I'm no economist, but I've got both hands-on local research and google behind me, and those are some mighty forces. Combining them, I've deciphered exactly what went wrong with the Argentine economy, why it happened, who won, who lost, and what needs to happen for this country to save the millions of people that are currently starving because of it.
If any of that sounds interesting to you, prepare a Mate (great link site from GERMANY?!?!), and read on:
Pictured above is the entrance to my local Citibank here in Buenos Aires. Isn't it pretty?
What went wrong
Argentina has a long history of economic folly, but could have been stable by now if not for the recent disaster. In early 2002, this country was forced to devalue it's currency, causing an economic shock-wave that effectively wiped out the middle class.
WHY?!?!?!!
In the early 90's, Argentina was experiencing historic levels of inflation. To control this, with full IMF backing mind you, the government pegged the Argentine peso in value to the US dollar- thus losing control over the currency's value while taking responsibility for covering the real gap between pesos and dollars. In layman's terms, the government got rid of inflation by paying the difference to the Argentine people, and made a peso worth a dollar. How did they pay for that?
Backed by the IMF and especially the banks, the government began issuing bonds for sale abroad to generate enough dough to cover their "dollar peg", or law of convertibility. P.S. - at no time was the peso ever really worth a dollar, in case you hadn't guessed.
Together the intl. banks and Argentine government created a huge speculative market on government issued Argentine bonds, selling the majority to US funds and wealthy individual European investors. This was a win/win (so it was thought) at the time for everyone:
- the government got the money it needed to cover the pesos against the dollar, and enjoyed great popularity among the people - who where now 'dollar rich'
- the bond investors got a guarantee on getting paid back from a government at a high rate of interest
- the bank higher-ups got million dollar spiffs off each big bond sale, because the margin of return was so big
- the Argentine people, who formerly had worthless pesos, now had that same amount in dollars. This meant that they could visit Miami and buy Sony products with reckless abandon. They also saved their peso dollars in local intl. bank accounts (citi, bank boston) and were promised that the money in peso/dollars was backed by US dollars at those bank's central branches in their home countries. Do you think it was... read on-
This is a classic bubble. Economically, the government of Argentina in 1998 looked like the .com situation in the US, everyone was profiting and nobody wanted to acknowledge the obvious truth - The "Wizard of Argentina" was really a small man named Menem (former pres, hated antisemite) sitting behind a curtain pulling levers. There was no money being made in Argentina, especially since shipping cow parts and wine bottles at a competitive price became financially impossible with the dollar peg.
Picture this - all the money was coming from investors outside the country, the country was spending more and more of that money to keep the lid on the dollar peg, and people were gleefully weekending in Miami while the bankers upped their bond-selling incentives. Even the utilities where all sold off to foreign countries, so little that was done in Argentina was generating any actual money for this country. Reading through some late 90's web documents from economists, I can't believe nobody saw how this was going to end.
As the 90's finished some of the top bank analysts in NY started whispering about Argentina's instability, and where silenced or 'promoted.' By 2000, ever single bank official selling Argentine bonds had to know there was no way in hell this country was going to cover those offers. Not a chance. By this point, they were taking in bonds to pay back bonds, forget about the out of control dollar peg. However, classically, the banks raised incentives again on bond sales, and flooded Argentina with more currency with the tacit approval of the government and the IMF.
At this point in time, everyone knew those investors where going to take a fall, all it was going to take was a catalyst. The US financial problems of late 2001 may have jittered investors and started the Argentina crisis, but the Asian crisis of 2002 which spread to Brazil was the nail in the coffin. Without their only real remaining trade partner, everyone (banks, govt, IMF) came to the table in 2002 to basically say:
The jig is up.
The investors wanted their money. The IMF wanted their money. The banks wanted their money from the government. The government had no money. The people had a bunch of money in peso-dollars in bank accounts, which they thought where guaranteed. This is December, 2001.
What happened next had not been seen before - the government defaulted on their bonds, creating the world's largest bankruptcy to date. They had no money, and they simply couldn't cover the cost. The politics of the country fell apart again, and they went through somewhere around 4 presidents in under 10 minutes (sorry - exaggeration, but you get the point).
