however, was enormously consequential, because a long-running crisis in the Argentine economy was reaching an acute stage. Global financial markets were panicking over the prospect that the country was heading into an economic cataclysm. Withholding approval of the IMF review not only would deprive the government of badly needed cash; it also would send a signal worldwide that Argentina was being cut off from international support at a moment of grave peril.
Most directly endangered was the cornerstone of the Argentine economy, its currency system, known as "convertibility," which kept the value of one peso fixed exactly equal to one U.S. dollar and allowed Argentines to use both currencies interchangeably. In the decade after its 1991 inception, the legal guarantee of the $1-per-peso link had proved remarkably successful in quelling Argentina's corrosive inflation and imparting a sense of stability among consumers, savers, and businesses. The peso-dollar equivalency was deeply ingrained in the nation's economic fabric: Millions of borrowers had taken out loans in dollars, even though their income was in pesos. Breaking the peso-dollar link would thus wreak havoc in the Argentine economy by generating bankruptcy en masse. Many borrowers were middle-class Argentines who had taken out mortgages on their homes; for a homeowner paying $1,000 a month on a mortgage, for example, a 50 percent decline in the peso would double, to 2,000, the amount of pesos required to make the monthly payments. That scenario loomed ever more menacingly as jittery investors and lenders pulled their money out of the country, depleting the reserve supplies of dollars that Argentina needed to keep the system alive and functioning.
In a bid to shore up the system, the IMF had twice granted emergency loans in 2001 to the Argentine government. In return, Economy Minister Domingo Cavallo, a man of intimidating personal force, had strained mightily to fix the country's underlying problems, demonstrating his commitment to fiscal frugality by cutting government salaries and pensions even though the economy was mired in a long recession. Despite these moves, the slump had deepened as every month of 2001 went by, and the markets were continuing to plunge, reflecting fears among investors and traders that the government lacked the wherewithal to maintain interest and principal payments on its $140 billion debt.
Without the lifeline that Reichmann's mission could extend, Argentina looked doomed—and for that reason, many in the markets were predicting that the IMF was certain to approve the loan disbursal as it had done on prior occasions. But within the IMF's highest councils, a powerful sentiment had taken hold that further assistance to Argentina would be an exercise in futility. "When we left Washington, the odds that the mission would complete the review were minimal," recalled Alberto Ramos, a member of Reichmann's team. The Argentine government had already acknowledged that its budget deficit for 2001 would exceed by a hefty margin the target agreed with the IMF, because the recession had caused a steep decline in tax revenues. And in examining the government's projections for the coming year, the mission's economists concluded that the amount of budget-cutting pain the government would have to inflict to balance its books would go beyond almost any conceivable bounds of political reality.
As Reichmann and his colleagues grimly sent word back to their superiors in Washington, a new financial shock rendered Argentina's situation even more irremediable.
Amid growing fears about the safety of bank deposits, a steadily increasing outflow of money from banks surged to full-scale flood stage during the final three days of November, when thousands of depositors queued up to pull $3.6 billion out of their accounts—about 6 percent of total deposits. On Saturday, December 1, the Economy Ministry announced restrictions on withdrawals aimed at halting the run. Under this decree, which would be dubbed the corralito, or "little corral," Argentines could take no more than $250 a week in cash from their accounts, although they could make payments by check or debit and credit cards. Furthermore, a comprehensive ban was imposed on transfers of money abroad except for those related to trade. People reacted with outrage to their inability to obtain cash from automatic teller machines. National television showed a woman screaming at presidential spokesman Juan Pablo Baylac: "How can I get my money? It's my savings. I'm furious." Radio talk shows were besieged with distraught callers asking how they were to pay their rent or electricity bills (checks and credit cards were much less commonly used in Argentina than in the United States). The government's assurances that the measures would be lifted after ninety days were dismissed as lacking credibility.
All these goings-on were being monitored closely at IMF headquarters, where a meeting of top officials and staffers convened on Monday morning, December 3. "A great feeling of defeat" pervaded the group, one participant recalled, because of the realization that the Fund's rescue effort had flopped for certain and was reaching the stage where the plug was going to be pulled. The last straw, as far as the IMF was concerned, was the country's imposition of the corralito, because it shredded the principles that lay at the heart of the convertibility system—the interchangeability of dollars and pesos, and the guarantee that the nation's monetary authorities would furnish dollars freely to anyone with a legitimate claim on them. IMF officials felt they had put their institution's money and credibility on the line based on Argentine insistence that the convertibility system was inviolate, only for the Argentines to abrogate its basic tenets without even consulting the Fund in advance.
