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October 1, 2014

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Saturday, June 28, 2014

Debt? Which debt?

By Nicolás Tereschuk
Guest columnist

In the next few lines I will try to explain what are we talking about when we speak about “public debt” in Argentina. This is something many foreigners may not know about. But if you aren’t from around here, no need to worry, because many Argentines do not know some of these facts either.

Most journalists and economists we watch on television, listen to on the radio and read in the papers every day do not try to explain the role played by private and public foreign debt throughout the last four decades. Most of them do not even know about the issue. Or perhaps they prefer not to know?

Eduardo Basualdo, the head of the renowned Economy and Technology Area at FLACSO Argentina and author of the one of the most precise works on this issue says several factors are clear when discussing debt.

As in many other Latin American countries, the level of debt in Argentina soared in the late 1970s.

But in Argentina, borrowing US dollars abroad — initially from US banks, then in global markets — was only the first step in a scheme, which unsurprisingly began during the fierce repression of the last dictatorship before becoming big business for locals. Although those companies that started borrowing heavily were formally in the industrial sector, a financial mechanism in which external debt played a fundamental role became the most important source of wealth for the holdings. “Wall Street” — financial speculation — started to replace “Main Street” — industrialization.

Basically, the wheel of fortune of the debt since late 1970s worked like this:

1) Local interest rates were maintained at artificially high levels by government policies. Therefore, the cost of borrowing abroad was lower.

2) This situation triggered waves of borrowing abroad by the biggest economic sectors and also foreign subsidiaries.

3) US Dollars were not used by the companies to invest in the industrial sector, but rather to invest in local financial instruments. Correspondingly, the price of those instruments also rose.

4) Once the local finanical assets rose in value, they were sold and converted back into US dollars.

5) The money was sent abroad, usually to tax havens.

But, what about the public sector debt? According to Basualdo, state borrowing abroad was a phenomenon that also played a crucial role in the process described above. Those loans guaranteed that there were enough US dollars to be transferred abroad by the biggest companies while at the same time maintaining the balance of payments more or less stable.

According to Basualdo’s book, by the end of the dictatorship, 38 local holdings (180 companies) held a lopsided 49 per cent of a huge external private debt.

To complete such a “successful” business, between 1981 and 1982 — mostly when the Latin American debt crisis burst — after capital flight had claimed millions of dollars, most of the private debt was taken on by the state. The huge bailout came to almost US$4.5 billion.

During the 1980s, when the democratic government of Raúl Alfonsín took office, the debt business didn’t end. Between 1981 and 1989 public debt grew at an annual cumulative rate of 12.6 percent.

Meanwhile, the private sector managed to reduce its debt at an annual cumulative rate of 12.1 percent. At the same time, capital flight by the main protagonists in this story — the biggest local holdings — increased at a pace of 17.2 percent annually. The United Nations Economic Commission for Latin America (ECLAC) calls the 1980s the “lost decade,” but it was clearly not “lost” for everyone.

Another chapter of this story took place in the 1990s, during Carlos Menem and Fernando de la Rúa’s administrations, which saw similar patterns. More loans were obtained but they were not invested and rather transformed into fresh dollars for capital flight.

Basualdo writes that “for every US$100 of total external debt, US$105 were transferred abroad. Between 1991 and 2001, the external debt increased US$78.91 billion and capital transfers abroad by local residents added up to US$82.87 billion.”

The debt in numbers

Numbers can help tell the story. Between 1975 and 2001:

- Interest paid to foreign creditors added up to US$117 billion.

- Total capital flight was 18 percent greater than the amount paid in interest: US$138 billion dollars.

- The stock of net external debt matched the amount paid in interest in 2001: US$138 billion dollars.

Since the dictatorship that began in 1976 until the mega crisis of 2001, borrowing abroad and then earning returns on those funds locally before whisking them away was not some marginal activity but the main business in town in Argentina.

After 2001, what had been borrowed had already left the country and what was left was in a few hands. Nonetheless, the bill still had to be picked up by the country. Taking that into account, the country does not look like an “irresponsible debtor” to me. More accurately, it looks as if someone stole Argentina’s credit card for 25 years and then Visa asked the country to pay.

Capital flight continued during Néstor and Cristina Kirchner’s governments — Argentina is still the country with more US dollar bills per capita outside of the US itself. However, unlike previous decades, the funds did not come from debt — which ceased to be the centre of the Argentine economy and fell sharply as a share of GDP — it was mainly fuelled by the money that came from local exports.

Now when you hear about the legal battle between Argentina and the vulture funds in US courts, when some “independent analyst” talks about Argentina’s defaulted debt, bear in mind which debt is being discussed here. The debt prior to 2001. The one used not for the country, but by a few of the richest — with the support of the prevailing public policies — to get even richer.

*Nicolás Tereschuk is a political scientist and author of the blog artepolitica.com.

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