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   Daily Blog - Tiger Software

                       November 29, 2007

     Additonal Conclusions added on March 7, 2009

    Vital Lessons for US from
    Argentina's Currency Collapse 
    of 2002.

           William Schmidt, - Tiger Software's Creator
      (C) 2007 William Schmidt, Ph. D.  - All Rights Reserved. 

      No reproductions of this blog or quoting from it
      without explicit written consent by its author is permitted.

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    Lessons from Argentina Currency Collapse  of 2002

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You know a country has problems when its main publicly
                           traded phone company drops from 50 to 2 in two and a half
                          years.   That was the case in Argentine.  That stock's direction
                           matched the US markets.  But the size of the decline was 
                          an Argentine nightmare.  Its nearly total collapse occurred
                          because of the 2002 collapse of the Argentine Peso.

Argentine Telephone Stock in ADRs

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                                                    2002 Collapse of Argentine Peso.

                        The chart below shows how fast the Peso lost its value. When it was suddenly de-coupled
                        from the Dollar, it fell 75% in 6 months.  The decline was rapid, but not immediate.

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      What Caused The Peso's Collapse in the First Half of 2002?

                     A brutal military dictatorship ruled Argenina from1976 to 1983.  Thirty thousand simply
       disappeared.   Many were tortured and pushed out of air planes.  There were no trials.   The dictatorship
       ran up huge debts in failed projects and the Falkland/Malvinas Islands War.  (Compare this with George
       Bush's absurdly arrogant war on Iraq, which economists say will cost the US $3 trillion.)

                     Unemployment and international isolation ended the distatorship and there was an election in 1983.
       The new government tried to restore the Argentine economy by creating a new currency.   New state loans
       were required on which in six years the government defaulted.  In 1989, Argentina's inflation reached 200%
       per month, topping 3,000% annually.
  A new government came in, campaigning on a populist platform,
       then privatized the telephone, energy and water services. With the new proceeds, the government started to
       restore confidence in Argentina's currency and economy.  IMF loans were procured.  The new Peso had a
       monetary value fixed by the value of the US Dollar. Life got immediately better for those with property and
       good jobs.  They could travel abroad, import household appliances and computers.  But Argentina's own exports
       suffered and recession became endemic.  To pay its quickly rising debts, Argentina had to keep borrowing
       more money from the IMF, it had nothing more to sell off, so it delayed its repayments.   In 1999, Argentina's
       GDP dropped 4%. Exporters wanted a devaluation.  But Argentine banking experts argued against a controlled
       devaluation, in which the Peso would be de-linked from the Dollar.   Devaluation was painted as unpatriotic. 
       So, the government did nothing while the recession turned into a depression as the 2001 world-wide recession hit.
       With government funds being exhausted and the countries balance of trade worsening, wealthy Argentines converted
       their money to Dollars and took it out of the country for safety,  This encouraged a "run on the Banks".  

                  "The official unemployment rate approached 20 percent and more than 40 percent
       of the population lived under the poverty line. This evolving economic apocalypse frightened
       the wealthy elite who began to send their peso/dollars abroad for safekeeping. This emptied
       the Argentine Central Bank coffers of foreign reserves which were heretofore used to amortize
       the nation's humongous foreign debt of US$141 billion (the greatest per capita foreign debt in
       the world with the exception of the US.)"
  ( http://www.gold-eagle.com/gold_digest_03/vronsky062303.html  )

                       In 2001, people fearing the worst began withdrawing large sums of money from their bank
       accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then
       enacted a set of measures that froze all bank accounts for twelve months, allowing for only minor sums of cash
       to be withdrawn. Many Argentines became enraged and took to the streets of important cities, especially Buenos
      Aires in 2001 to 2002. At first. there were simply noisy demonstrations, but soon they included property destruction,
      often directed at banks, foreign privatized companies, and especially big American companies. Foreign capital
      stayed away and .matters worsened.    Confrontations between the police and citizens became a common sight,
      and fires were also set on Buenos Aires avenues. A State of Emergency was declared, but this produced violent
      protests  in December 2001 in which several died.   The President fled in a hellicopter and residned, creating a
      a political vacuum.  An interim goverment emerged from the Legislative Assembly. It defaulted on the larger
      part of the public debt, $93 BILLION at the end of 2001   A new President, Eduardo Duhalde, was appointed
      by the Legislative Assembly.  Announcing "we are in collapse" and "Argentina is bankrupt", he abandoned the
      1-1 peso dollar parity in favor of a provisional 1:4 pesos per dollar.  All Dollar accounts were converted by law
      to Pesos at this rate!  It defaulted on $143 billion in debt.

