Assigning blame in Buenos Aires: questionable lending practices by United States' banks and other foreign financial institutions played a critical role in the meltdown of Latin America's third-largest economy

0 Comments | Insight on the News, Feb 18, 2002 | by Martin Edwin Andersen

Argentina's spectacular economic meltdown has created a cottage industry of political pundits, economists and international financial experts who for several weeks vigorously have competed in a low-stakes blame game where the fault always is found in Buenos Aires.

The New Year arrival to the Argentine presidency of Per6nist Eduardo Duhalde, a vociferous critic of free-market reform, was interpreted by media commentators as diverse as National Public Radio and the. Wall Street Journal as symptomatic Of the country's unique political and economic dysfunction. "Bankers and Bush administration officials," reported Washington Post columnist Jackson Diehl, who served as that newspaper's correspondent in Buenos Aires in the mid-1980s, "have been quietly appalled by his insistence that the free-market model Argentina has pursued for the last decade is `exhausted' and must be replaced by `our own scheme' which he says will have as its central axis" the protection of Argentine industry.

"Though the policy models of the two leading parties, the Radicals and the Peronists, had not been updated since the 1950s," Diehl observed, "nationalist notions of Argentine exceptionalism convinced the politicians they could outsmart the [International Monetary Fund] IMF."

Other observers point out that Duhalde's rhetoric lacks a program to sustain it, that he has picked a mediocre Cabinet and that, when he was the Buenos Aires provincial governor, he and his economic minister, Jorge Remes Lenicov, left the province with the biggest debt in Argentine history. Duhalde's populist backlash against a free-market/neoliberal economic model, they say, is to blame for the country's current financial debacle. Duhalde claims that it is the IMF's financially orthodox recipes for reform that are responsible for Argentina's hyper-unemployment (now at about 20 percent) and the virtual liquidation of its formerly large middle class. Today, barter has replaced the now-devalued peso as a medium of exchange for many essential items in a country that a century earlier had a higher average annual income per person than either France or Germany.

Wracked by the pain of economic contraction, fearful of more outbreaks of mob violence on city streets and stunned by a national political crisis resembling those of much poorer "failed states," Argentines say they feel betrayed by the IMF's decision to stand by and let the country announce late last year that it could not pay either the interest or the principal on its $141 billion debt. Political observers in Buenos Aires tell INSIGHT the unelected Duhalde faces a no-win situation in which he either must bow to foreign pressure and renege on his promises of a state-led economic reactivation -- a prescription for anarchy and social disorder -- or tough it out and find that Argentina's economic isolation is even worsened. With polls showing that politicians of all stripes are out of favor with most Argentines, Duhalde risks his meager political capital if he tries to wriggle out of his own promises, these experts say.

Defenders of the free market tend to lay all the blame for the current crisis on the Argentine people, whose political bankruptcy was much in evidence by Duhalde's selection as the country's fifth president in two weeks. Nationalist and protectionist forces, on the other hand, single out "globalization" and international financial institutions, such as the IMF, as their scapegoats for the country's current crisis.

Ironically, both sides appear to ignore the critical role played by foreign banks in the sad tale of Argentina's leap into greater underdevelopment.

In recent years, the role of private foreign financial institutions, particularly American and Spanish banks, has grown enormously in the Argentine market. Today, almost one-half of the deposits in Argentina -- of a total of $67 billion -- are controlled by foreign banks. Citibank has one of the largest operations there of any American bank. In January, parent company Citigroup reported that Argentina's economic free fall had cost it $470 million in losses on loans, investment securities and trading positions. FleetBoston Financial Corp., which merged recently with BankBoston, is the most exposed U.S. bank and in mid-January was forced to postpone its fourth-quarter earnings announcement while it assessed its losses in Buenos Aires. Business analysts say these, together with J.P. Morgan Chase & Co., shouldered a disproportionate share of losses from the peso's devaluation to 1.4 pesos to the dollar from the 1-1 parity established by then-president Carlos Menem in 1989.

In 1976 Henry Kissinger, secretary of state and a former Rockefeller family retainer, gave Argentina's military rulers the go-ahead to carry out a vigorous counterinsurgency campaign against Marxist terrorist groups that resulted in the kidnapping, torture and clandestine murder of at least 15,000 people, in what was known as the "dirty war" (see "Kissinger Had a Hand in `Dirty War'" Jan. 28). Months after Kissinger gave the generals the "green light" -- in the words of the U.S. envoy to Buenos Aires at the time, Robert Hill Kissinger's former boss, vice president Nelson Rockefeller, also voiced his support for the military regime.