Some countries learn from their monetary history. Then there is Argentina.
As
Argentina's foreign-currency reserves dwindle, a mega-devaluation looks
inevitable—again. Some countries learn from their monetary history. Then
there's Argentina.
In
the late 1990s, there was talk in Buenos Aires of replacing the peso with the
U.S. dollar. What dollarization might have meant came to mind last week when
Irish Finance Minister Michael Noonan stopped by the Journal's New York offices
to talk about his country's recovery from the 2008 banking crisis.
Mr.
Noonan was asked if he regrets his country's membership in the euro, which
effectively precluded Irish politicians from using monetary policy to clean up
a debt mess. He shot back that without the constraints of the euro, Ireland's
small, open economy would have probably suffered the far worse fate of a large
devaluation when its banks failed.
Marking down the currency is the least-painful path
for the state when it cannot meet its obligations. But as Mr. Noonan pointed
out, it's brutal on the population. Devaluation reduces the purchasing power of
the nation. Real wages and the real value of nest eggs belonging to ordinary
people are cut from one day to the next.
What
is worse, Mr. Noonan observed, is that few countries go through a
mega-devaluation only once. "It becomes a habit."
In
the case of Argentina that's being kind. A 200-year history of recurring
devaluations is even more serious than an addiction. It's pathological.
The
latest markdown came last week when Argentina announced that it now costs eight
pesos to buy a dollar from the central bank instead of 6.9. That's up from
three in 2006. In the black market the price is now more than 12 pesos,
suggesting that there is much more bloodletting to come.
This
crisis comes just over a decade after the last one, which happened just over a
decade after the one before that. But undermining the value of the peso is not
a modern phenomenon in Argentina.
According
to UCLA professor Sebastian Edwards, author of the 2010 book "Left Behind:
Latin America and the False Promise of Populism," the habit of devaluation
in Argentina dates back to the 1820s. In 1827, the paper peso that circulated
in Argentina was devalued by 33.2%, Mr. Edwards says. In 1829 it was devalued
by 68%. In 1838 there was a 34% devaluation, in 1839 a 65.5% markdown, in 1845
a 95% reduction and in 1851 a 40% devaluation. An 1868 currency board came
unglued in 1876; another one, established in 1891, survived until 1914.
The
politicians were only warming up. According to Mr. Edwards, there were currency
crises in 1938, 1948, 1949, 1951, 1954, 1955, 1958, 1962, 1964 and 1967.
"In
1971," Mr. Edward writes, "there was a new crisis when the peso was
devalued by 116.8%." (The percentage can exceed 100 because it is
calculated using pesos per dollar.) Argentina's economic instability grew worse
after 1974. "Inflation rose to 444% in 1976. This crisis recurrence had a
negative impact on growth: per-capita income fell at an annual rate of 1.7%
between 1975 and 1985. By 1985 inflation was 672%. Between 1981 and 1991, the
rate of devaluation of the peso averaged a staggering 1,346% per year."
President Cristina Kirchner's
practices of expropriation, contract abrogation, export taxes and caps on
utility rates have destroyed capital. Meanwhile, government spending as a
percentage of GDP doubled over the last decade. Neither foreigners nor locals
want to hold pesos because the central bank erodes their value by printing too
many of them. When that happens, there is almost no way to stop a foreign-exchange
run on the central bank, an inflationary spiral and impoverishment.
Last
week Argentina's foreign-exchange reserves dropped $1.25 billion as its central
bank struggled to defend the peso. Reserves are now a mere $28.3 billion—down
from a peak of $52.6 billion in January 2011.
The
worsening foreign-currency shortage is bound to stress an economy that relies
on imported raw materials and intermediate goods in the industrial and farming
sectors. Argentines report trouble finding medicines that are sourced outside
the country. Price controls, informally applied using intimidation, further
complicate the situation. Importers may buy dollars on the black market to pay
foreign suppliers, but they lose money unless they can adjust retail prices.
Fearing
an inflationary spike, the government last week said it would increase
competition in local markets by introducing more imports if the local producers
try to raise prices. Apparently the geniuses at the central bank forgot to tell
the price-controllers that they haven't got the dollars to bring in more
imports.
Jorge
Capitanich, Mrs. Kirchner's chief of cabinet, says speculators—out to make a
quick buck by beating down the value of assets so they can buy them—are the
cause of the peso collapse. Such economic ignorance at the helm of a nation of
41 million souls is frightening. But it is not surprising in Argentina.
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