"What does convertibility mean now?" demanded Anne Krueger, the IMF's first deputy managing director, at the meeting.
Back in Buenos Aires that day, Reichmann was in the midst of lunch with a prominent Argentine economist when his cell phone rang with a call from a superior at IMF headquarters informing him that the Fund's top management was calling an end to the mission. Reichmann was ordered to return home that evening, ostensibly to brief the Fund's executive board about the new and disturbing circumstances in Argentina. The IMF would officially announce two days later that it was "unable at this stage" to complete the review necessary to disburse the $1.24 billion. In simple terms, Argentina was being abandoned.
Now Reichmann faced the unpleasant task of informing Argentine officials about the IMF's decision. He quickly arranged after lunch to fly back to Washington on a United Airlines flight departing at 8:30 P.M. and tried to reach Cavallo to convey the bad news. The two men met around 4 P.M. in Cavallo's office in the Economy Ministry, where Cavallo made it plain that he was not going to let Reichmann off easily. "You can't tell this to me," he said to the IMF official. "You will have to explain it to the president."
That meant Reichmann would have to meet President Fernando de la Rúa at his residence in Olivos, about an hour's drive from downtown Buenos Aires. Reichmann protested that he didn't have time. "I've got an 8:30 plane to catch," Reichmann told Cavallo, but the economy minister retorted that he would arrange for a government helicopter to ferry Reichmann to the presidential residence and then to the airport. Reichmann rushed to the Sheraton to pack his suitcase and returned for the helicopter ride to Olivos, where he met de la Rúa in his office.
In his twenty-eight-year career at the IMF, Reichmann could not recall a more difficult and emotionally charged moment. De la Rúa, a somber, austere man who had won the presidency two years earlier by campaigning on his reputation for being boring but honest, was obviously horrified by the fate he expected to befall his country. He asked Reichmann if he understood what the IMF's decision meant. The mission chief replied that he did.
"We knew that we were losing our last chance," recalled Chrystian Colombo, the cabinet chief, who was also present at the meeting. Reichmann, he added, was "very upset and uncomfortable."
About a half hour into the meeting, a military aide interrupted to inform the group that United could not hold its plane to Washington. The helicopter would have to take Reichmann to the airport immediately or he would miss the flight.
"So nothing can be done?" De la Rúa's tone of incredulity spoke volumes as the IMF official prepared to leave.
Reichmann shrugged wordlessly, raising his palms upward in a gesture of anguish.
The president's head sank to his chest. Reichmann headed to the helicopter.
[ CHAPTER 1 ]
Globalization's Big Bust
THE COLLAPSE of the Argentine economy, which commenced a couple of weeks after the withdrawal of the IMF mission in early December 2001, was one of the most spectacular in modern history. Partly, this was because of the manner in which the country descended into anarchy. First came the scenes of people thronging the Plaza de Mayo banging pots and pans, and mobs looting shops and sacking government buildings all over the country, resulting in so much mayhem (including the deaths of more than two dozen people) that President de la Rúa was forced to resign on December 21. Then came the tragicomic spectacle of a succession of five presidents taking office over a mere ten days, ending on New Year's Day of 2002 when an emergency session of Congress handed the presidency to Eduardo Duhalde.
Equally disturbing was the severity of the economic downturn that beset the country following the government's default on the bulk of its debt and its decision to let the peso sink in early 2002. Like an engine that has seized up for lack of oil, the Argentine economy ground to a virtual halt, as additional restrictions on bank withdrawals led to a breakdown in the system by which people and businesses paid each other, and the bank credit that companies needed for day-to-day commerce dried up. National output shrank 11 percent in 2002, leaving nearly one quarter of the workforce unemployed and a majority of the population below the poverty line, even as prices soared for basic food items such as bread, noodles, and sugar. Average annual income per capita, which in the late 1990s peaked at $8,500—double Mexico's level—sank to $2,800 in 2002. Although that low level was attributable in substantial part to the 75 percent decline in the exchange rate of the peso against the dollar, it reflected the privation felt by millions whose living standards plummeted and personal savings withered in value.
