Boom, Bust and Bus

It’s fairly widely known that in late 2001 and early 2002, Argentina’s economy exploded.  And not in the “welcome to the developed world” kind of way, that had already happened in the 90’s.  It exploded in the same way a racing car does, a spectacular fireball that makes everyone watching go “oooooh, aahhhh” and take a huge step back.

And I’m going to tell you the story of that default and why it makes riding the bus (something I’ve already covered) so damn difficult.

It was the largest sovereign default in history.  Argentines wanted to play with the big boys, but the recession of the 90’s was wreaking havoc on its economy.  Inflation was out of control, we’re not talking German-Weimar-Republic-tote-your-cash-around-in-wheelbarrows bad, but prices had skyrocketed around 1000%.  Because prices had gone up, the government had to print money in higher and higher denomination bills, meaning coins became worth less than their weight in metal and began disappearing altogether (this is key, remember this).  And if you know very little about what this means, take a look at what is currently happening when you put your money in a savings account and earn 1% annual interest (which is probably your savings account APR right now) in the U.S.  Inflation in the U.S. is around 3% now, which means your savings account is being out-paced by the inflation rate, which also means you are LOSING MONEY because you aren’t earning enough interest to cover the loss in value due to inflation.

Now imagine the same sort of concept in Argentina, only with a catastrophically higher inflation rate.  If you put your money in a savings account, it would literally be worthless the next day.  So everyone held on to their cash, including foreign investors.  So what is the solution?  Admit defeat.  Tell the world “we’re powerless to control the value of our own currency.”  Just give up.  Give up, and then say “Ok folks, each peso is worth exactly one U.S. dollar.”  One-for-one exchange with the dollar, pure genius.

Why pure genius?  Because inflation meant that there were a TON of pesos floating around that had been worth 1/1000 of a dollar last week, and they were now 1:1 with the dollar.  Everyone was suddenly incredibly rich.  Everyone who walked into a bank with a peso could, literally, walk out with a dollar.  Imports skyrocketed and the economy was booming.  Seeing this incredible growth, investors started dumping money onto the country and Argentine bonds (instruments of national debt, think U.S. T-bonds) became a hot commodity.  For 7-8 years, this was amazing.  And it worked, until it didn’t.

Imports from outside of Argentina were amazingly cheap, which allowed people in Argentina to afford things they never had been able to previously.  Think Argentine playboy rolling around Monte Carlo in a Lamborghini.  But on the flip side, Argentine exports were suddenly expensive, manufacturing suffered.  Crop exports couldn’t compete on the global market.  And as a result, unemployment started to creep up.  To counteract it, and keep the good times rolling, the Argentine government started to borrow more and more money.  (Those familiar with the Greek debt crisis can start to see a few parallels, right?)  The country was basically surviving on credit and fell into another recession.  But Argentina couldn’t do anything to solve the problem; they were powerless because they had previously declared that one peso was equal to one dollar.

So people panicked.  There were riots and week-long stretches of violence.  And then a light bulb slowly started to turn on in the minds of the wealthy and fiscally-minded folks.  They could see disaster looming over the horizon, this wasn’t going to end well.  So they did what smart and fiscally-minded individuals do, they tried to avoid losing money.  How?  Well, at that time the peso was still pegged to the dollar, so they quietly began to transfer their money out of Argentine banks and change it into U.S. dollars in foreign accounts.  Think a 1920’s era bank-run, but in slow motion and over the internet.  All of the dollars that the Argentine central bank needed to maintain the 1:1 peg had up and left.

So what did the government do?  They closed the banks and forbade any and all withdrawals.  Literally, shuttered and boarded up with fences erected to keep the mobs of people away.  They stayed that way for a week or more.  The people lost it.  They had already been rioting, but now they lost it.  Sustained violence and general disorder went on for weeks because all of these formerly (and yes, artificially) wealthy people were now broke and in a recession with incredibly high levels of unemployment.  Paper money had all but disappeared and through it all, in an attempt to quell the chaos, the Argentine government kept borrowing money.  But as they continued, the interest rates on the loans shot up because of the unrest.  The more they needed the money to stabilize the country, the more expensive it got for the government to borrow it.

The government had lost control.  In the first two weeks of 2002, the country went through five different Presidents.  The third of those five is the one who left the legacy.  He suspended payment on all foreign debt.  Total default.  Total loss of faith in the government.  Total suspension of belief in the banks.  People didn’t even trust their own paychecks.  Cash became king, and people hoarded it like crazy.  Eventually, the 1:1 currency peg was severed and the value of the peso spiraled down to around 3:1 or about 33 U.S. cents per peso.

To this day, people are still trying to regain the money they lost when Argentina defaulted.  Think international repo men trying to nab battleships and anything else of value belonging to Argentina.  The country owes somewhere in the neighborhood of $16 billion USD, plus interest, to creditors who invested in Argentina when it was artificially booming.  And they aren’t paying.  Any funds the country has have been moved to the Bank of International Settlements, conveniently located in Switzerland under all of the immunity from appropriation that the Swiss are famous for providing.

So what does this mean nowadays?  Well, it would be totally legal for any entity that Argentina is indebted to, to seize any Argentine asset they can find in order to service that debt.  Which means that Argentina, to this day, is essentially and effectively barred from raising any money in international credit markets.  Any money that they raise, can be seized.  And the long-term effect is that no one, for the foreseeable future, will loan them any money.

Now why did I tell you this long story?  Well for one, absent the bail out, Greece is currently in the exact same situation that Argentina was right before the Argentines walled up the banks.  The other, and more relevant, issue is physical currency.  Because the initial problem was inflation, and coins became worthless, Argentina went through a coin crisis in late 2008 and 2009.  It is still suffering through it because the central bank refuses to mint more coins out of fears of inflation.  And so the main mode of transportation in Buenos Aires, riding the bus, becomes really difficult.

As I said earlier in the blog, buses take payment in the form of coins or the rechargeable RFID payment card called Sube.  And up until recently it was only coins.  So people hoard coins much in the same way they hoarded any cash in early 2002.  Shopkeepers will flat out refuse to change a 2-peso note for coins.  The only way to get coins is to purchase something that guarantees change in coinage or to go to a bank and ask for coins.  But even then, there is a maximum of 10 pesos in coins per transaction at the bank.

People adapt though.  It hasn’t stopped people from moving around the city.  People here are used to this kind of minor challenge and they just find a way to keep moving ahead.