As you’ve probably heard Argentina has defaulted on it’s Sovereign debt. This is the second time in 12 years that Argentina is defaulting. Of course the Kirchner Government is trying to blame the U.S. for their troubles by saying that it is our fault… after all, those greedy capitalists aren’t willing to accept less than 50% of what we promised to repay when they took out the bonds in the first place. It’s not fair… our economy is a wreck because of our socialist policies, so we shouldn’t have to pay what we owe.
But Argentina’s problems aren’t any surprise to readers of Financial Trend Forecaster. We talked about Argentina’s politics back in 2012. At that time, we featured the photo at the left showing Obama snuggling up to Socialist President Kirchner and told you how inflation was beginning to ravage Argentina back then already, in an article titled: Trends: Argentina’s Finances Going Bust Again?
In it we told you how Argentina was following the typical recipe that governments always seem to follow as they destroy their economies. In 2012, the “official” inflation rate was 10% but the unofficial rate was more likely about 24%.
In July 2012 we said, “Things Are About to Get Much Worse for Energy Firms in Argentina”. In April, Argentina’s President Cristina Fernandez de Kirchner nationalized Spanish Repsol’s shares in YPF (Yacimientos Petrolíferos Fiscales the national Argentine energy company.) While there are certainly short-term gains to be realized, the long-term effects of the Argentina-Spain relationship and Argentina’s relationship with other oil majors will result in significant setbacks in investment confidence and overall appetite for working with the Argentine government.
In April of 2013, in an article entitled How International Law Can Affect Your Investments we listed several countries that have exchange controls, including at the top of the list Argentina but also accompanied by Brazil, China, Cuba, Egypt, Iceland, Myanmar, North Korea, Pakistan, Russia, Ukraine, Venezuela and Zimbabwe. See full list.
And then about a year ago, in an article entitled “Surviving a Hyperinflation” we said, “currently Argentina is trying (unsuccessfully) to prevent her citizens from exchanging Argentine Pesos for Dollars and it may end up with a second round of hyperinflation before long.”
Interestingly, despite all its problems Argentina can still be a great place to live. In this article, Doug Casey talks about the community he is building there. He has often said, that as long as you aren’t tied to the local currency and aren’t a “serf” of the local government you can survive and often prosper in places like Argentina. In the article he tells us, “there are two basic ways to motivate and coordinate human behavior on a large scale: coercion and persuasion. Government is the human institution based on coercion. The market is the one based on persuasion. Individuals can sometimes persuade others to do things for love, charity, or other reasons, but to coordinate voluntary cooperation society-wide, you need the price system of a profit-driven market economy.“
How to Destroy Your Economy in One Easy Lesson
1) Promise the poor “Bread and Circuses”.
2) Tax the “Rich” to Pay for it.
3) When there aren’t enough rich, borrow money and start inflating the currency to cover the shortfall.
4) Add a bit of corruption and “skimming” as the money passes through the government’s hands.
5) Restrict foreign exchange to the “official” exchange rate to prevent “evil capitalists” from profiting from the Country’s misery.
6) Institute price controls to “protect” the poor from the disastrous effects of government policies.
7) Lie, fudge government statistics, punish journalists… do whatever is necessary to hide the truth about the actual state of the economy
8) Default on government debt when it becomes obvious to those stupid enough to lend you money in the first place, that there is no way you can pay them back.
9) Hope that they quickly forget their losses so you can borrow from them again in a few years.
Argentina’s History of Defaults
Argentina has defaulted on its external debt seven times and five times on its domestic debt since its independence in 1827. By mixing it up a bit they always seem to be able to find new suckers. Argentina’s first sovereign debt default came a mere 11 years after declaring independence from Spain. But after all, they were a new country and they eventually resumed payments on the debt 32 years later. So that by the late 1800’s Argentina was in the midst of a commodity boom and lenders had forgotten their caution. In 1890, Argentina’s default on 48 million pounds almost brought down Baring Brothers and the global credit markets.
In 1915 and 1930 individual Argentine provinces defaulted but the federal government continued to pay its external debt. Other defaults included, external debt default in 1982 and internal debt default in 1989.
One of the most famous episodes in Argentine history occurred in the 1950’s as Juan Perón instituted massive socialist policies in Argentina in a wave of popular support from the poor but by 1955 the country’s economy was a mess and he was ousted in a coup in 1955. His wife Eva is the subject of a great deal of popular propaganda and the subject of the movies and plays entitled “Evita”. She died of cancer in 1952 shortly after a massive crowd begged her to run for vice-president. Juan Perón returned to Argentina and was soon after elected President for a third time from October 1973 to his death in July 1974. His third wife, Isabel Perón, was elected as Vice President on his ticket and succeeded him as President
Interestingly, Kirchner is a big fan of Perón, succeded her husband as president and has followed Perón’s playbook almost to the letter, I wonder if her government will eventually suffer the same fate?
After the coup ousting Perón, the debt was restructured to avoid default but that just put off the day of reckoning until 2001 when some of that debt which was still owed 46 years later was defaulted on in 2001. That plus new debt amounted to almost $100 billion… the largest sovereign default ever at the time.
In 2005 and 2010 creditors were able to swap about 93% of the outstanding bonds for 33 cents on the dollar to a hedge fund who has pursued legal action to try to collect… good luck with that.
Footnote: In 1943, Ludwig Freude traveled with Perón to Europe to attempt an arms deal with Germany. Ludwig’s house became the meeting place for Nazis and Argentine military officers supporting the Axis. After the war, Ludwig Freude was investigated over his connection to possible looted Nazi art, cash and precious metals on deposit at two Argentine banks, Banco Germanico and Banco Tournquist. But on September 6, 1946, the Freude investigation was terminated by Péron’s presidential decree.
Recently declassified files from Brazil and Chile reveal that during WWII Péron sold 10,000 blank Argentine passports to ODESSA – the organization set up to protect former SS men in the event of defeat. A Croatian priest, named Krunoslav Draganovi?, was authorized by Perón to assist Nazi operatives to come to Argentina and evade prosecution in Europe after World War II, and the Argentine consulate in Barcelona gave false passports to fleeing Nazi war criminals and collaborators.