The impact struck Argentines of every social class. One of the country's richest women was forced to auction off paintings by Gauguin, Degas, Miró, and Matisse. Members of the middle class became nervous wrecks over their lost nest eggs; in one widely publicized case, a fifty-nine-year-old woman who could not get her dollars out of her bank account walked into her bank, doused herself with rubbing alcohol, and set herself ablaze. Hardest hit, in general, were people on the bottom economic rungs. Among the most heart-rending tales were those of children suffering in rising numbers from malnutrition, and even dying from it—a shocking phenomenon in a country abounding with cattle ranches and wheat fields. Residents of fashionable Buenos Aires neighborhoods grew accustomed to averting their gaze when hordes of people called cartoneros would descend on their streets in the evening, ripping open plastic trash bags in search of anything saleable. In a grisly symbol of the nation's abasement, an overturned cattle truck outside the industrial city of Rosario in March 2002 attracted hundreds of shantytown residents wielding machetes and carving knives, who slaughtered and diced up twenty-two Angus steers on the freeway, then fought over bloody hunks of meat.
Argentina's downfall was especially painful for its citizens to bear—and for outsiders to behold—because during the 1990s the country had seemed at long last to be moving full steam toward its rightful place in the ranks of advanced nations. Argentina is the most Europeanized of Latin American countries, boasting the region's highest education levels and a throbbing intellectual and cultural pulse. The Continental influence is readily apparent to any Buenos Aires visitor who has strolled past the city's manicured parks, Beaux Arts buildings graced by balconies with wrought-iron railings, and bustling cafés that look as if they were transplanted from the Via Veneto or the Champs Elysées. The people of this proud land understandably thought they were leaving behind their history of squandered riches and destructive upheaval when, from 1991 to 1998, the economy grew at an average rate of 6 percent a year, reaching a total gross domestic product of nearly $300 billion, with almost no inflation. That performance marked a drastic departure from the stagnation, bouts of hyperinflation, and repeated currency devaluations that had afflicted Argentina since the mid-twentieth century. Thus the pain was all the more excruciating when these raised aspirations were dashed.
If Argentina's economic unraveling were an isolated case, it might be dismissed as a pitiable curiosity that has little bearing beyond the country's borders. But it came in the wake of financial crises that struck other fast-growing "emerging markets" such as Mexico, Thailand, Indonesia, South Korea, Russia, and Brazil. It offers a case study of a pernicious syndrome that global capitalism has manifested in recent years: A developing nation shows great promise by unleashing the forces of private enterprise; foreign capital streams in, generating an investment boom; amid the ensuing euphoria, the country's economy is puffed up to the point where serious vulnerabilities develop; an economic reversal degenerates into turmoil and panic; and finally, international rescue efforts fail or make a bad situation worse. A good analogy would be the membership process for an exclusive country club, in which hopeful applicants are given tremendous encouragement that they are meeting all of the strict criteria for joining, only to have the club door slammed in their faces and find themselves cast out on the street just as they are nearing the initiation rite. Think of the world's rich nations as the members of this club, and the emerging-market nations as the aspirants for membership who, one after the other, suffer this cruel setback. As an ugly example of the genre, Argentina presents an unsurpassed rise and fall, and the culpability of the international community—both the official and private sectors—is weighty. For believers in the power of globalization to raise living standards in the developing world (and I include myself among them), this dispiriting saga is an eye-opener to the need for systemic change.
Argentina prided itself on following free-market, economically orthodox policies during the 1990s. Few countries if any were so lionized for hewing to the "Washington Consensus," a sort of economic Ten Commandments prescribed by the IMF, the World Bank, and the U.S. government. Among the main elements of this recipe are the eradication of inflation, the privatization of industry, the deregulation of the economy, and the removal of trade barriers, all of which the Argentine government vigorously pursued. The Heritage Foundation, a conservative think tank that evaluates countries according to an "Index of Economic Freedom," rated Argentina in 1999 as tied with Chile for the best policies in Latin America, and almost equal to Australia and Taiwan. (The criteria include the degree of government intervention in the economy, respect for property rights, extent of black-market activity, and so on.) But having been a poster child for the Washington Consensus, Argentina is now a poster child for the growing disenchantment with the model in the developing world.