Together with the banks, the government froze people's bank accounts overnight, and issued a decree that you could only take out a thousand bucks each week. At the same time, the IMF pulled funding, and forced the government to remove the dollar peg that it could no longer support, and free-float the currency. This is when the fun really began...
Who Won, Who lost
The international banks where winners from the crisis in Argentina. The banks in NY and abroad collected an egregious amount of money handling the bond issuing, and sold bonds well after they were obviously going to further destroy this country. They won't ever be held accountable, either, which is too bad since the bonuses handed out to the executives involved amount to enough money to make a dent in this country's outstanding default amount.
Brilliantly, the local branches of intl. banks where permitted to 'take the money and run', and never owned up to their guarantees to the people on the peso dollar. When the curtain was lifted, they pointed at the government, took their profit, and issued people their peso dollars at the going rate - 1/3 of the dollar. That means if you had $9,000 in your account on Friday, on Monday you woke up to $3,000. The intl. branches weren't accepting calls. People took up hammers and began physically attacking the banks in anger (I would too), so the banks physically boarded themselves up and hired armed guards. This situation continues today.
The US upper class profited as always, but this time the Argentine upper class got their god-given payday as well. Before the bank accounts where frozen and the currency was devalued, the upper class here was magically alerted, and moved their money to the US stock market, and accounts physically in NY, Canada, Switzerland, and the Caribbean. What's even worse is that with their money in dollars, when they changed it to pesos they got 3 times as MUCH as they did the day before. So, the upper crust here got 3 times richer (at least in this country) overnight, and never looked back.
The people who lost are numerous. Individual European investors lost so far, although the govt. here is currently working on a scheme to pay them back. Some of the big losers where the Argentine middle class, who saw their life savings divide by 3 overnight. As the economy tanked, most people lost their jobs at the same time they lost their money, which makes a great environment for the wave of suicides that happened.
The lower class in Argentina generally didn't have any savings to lose, however as the government fell apart, the services they needed to stay alive could not be provided and jobs disappeared. This all led shortly to a crisis in the North of Argentina, where it is said that millions are currently starving. The government's hands are tied on how much aid it can afford people in it's own country right now because of the amount of debt it owes the bond-holders.
The IMF issued a vomit-inducing paper discussing the steps they need to take in the future to keep this kind of thing from happening again. OOPSEEE! I still wouldn't consider them losers, even though they had to uncharacteristically consider the negative effect of their own policies.
What needs to happen next
Since the devaluation, exports are dramatically on the rise. The current government here has taken a hard-line stance that the debt amounts must be negotiated (read: lowered) to allow for any payback. Either way, Argentina is going to have to come up with around US$30bn to drag it's butt out of default, and began to receive new international investment. Not much positive can happen till then.
The middle class will never see their money again, and most are so jaded by banks and governments that they've already moved on. Others continue to take to the streets with hammers and bombs. The lower class is literally starving to death, or living in extreme poverty. The export market and it's associated jobs may eventually provide relief, but aid is needed now that can't be delivered by the government. The upper class now guards their tripled wealth more carefully, as people have become more desperate to snatch it. Much of their fortunes are still invested overseas, which does little for their ailing country.
What happened is another microcosm of what is wrong with the world's system. I'm sure there is some hotshot 28-year old in Brooklyn who sold those bonds and made a few mil, but he'll never be forced to pay back any part of his earnings to the investors or the people he helped starve, even if he knew what he was selling was snake oil. He'll buy a brownstone for cash and brag to his friends about his new car.
In the future, unless the banks and IMF are ever taken to task for the harmful capitalist policies that employ on countries like this one, the middle class will continue to be destroyed, and the lower class starved. As for the default debt in Argentina, less than one-half of the amount the US president will rubber-stamp through congress to continue policing in Iraq would cover it fully. Considering it's such a paltry amount to the international players, maybe they'll let some of it slide, but I'm not holding my breath for Argentina.
Everyone in Argentina pushes some sort of two-wheeled mode of transportation, even little old ladies. I say 'pushes' with only a slight bit of irony, having helped push some poor tattooed-dude's old Peugot 405 down the road earlier in the day, but that's besides the point. 
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