                   "After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge
      depreciation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means
      to replace them locally at the time).  The economic situation became steadily worse with regards to inflation and
      unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar,
      while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were
      considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average
      Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became
      virtually inaccessible, and salaries were left as they were before the crisis."


                  A year later, the economic outlook began to improve dramatically.  Unlike in the 1990's, the cheaper price
      for the Peso encouraged exports and tourism.  The Peso slowly revalued on its own.  The trade surplus became
      very large.  While imports started to rise as citizens began to prosper,  foreign capital came into Argentina
      worked to counter that force and strengthen the Peso.   GNP surged 8.8% in 2004,  9.0% in 2005,  9.1%
      in 2005 and 8.5% in 2006.  Nine million people in Argentina still live below the poverty line, but that's half
      the number who suffered so five years ago.

     wpe25.jpg (8338 bytes)      wpe26.jpg (32136 bytes)
                                                            Trendy Argetine restaurants...Elegant hotels... Smartly dressed guests....Harp concertos.
                                                            Busy outdoor markets on a sun-drenched.  Flourishing tourism...

        Argentina's Lessons for the US.

     (1) A war is a great drain on national resources.  The occupation of Iraq puts the US at grave financial risk.
     Three trillions dollars will have been wasted by Bush and Cheney's blunder.  We may never recover.
TigerSoft Bog - 3/7/2008 -The Real Cost of Bush and Cheney's Iraq ...

      (2) Until the US can start to export much more, its currency will be under steady pressure.   Since this
     article was written, a world-wide financial panic has hit.   This has made the Dollar and US Treasury
     instruments seem to be havens for investors who have nowhere else to turn.  When, however, the
     world-wide recession ends or China chooses to no longer provide the US any more loans, the Dollar
     will likely come down very hard, putting the US at risk of discovering first-hand what Argentina has learned.

     (3) The stronger Dollar since the fall of Crude oil in the Summer of 2008, has made it even harder
     to export American manufactured goods and allowed foreign products to continue to dominatethe
     shelves  of American stores. This only makes the Dollar more vulnerable longer term and brings
     the US closer to the Argentine case.

      (3) The world wide recession may very well dry up foreign loans that keep an insolvent government afloat.
      That is what happened to Argentina in 2001 and triggered the collapse of its currency.  Watch for signs
      that China changes its policy of buying US Treasuries or an OPEC decision to use currencies other
      than the Dollar as the primary medium of international exchange for buying its oil.

      (4)The world wide bull market from 2003-2007 had been leaving most of the US behind. The rising
      foreign markets had the effect of  creating a flight from the dollar among American investors. Now,
      the break in the bubble is making investors consider the Dollar a safe place to put their money. 

      5) But US financial institutions, because of their reckless use of leverage, are now in 2009, essentially
      insolvent.  So, they are no longer in a posiiton to benefit from a strong Dollar.  This will dramatically
      hurt the long term trade imbalance of the US.   American banks are widely distrusted and despised, by
      Americans and foreigners alike, as trillions of Dollars must be raised by the Treasury and the Federal
      Reserve to keep these Zombie Banks alive. This short-term borrowing makes the US Goverment that
      much more debt-ridden and financially vulnerable.  The grotesqueness of the bailouts for banks reveals
     as never before how beholden both major political parties in the US are to Wall Street. 

(5) If the US follows the Argentine model, its government will be tempted to sell off its finest assets in
       sweetheart deals which they will term "privatization".  This has not happened yet,  But as Obama
       moves towards puting the US Government into a position of owing $2 trillion, we may even see the
       National Parks be privatized.  Selling rights to pollute to coal-burning US utilities is a sign of the times.

      (6) More important, is what is happening to corporate America.  The 2008-2009 market massacre
      is allowing China, and any foreign investor that wishes, to buy corporate America for pennies on the
      Dollar.  When there is a recovery, profits will not stay in this country.  They will go overseas, if
      the Argentine model plays out.

      (7) The
IMF bailed Argentina out, again and again. "Like a gambling house that keeps handing out
      chips to a losing player to keep him in the game, to clean him out, the
IMF kept shoveling dollars
      into Argentina, until she had lost everything she had."  When their stock market was down to "give away"
      levels, the banks and brokerages that control the IMF bought Argentine stocks.  In that way, the
      backers of the IMF can lose billions in loans and still make money.
China and the "friendly" OPEC countries are now doing this to the United States.  But we are not
      being warned by our government, whose short term interests are served by more borrowing.

