Argentina's Last Crisis

Brad Setser looks back at Argentina's recent crisis:

Brad Setser's Web Log: What happened to Argentine banks in 2001? And why?: Retrospective analysis of what went wrong in Argentina back in 2000 and 2001.... Argentina's crisis was a searing experience for me. In my no doubt biased view, the case studies are the real strengths of this just released IMF paper (fully disclosure: I contributed to the Argentine case study).... The core thesis of the Argentine case study is simple: Argnetine's banks were in far better positioned to survive a devaluation and a government debt restructuring at the end of 2000 than they were at the end of 2001. Consequently, waiting a year had real costs....

[D]uring the course of 2001, Argentine banks got rid of precisely those assets that would (potentially) have performed in the event of a devaluation and government debt restructuring. They ran down their best assets -- their liquid offshore reserves -- to pay off depositors (and to pay off maturing cross border credits). They also reduced their peso lending to Argentine firms dramatically. Peso deposits fell more rapidly than dollar deposits (that, incidentally, does not mean dollar depositors did not run: some peso depositors shifted into dollars, and some dollar depositors ran). To stay matched, currency wise, the banks had to reduce their peso lending commensurately.

That left the banks with dollar-denominated lending to the government, and dollar-denominated lending to Argentine firms. Both types of lending were almost sure to go bad in the event of a restructuring and a devaluation...

Comments

[bobbyp]

Just the last in a long list of examples of how bankers are generally dumber than dirt.

[anne]

Importantly, professional investors knew of the danger. How long had Paul Krugman been openly warning of the failing of the Argentine economy because of the dollar peg? There was every possible opportunity for professionals to sell Argentine assets and sell they did, but how and to whom? Who in Europe or America was buying Argentine debt when professionals understood what was happening and what would happen?

[anne]

Investment company executives cheered Argentina and cheered the peg as the Argentine economy went from recession to depression. The failure built and built, and knowledgeable investors and speculators readily sold assets under the peg. Who then was left with assets that could not have been secured?

[anne]

I have long been annoyed at the way in which international bonds are sold to ordinary investors. If selling Euro bonds can be tricky because of currency movement, selling bonds from developing economies introduces credit risks that have caused damage time and again. Mexico, Brazil, Argentina... From 1998, I am struck that investors were not repeatedly warned of the growing risks in Argentine debt. Unlike Mexico in 1994, if ever a problem should have drawn warnings it was Argentina's. Where were the proper warnings? What am I missing :) ?

[anne]

What of foreign owned or influenced banks as opposed to domestic banks? What happened at Citigroup's Argentine bank as the situation deteriorated? What of the Spanish banks? There is much more to be understood.

[Kenya Holidays]

It is hard to look at the U.S. and not see a country with enormous internal strains. Krugman, who has been usually concerned with economic and political realities, is now echoing Moyers’ concern about the rise of Christian fundamentalism: It has finally achieved real power. Cf. Danforth’s recent article in the NYT. If you think evangelicals are silly about evolution, geology, and medicine, you should see what they try to do with the speed of light and the red shift—all in the name of bringing science into line with the Bible. If you think the U.S. will maintain its technological lead if these folks continue to solidify their hold on the government, guess again.

[Kenya Safari]

A return to profitability may allow banks to boost lending for a second year, said Jorge Sarghini, president of state-run Banco de la Provincia de Buenos Aires SA, the country's No. 2 bank. Bank lending tumbled 29 percent in 2003, the year the economy began to recover from a four-year recession, according to central bank data

[katiba]

Well all one can say is that Krugman should just be aware taht what goes around surely comes around and he might just find himself is a similar difficult situation that he has put the other chap :)