The Argentina economy over the past decade makes for an interesting case study. Argentines went through a painful crisis and just when everyone thought it was all in the past, financial uncertainty has recently reared its ugly head once again. Throughout the 90’s, the Argentine peso was pegged to the US dollar, one-to-one. While the US (and consequently the dollar) was riding the dot-com boom, South American (and their pesos) commodity-export-centric economies were being hurt by the weakened global demand caused the Asian Financial Crisis of 1997-98. The Argentine peso-US dollar peg was a joke, given the vastly different economic health of the two nations (similar to the obvious discrepancies with Venezuelan exchange rates today). Even as Brazil’s (SA’s largest economy) currency (the real) lost half of its value in 1999, the Argentine government clung to full convertibility. While some politicians advocated “dollarizing,” others turned to the IMF who recommended various fiscal targets if convertibility was to be protected. But it was unrealistic and nearly impossible for the Argentine government to pull itself out of the hole. The artificially-high FX rate pummeled Argentine exports and unemployment was getting out of control. By 2001, everyone knew that the one-to-one peg was unsustainable and as rumors or devaluation swirled, Argentines pulled out their savings and exchanged pesos for dollars in droves. The government then banned withdrawing money from bank accounts, pensions, and even limited access to salaries! Can you imagine the government banning people from accessing their bank accounts?! By January 2002, the government did abandon convertibility and the peso dropped to a quarter of its value, before bouncing to and settling at around 3 pesos:1 USD later that year. Many Argentine’s life savings were wiped out, inflation soared, and Argentina defaulted on its debt.

            Since then, the country has gone backwards, infrastructure-wise and poverty-wise. And since the government never settled with all of its defaulted-debt holders, the country has largely been locked out of international credit markets and is unable to fund much potential growth. On the bright side, Argentina has hydrocarbons (oil and natural gas) and benefited from the most recent global boom. Argentines had hoped that the worst was behind them. A popular billboard from a recent election said, “Your kids don’t know what the IMF is? We’ll make sure they never will.”

            While commodity prices and emerging market economies strengthened through 2007, even as developed economies began to fall, 2008 was disastrous. The credit crisis didn’t affect Argentina initially too badly, because there wasn’t really a market for Argentine bonds since 2002. The main investors of Argentine debt were domestic funds (pensions and mutual funds) who were forced to invest in the worthless things by the government. Since it cannot access international funding, the government really pushes for domestic investment in government bonds and discourages the use of dollar-denominated bank accounts (which began being offered earlier this decade for obvious reasons). When oil (and all commodities) began to tumble in July 2008, government revenues began to fall sharply. While we were living in Buenos Aires in October, the president announced a plan to nationalize all the private pension funds. This drew outrage from the media, educated, and professional classes, since the government was basically stealing workers’ money. Remember, the ban on bank withdrawals is still a recent memory. But with a majority in the Senate and public support among the lower classes, the bill was passed in the Senate. The government gets a few things from this. One, they get control of all the money in the pension funds to spend as they please. The government has already announced that it will sell foreign debt held by the funds and buy domestic debt. Two, since the pensions are some of the only ones who hold domestic government debt (and only because they’re forced to), the treasury is relieved of much of its debt payments (because it’d just be paying itself). Foreign media widely reports that the government will likely default on their debt in 2009, while domestic media seems to think that it’s a political move designed to (literally) enrich the party. Whatever the reason, these moves have obviously had consequences. The Argentine benchmark index, the MERVAL, has tanked. Argentine bonds have tanked and the prices of CDS (credit default swaps) on the aforementioned debt has soared (last I read, it cost a quarter to insure a dollar of Argentine government debt, which is ridiculous). While the government defended the peso for a couple weeks, they finally capitulated as most countries do when trying to defend their currency. When we arrived in BA, it was 3.14 pesos to the USD; today, it is over 3.4, which has made Argentina increasingly cheaper for us to travel. Several times, I encountered empty ATMs and on several days saw lines at banks around the block. With further currency depreciation expected, people are trying to get dollars.

            Travel finances aside, what is the state of the Argentine economy and what is in store? Like its neighbors, Argentina is heavily dependent on commodity exports and the worldwide slowdown has and will continue to seriously hurt it. The pain will be intensified by the fact that the government cannot get international funding, its recent history of debt-default, and the current perception that the government is scrambling to not default on its debt in 2009. Not only are state revenues falling, the state has no other means of acquiring cash. The government is running populist campaigns (“We’ll protect the pensions” or “Why is America lecturing us on financial responsibility, when they started the mess”) and only in November did it admit that the country was in trouble. Well, I think the country is in real trouble without any hope in sight: demand and prices for the country’s two most important exports have tumbled (oil and soya), the currency will certainly continue to depreciate due to both domestic and international factors, unemployment and inflation will result, and the government may default on its debt for the second time this decade.

 

Exchange Rate Tangent: Since I wrote about the weak dollar and its negative effect on our travel expenses, the credit crisis has intensified and initiated a “flight to safety” in currency markets. The dollar has strengthened against every single currency we’ve used over the past 18 months, except the Japanese Yen (since Japan’s central bank is deemed to be more solid than even America’s and the yen was heavily undervalued due to the carry trade which helped fuel this latest bubble). The Yen has strengthened from about 125 to 90 over the past year (it was 107 when we were there). Although I’m glad we weren’t in Japan a month later than we were, it kills me to see the Korean Won at 1500. It was around 1000 when we were there, which means we would’ve spent a third less money if we visited now- a good margin in a somewhat expensive country. Honestly, I don’t care if the Indian Rupee, Thai Baht, or any other developing nation’s currency has fallen 20-30%, because those countries were so cheap anyways. Argentina and Chile were expensive countries to travel, but considerably cheaper due to FX moves. Bolivianos are pegged to the dollar, many Peruvian prices are denominated in USD (although still payable in soles), and Ecuador’s official currency is USD, so I think we’re pretty much done watching exchange rates. But, for you Americans out there, now may be the cheapest time to travel literally anywhere in the world (except Japan).

 

My tangent’s tangent: In my opinion, the best value destinations for American’s right now are: three of the world’s most expensive nations have become way cheaper: the UK (pound down over 25%), Iceland (kronor down between 60-90%), and Russia (ruble down over 30% and getting weaker). Additionally, I believe the Euro will continue to weaken due to all the once-boom-and-now-bust-nations like Spain, Greece, and all of Eastern Europe. Commodity-centric economies like Australia and all of South America are getting cheaper by the day too (all currencies hurting bad versus dollar). All of Asia has become even more cheap, except China (RMB remains up about 20% versus USD for 2008) and Hong Kong (HKD is pegged to USD at 7.8). Okay, I was going to list three countries as being a good value, but almost everywhere is as cheap as its ever been. I know times are tough in the US, but with cheap oil and a strong dollar, flying to and traveling almost anywhere internationally is unbelievably cheap. This is one long post….I think it’s time for me to sleep….