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8 years after default, Argentina pays up. Lessons for Ireland?


feargach

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Argentina pays bond and seeks to return to global capital markets — MercoPress

The original problem was that they followed the 1999 IMF instructions and slashed public sector pay as an alternative to allowing the peso to fall from its overvalued level. We in 2009 are planning to follow IMF instructions and slash public sector pay as an alternative to allowing the property market to fall from its overvalued level.

In Argentina, the policy worked in the very short term. With cash saved from public sector pay, and massive loans from the IMF which were conditional on public sector pay cuts, Buenos Aires was able to prop up the artificially high price of the peso for almost two years. But consumer spending had collapsed and the inevitable crash happened. A flood of sellers hit the peso and Buenos Aires was unable to buy up all the pesos at one to the dollar. The experiment collapsed and the peso fell to 3 to the dollar.

Since the default, Argentina has spent most of the ensuing period in rip-roaring high growth. If you believe official stats they have done wonderfully, but even adjusted for the fakery the government adds to the figures, all economists agree that real growth has mostly been the order of the day since the Kirchners took power and told the IMF to fsck off.

Argentina paid creditors a total of 2.25 billion dollars on government-issued debt Monday, as it sought to shed the last vestiges of its 2001 default and return to the financial mainstream. Economy Minister Amado Boudou said the payment, or coupon, had been made to holders of dollar-denominated Boden 2012 bonds—meeting a debt obligation that aims to boost confidence.

Argentina has been excluded from (global capital) markets since December 2001, when the country suffered an economic collapse wiping out personal savings, shredding government finances and prompting Buenos Aires to default on its debt.

...
In 2005 Argentina restructured its defaulted debt but there are still an estimated 20 billion dollars in holdouts plus a pending debt to the Paris Club of lenders of 6.5 billion. The country’s debt currently stands at 145 billion US dollars, plus the standing demands.

The Boden 2012 bond was issued in 2002 to compensate creditors who found access to their capital blocked during the 2001 freeze on bank withdrawals. It is estimated 65% of the bond issue is held outside Argentina and 35% locally.

Economists and private consultants saw Monday's move as ruling out the possibility that Argentina would delay debt repayments as it struggles against slumping growth and tax revenues.

Boudou defended the government's decision of using part of Argentina’s international reserves for the repayment operation arguing that "it will have a neutral impact on the Central Bank reserves."

“The funds we paid out are dollars bought by the Argentine Central Bank with money obtained through fiscal surplus hence we are not putting the federal currency reserves under risk". He added that the Central Bank currently has 46 billion on its reserves “which triple what the Central Bank used to have in 2003 before the Kirchners took power."
 
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toughbutfair

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I quit reading it after the first paragraph.

You claim the reason we want to cut public sector pay is to prop up the property market???

Seriously, that is ridiculous.
 

smitchy2

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We don’t have a national currency.

Letting property prices fall is not the same as devaluing your own currency.
 

feargach

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We don’t have a national currency.

Letting property prices fall is not the same as devaluing your own currency.
It is not the same, true. A ton of compressed feathers falling on you is different from a ton of compressed chipboard in many different ways. As far as killing you, though, the effect is highly similar.

The similarity here is that Buenos Aires in 2001 and Dublin in 2009 are both taking similar steps, at the urging of the IMF, to cut public sector pay and direct the savings towards attempting to prop up a falling asset.

It doesn't matter hugely what kind of asset it is, whether it is a national currency or a property market. All that matters is whether the attempt to prop up the asset can be successful or not.

That has only one important variable: are the buyers stronger, or the sellers?

Buenos Aires borrowed heavily from the IMF to prop up their preferred falling asset, but ultimately the peso bears won because they were the stronger party. We are goingto be borrowing heavily from the bond market to prop up NAMA, and that shall be a battle between the property bears and the bulls. We shall see who wins. Every other post-property crash battle has ended in a decisive bear victory. But hey, Ireland is different.

You claim the reason we want to cut public sector pay is to prop up the property market?
No, I don't claim that or anything like it.

Unless you are a Cabinet minister. Are you? If not, I am referring to our government's stated plans, and parallels with Gaucho country.

I just point out similarities to the two situations. What "we" on P.ie want is immaterial in any case.

The government has made it clear that it wants to to prop up the property market, though it chooses to phrase that aim as "avoiding a fire sale". If you can explain a practical difference in this case between "propping up" and "avoiding a fire sale", I'll withdraw it. Can you?
 
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smitchy2

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It is not the same, true. A ton of compressed feathers falling on you is different from a ton of compressed chipboard in many different ways. As far as killing you, though, the effect is highly similar.