In the bankrupting of Argentina, the key events of which took place between 1996 and 2001, two sets of actors from abroad belong at the center of the drama—private market financiers and top international policymakers, the latter being principally at the IMF and the U.S. government, the Fund's dominant overseer. By putting human faces on these players, demystifying their operations, and chronicling their actions at critical junctures, I seek in this book to lay bare, in an accessible manner, the uncomfortable story of the international community's role in the Argentine debacle. It may seem obvious that Argentina, for all its own failings, was a victim of misfeasance, nonfeasance, and even malfeasance by foreign money interests, bureaucrats, and political figures. But only by going behind the scenes can the scale be truly appreciated and put in proper perspective. Thorough scrutiny of these events also helps pinpoint the factors that led Argentina over the cliff. Some of the recriminations that have been leveled in the wake of the country's collapse are offbase, and it is important to draw the right lessons from what went wrong.
One crucial (and often ignored) factor in the collapse is the modern system of globalized financial capital. This engine is remarkably powerful but volatile. Just as it would be unwise to put a fourteen-year-old behind the steering wheel of a Ferrari, newly developing economies are not always able to thrive for long with the wild ride of money moving freely across international borders. This is a facet of globalization about which economists harbor growing misgivings. It is one thing to open a country to foreign goods and to investment in factories by multinational firms. It is quite a different matter to open it to the giant flows of international finance, which can be expansive and buoyant during some periods, timorous and flighty in others. At a time when Argentina's indebtedness was mounting in the late 1990s, global markets lauded the country as a paragon of the developing world and poured money in, lulling the government into complacency. The IMF also overlooked Argentina's vulnerabilities, but even when the Fund tried to sound alarms, the markets' optimism rendered the Fund's concerns irrelevant. Nancy Birdsall, president of the Center for Global Development, has coined an apt phrase to describe how Argentina was treated: The country was "the spoiled child of the Washington Consensus."
Globalization is not supposed to work this way. According to globalization's most ardent boosters, international markets reward good, sound economic policies by steering capital to countries that practice them. The influence of the capital inflow makes the government even more disciplined, because policymakers know that otherwise investors may yank their money out. As Thomas Friedman put it in his book The Lexus and the Olive Tree, the "Electronic Herd"—the agglomeration of the world's investors—"can impose pressures [for good policy] that few governments can resist. It has a self-interest in doing so and it generates in others the self-interest to comply.... The Electronic Herd turns the whole world into a parliamentary system, in which every government lives under the fear of a no-confidence vote from the herd."
That's the theory. In practice, foreign funds numbed Argentine policymakers into minimizing the perils of their policies. The effect was similar to a dose of steroids, giving the economy a short-term boost while insidiously increasing the risk of breakdown in the long run.
Argentina was not a wholly innocent victim—far from it. Democratically elected and appointed Argentine officials made the decisions that led the country down the road to economic disaster. They spent more than they should have, taxed less than they should have, and borrowed more than they should have—all the while keeping a currency system that required much stricter fiscal discipline—because they wanted the political benefits they could accrue from these practices. But in putting their nation's economy on a collision course, they got plenty of help. Argentina will be paying the price for a long time, not only for its own mistakes but for the mistakes of the international community as well.
"It's like a nephew who becomes dependent on a very rich, doting uncle," said William McDonough, who was president of the Federal Reserve Bank of New York until 2003. "Suddenly the uncle dies and leaves the money to someone else, or decides he doesn't love the nephew anymore and cuts him off. You can ask, who's responsible—the uncle or the kid?"
For the markets, doting on Argentina was understandable to some extent, given the great strides the economy was making and the government's commitment to free-market reforms. But fueling the flow of money from abroad were forces that went well beyond the age-old phenomenon of irrational exuberance.
Upon close scrutiny, the conduct of the markets in Argentina is redolent of the scandals that rocked Wall Street following the bursting of the stock market bubble in the United States. Striking parallels can be seen between Argentina's crisis and some of the most notorious flameouts of recent years, such as Enron Corp., WorldCom Inc., and Global Crossing Ltd., in which major brokerage firms pumped up the companies' securities prices, issuing bullish forecasts that were later seen to be tainted by self-interest. In Argentina's case, though, the injured party was not a company or group of stockholders. It was South America's second-largest country, a nation of 38 million people.