      (7) Government efforts to forbid the drain of currency can create violent protests.  If Obama raises
     taxes too swiftly on the richest Americans, we can expect their capital to go to overseas tax havens.
     Already, the rich are wailing that Obama is a secret Marxist and has started a "class war" against
     the rich.

      (8) At some point, when Americans wake up and find that they are owned by foreigners, they will
      turn nativist and kick and scream.  But it will be too late and poverty will become very widespread
      because the collapse of a currency creates its own dynamics and the decline starts to feed on itself: 
      At this point, nothing can stop its collapse.  
                 Example:   Fear of a currency collapse ---> flight of capital ---> unemployment ---->riots
                 -----> more fear and more flight of capital.  The cycle only ends with a financial panic and devaluation.

      (9) A sudden and severe drop in a currency dishes up stark changes in business and personal
      consumption, as vital imports cannot be afforded and businesses needing them fail.  This sends
      poverty and unrest to very dangerous levels.  Such is the experience of Argentina in 2002-2003.

10) At the same time, a very over-priced currency soon generates recession and rapid increase
      in impoverishment, too.  Review Argenitina between 1997 and 2001.  This is because the IMF will only
      grant its loans (bailouts) on conditions that the Government lay off many of its own workers and make
      deep across-the-board cuts in its spending and and social safety-net programs.  
       ----- See World Bank's detailed study of this:


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                        The International Monetary Fund:
                      A Critical View by Pat Buchanan

                                         : December 29, 2001
      "The beneficiaries of IMF bailouts are the First World speculators and plungers who find their emerging market
       paper going rotten, but can access the Treasury and Fed to get the IMF to bail out their clients, so they can get
       their money out, while ours pours in.  A second beneficiary is the overpaid IMF employees with tax-free
       salaries, who travel the world first-class as they play savior of troubled nations. With the hook of our dollars,
       they acquire real power by making the recipient nations debtors, clients and captives of that rising New World
       Order in which the IMF is to play a commanding role.   Bottom line: The IMF is the social safety net of Goldman
       Sachs. It exists to spare the Money Power the free-market consequences of its idiot investments
. Argentina's
       is the greatest default in history – not the last. More are coming. For all that keeps this game going is a U.S. trade
       deficit of $450 billion and IMF and World Bank loans that shovel tens of billions of dollars abroad annually to
       stave off defaults. ( http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=25862 )

                                               Economic Debacle in Argentina
|                                      The IMF Strikes Again

                                                                   by Arthur Macewan
                                       Dollars and Sense magazine, March / April 2002


As Argentina entered into the lasting downturn of the period since 1998, the IMF continued, unwavering,
in its financial support. The IMF provided "small" loans, such as $3 billion in early 1998 when the country's
economic difficulties began to appear. As the crisis deepened, the IMF increased its support, supplying a
loan of $13.7 billion and arranging $26 billion more from other sources at the I end of 2000. As conditions
worsened further in 2001, the IMF pledged another $8 billion.

However, the IMF coupled its largesse with the condition that the Argentine government maintain its
severe monetary policy and continue to tighten its fiscal policy by eliminating its budget deficit.
(The IMF considers deficit reduction to be the key to macroeconomic stability and, in turn, the key to
economic growth.)

The Argentine government undertook deficit reduction with a vengeance. With the economy in a
nosedive and tax revenues plummeting, the only way to balance the budget was to drastically cut
government spending. In early July 2001, just before making a major government bond offering,
Argentine officials announced budget cuts totaling $1.6 billion (about 3% of the federal budget),
which they hoped would reassure investors and allow interest rates to fall. Apparently, however,
investors saw the cuts as another sign of worsening crisis, and the bonds could only be sold at high
interest rates (14%, as compared to 9% on similar bonds sold just a few weeks before the announcement
of budget cuts). By December, the effort to balance the budget required cuts that were far more severe;
the government announced a drastic reduction of $9.2 billion in spending, or about 18% of its entire budget.

With these cutbacks, the government both eviscerated social programs and reduced overall demand. In
mid-December, the government announced that it would cut the salaries of public employees by 20%
and reduce pension payments. At the same time, as the worsening crisis raised fears that Argentina would
abandon the currency board system and devalue the peso, the government moved to prevent people
from trading their pesos for dollars by limiting bank withdrawals. These steps were the final straws,
and in the week before Christmas, all hell broke loose.

(Source: http://www.thirdworldtraveler.com/South_America/EconDebacle_Argentina.html )

       More reading on the Argentine Collapse. 

   2008-2009 ILF - ETF for Latin America

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