The similarity here is that Buenos Aires in 2001 and Dublin in 2009 are both taking similar steps, at the urging of the IMF, to cut public sector pay and direct the savings towards attempting to prop up a falling asset.

It doesn't matter hugely what kind of asset it is, whether it is a national currency or a property market. All that matters is whether the attempt to prop up the asset can be successful or not.

That has only one important variable: are the buyers stronger, or the sellers?

Buenos Aires borrowed heavily from the IMF to prop up their preferred falling asset, but ultimately the peso bears won because they were the stronger party. We are going to be borrowing heavily from the bond market to prop up NAMA, and that shall be a battle between the property bears and the bulls. We shall see who wins. Every other post-property crash battle has ended in a decisive bear victory. But hey, Ireland is different.
We are also going to be borrowing heavily to prop up our bloated current expenditure that has risen dramatically over the last 5 years. This is not related to NAMA.

You are obviously involved in the public sector yourself.

NAMA is going to attempt something similar but in many ways different to what Sweden did in the 1990s. Buying up overinflated property in the hope to turn a profit on it in upcoming years.
The reason why the government don’t want to nationalise as they could never make any unpopular decision just like the way they have not touched the way the public service is run in years.
Instead they plan to take 25% warranties over shares of the bank in the hope they can make money on both this shareholding and on the assets.
Of course, this makes the price charged by NAMA critical.
 

Clanrickard

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The similarity here is that Buenos Aires in 2001 and Dublin in 2009 are both taking similar steps, at the urging of the IMF, to cut public sector pay and direct the savings towards attempting to prop up a falling asset.
Complete rubbish. It has nothing to do with the IMF and everything to do with the fact that we have a huge gap between what we take in an what we pay out. A child could see there is a problem let alone the IMF.
 

feargach

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I'm only involved in that I have members of my extended family working there, doing a hard job with insufficient resources, for pay that leaves them with far less disposable income than their German counterparts, after you adjust for cost of living.

I'm an independent businessperson. I've done some contracts for public service entities, and generally been well-impressed by their efficiency and general superiority to their counterparts in the Irish home-grown business sector. I particularly like the way they don't try to cheat you like the typical Irish home-grown company does.

I don't work with any Irish customers any more, but if I did, they would be public ones.
 

dmc444

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I think comparing Ireland to Argentina is abit of a stretch to be honest.

I would compare our situation to either Canada in 1993- They had a $42 Billion deficit and unemployment near 12% and had been in terrible economic position for about 10 years.

What happened in Canada, was Paul Martin rolled back spending to 1950 levels and he cut, cut and Cut again, it was tough medicine but in just 4 years he eliminated a $42 Billion deficit and set canada on a path to massive surplus and Martin is largely the reason why Canada has not bailed out any bank.

Another Comparison is Austrailia in 1996/97, Huge budget deficit, chronic unemployment and people calling them a banana republic.

Austrailia under Hawke/Keating dramatically reformed the economy and then Howard/Costello implemented severe budget cuts that were so harsh, the Oz Parliament was trashed by a mob but in just 2 years there fiscal postion was sorted out.
 

Libero

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feargach said:
The similarity here is that Buenos Aires in 2001 and Dublin in 2009 are both taking similar steps, at the urging of the IMF, to cut public sector pay and direct the savings towards attempting to prop up a falling asset.
Well, the comparison is interesting. With Argentina (and, more recently, the Baltic states), the IMF didn’t want to preserve the currency peg for the sake of it. No, the IMF believed – along with a big part of Argentina’s native elite – that keeping the peg was vital for international confidence and to provide a stable framework for Argentina’s economy. It was also of some importance that a lot of wealth was held in pesos but a lot of debt was denominated in US dollars, spelling disaster if the natural, unpegged state of currency valuations was allowed to prevail.

Yup, that rings some bells alright.

Here in Ireland, we also have a coherent argument in favour of NAMA: that we need it to protect the banking system, without which we won’t have much of a domestic economy; in addition, the banks are guaranteed and going back on that commitment would damage international confidence. However, even though all of that carries some force, it’s hard not to see the other, less attractive, reasons in the background. As with Argentina, our native elites talk of the national interest but clearly have at least one eye on how any policy will effect their assets and debts. A realistic treatment of property values and debts would be as devastating here for men of property, as was the eventual dollar collapse in Argentina.
 

feargach

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Well, the comparison is interesting. With Argentina (and, more recently, the Baltic states), the IMF didn’t want to preserve the currency peg for the sake of it. No, the IMF believed – along with a big part of Argentina’s native elite – that keeping the peg was vital for international confidence and to provide a stable framework for Argentina’s economy. It was also of some importance that a lot of wealth was held in pesos but a lot of debt was denominated in US dollars, spelling disaster if the natural, unpegged state of currency valuations was allowed to prevail.

Yup, that rings some bells alright.

Here in Ireland, we also have a coherent argument in favour of NAMA: that we need it to protect the banking system, without which we won’t have much of a domestic economy; in addition, the banks are guaranteed and going back on that commitment would damage international confidence. However, even though all of that carries some force, it’s hard not to see the other, less attractive, reasons in the background. As with Argentina, our native elites talk of the national interest but clearly have at least one eye on how any policy will effect their assets and debts. A realistic treatment of property values and debts would be as devastating here for men of property, as was the eventual dollar collapse in Argentina.
Like I said, plenty of parallels. My comments on the public service were a side issue, but a red rag to a bull that deprived the idealogues of the power of reason.
 

feargach

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The IMF praised Argentina's government policy on banks shortly before the disaster

September 23, 1998:

Idiots May Fabricate said:
Claudio Loser, Director of the Western Hemisphere Department of the IMF, said: "The IMF’s Executive Board today concluded the first review under the Extended Arrangement with Argentina. The review found that all applicable quantitative performance criteria were met by Argentina and that substantial progress has been made in the implementation of the structural reforms included in the program, which remains in full force."
News Brief: IMF Executive Board Completes 1st Review of Argentine Program

Infamously Malignant Force said:
It is true that in many respects the experience of Argentina in recent years has been exemplary, including in particular the adoption of the proper strategy at the beginning of the 1990s and the very courageous adaptation of it when the tequila crisis put the overall subcontinent at risk of major turmoil. It is noteworthy that Argentina was probably the first in reacting by immediately strengthening its policy stance and, in particular, pushing ahead with banking sector reform, which of course turned out afterward to be one of the main elements of trouble in other parts of the world. Notable, too, are the efforts of Argentina since that time to continue its excellent compliance with the performance criteria under our arrangements and much progress in implementation of the structural reforms.
Press Briefing by IMF Managing Director Michel Camdessus

Less than four years after those words were spoken, Argentina's IMF-approved fantasy economy collapsed, putting 57% of the population under the poverty line.

In 2003, a new president took power, reversed the policies promoted by the IMF.

In 2004, the IMF called for cuts and austerity in order to pay off defaulted bondholders (euphemism used: "a comprehensive and sustainable debt restructuring, that of course will allow Argentina to regain a normal situation in the financial markets as a clear prerequisite for a sustainable growth path in Argentina.").

It turns out that following IMF orders to the letter was not, in fact, a prerequisite for growth. Argentina rejected the call and grew like the clappers despite IMF disapproval.

In 2006, Pres. Kirchner paid off all IMF loans far ahead of schedule and ended Argentina's relationship with the Fund, in a hostile manner. The economic boom caused by reversal of IMF policies, coupled with the hatred of the IMF among Argentines, led to his wife easily retaining power for the couple in the subsequent elections.
 

seanmacc

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Proof that you can't cut your way out of a depression and proof that our government is strangling the working man to appease a load of foreign bond holders.
 

Astral Peaks

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So now, how do the OPer and the other fellow travellers feel about Argentina, given the utter collapse last week of the peso and the 30% inflation that plagues the lives of it's citizens?

It (the Government of Kirchner) started the week introducing tight controls on the purchase of online goods from abroad, to prevent Argentinians from spending dollars in ever larger quantities – especially on Chinese products which, as a result of 30% inflation, can be cheaper delivered to their door from abroad than bought at local stores.
But on Friday the government seemed to do a U-turn, saying it would relax its grip on the dollar. From next week it will remove some of the controls it introduced two years ago which banned Argentinians from trading their pesos for dollars, a customary practice in a country with a long history of inflation.
Populism isn't the panacea it might appear to be, it seems.
But then we had to endure 12 years of Bertie and FF before we learned that lesson, didn't we?

Peso collapse raises fears Argentina lurching towards decennial crisis | World news | The Guardian
 

Carlos Danger

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So now, how do the OPer and the other fellow travellers feel about Argentina, given the utter collapse last week of the peso and the 30% inflation that plagues the lives of it's citizens?



Populism isn't the panacea it might appear to be, it seems.
But then we had to endure 12 years of Bertie and FF before we learned that lesson, didn't we?

Peso collapse raises fears Argentina lurching towards decennial crisis | World news | The Guardian
Yeah, it sucks when you can't afford to buy any more ink/toner/printers/electricity to run the place.
 

SPN

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southwestkerry

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The Ruble and the Lira are no better and keep an eye on the Rupee too.
 

Partizan

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The Rouble has plunged to a five year low against both the US$ and the Euro.

US$ 1 = 34.0302 RUB

€1 = 46.3022 RUB

Something major is brewing under the surface and is rattling the markets.
 
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