And the Money Kept Rolling In (And Out) Wall Street, the IMF and the Bankrupting of Argentina by Paul Blustein Public Affairs © 2005 278 pages Focus Take-Aways Leadership & Mgt. • Argentina's hyperinfl ationary economic chaos ended in 1991, thanks to a system of Strategy strict 1:1 convertibility between the peso and the U.S. dollar. Sales & Marketing • Against all expectations, Argentina achieved monetary stability. Corporate Finance Human Resources • Argentina's economy boomed. Foreign investors poured capital into the country. Technology & Production • International banks and brokerage fi rms hyped Argentine bonds. Small Business • As Argentina's levels of indebtedness grew to unsustainable levels, confl icts of Economics & Politics interest in fi nancial institutions led them to promote Argentine bonds even more. Industries & Regions Career Development • Argentina was reluctant to abandon the peso's 1:1 exchange rate with the dollar. Personal Finance • Regulators who might have forced discipline on Argentina – most notably the Concepts & Trends International Monetary Fund – failed to do so. • Instead, they kept extending fi scal rescue packages. • Eventually, the game was up. By 2001, Argentina hit economic and political chaos. • Although Argentina's government is most directly responsible for the country's plight, international banks and international regulators contributed greatly to Argentina's fi nancial fi asco. Rating (10 is best) Overall Applicability Innovation Style 9 n/a 8 9 To purchase abstracts, personal subscriptions or corporate solutions, please visit our Web site at www.getAbstract.com or call us at our U.S. offi ce (954-359-4070) or Switzerland offi ce (+41-41-367-5151). getAbstract is an Internet-based knowledge rating service and publisher of book abstracts. getAbstract maintains complete editorial responsibility for all parts of this abstract. The respective copyrights of authors and publishers are acknowledged. All rights reserved. No part of this abstract may be reproduced or transmitted in any form or by any means, electronic, photocopying, or otherwise, without prior written permission of getAbstract Ltd (Switzerland). Relevance What You Will Learn In this Abstract, you will learn: 1) How Argentina’s economy revived; and 2) How it then crashed again, as the country snatched fi nancial failure from the jaws of victory. Recommendation This is a very readable, lively presentation of the story of how Argentina overcame decades of monetary mismanagement and put itself on the path to economic growth during the early 1990s only to descend again into economic chaos. getAbstract.com recommends this book to those interested in international fi nance, although it suffers slightly from a moralistic tone, as author Paul Blustein points an accusing fi nger at international banks and brokerage fi rms. One might also have hoped for a bit more insight into what happened to the billions of dollars that fl owed into Argentina during its brief boom years. But Blustein’s expert analysis (organized around metaphorical references to the musical Evita) says much about the dark side of globalization and points to some severe, apparently recurring problems in the international fi nancial system. Most instructive is his observation that elements of Argentina’s experience are now apparent in the fl ow of funds to emerging markets newly favored by international investors. Therefore, this book unfortunately may be a harbinger of things to come. Abstract “Globalization’s Big Bust” “The collapse The story of Argentina’s bubble is one of euphoric optimism, reprehensible greed, of the Argentine economy…was irresponsible regulation and tremendous suffering, including children dying of one of the most malnutrition and losing everything as their banks collapsed. spectacular in modern history.” Major international investment banks and brokerage fi rms collected about $1 billion for their services underwriting Argentine bonds from1990 to 2000. With that much money at stake, banks had no incentives to publicize doubts about whether these bonds were truly sound investments. As was the case in the U.S.’s corporate stock market scandals during the same period, security analysts whose pay depended on keeping stock salespeople pros- perous painted too rosy a picture of the investment quality of Argentine bonds. But confl ict “In a country of interest was not the only factor driving Argentine investments. The index that inves- like Argentina, (Economy tors use to measure money managers’ performance encouraged imprudent investment in Minister Domingo) Argentina because it gave the most weight to the country that borrowed the most money. Cavallo believed, Thus, the more indebted Argentina became, the more important it was for money manag- monetary policy was a dangerous ers in emerging markets to buy additional Argentine bonds. But the Argentine fi nancial instrument, a fi asco was not entirely the fault of bankers and brokers. The Argentine government failed view effectively to exercise fi scal discipline, and international regulators proved excessively indulgent. endorsed by the Argentine public, The eventual Argentine economic collapse, stemming from fi nancial events in 1999 and which by and 2000, had severe consequences for the people of Argentina and for the world as a whole. large came to see convertibility as a For many years, the International Monetary Fund (IMF) had pointed to Argentina as the contract locking case study for sound fi nancial management and the benefi ts of globalization. The fact that a its undisciplined favored darling of the international capital markets could come to such an ignominious end government into acting sensibly.” provides ample ammunition for the anti-globalization movement. But what actually went wrong? A timeline of the Argentine collapse shows plenty of blame to go around. And the Money Kept Rolling In (And Out) © Copyright 2005 getAbstract 2 of 5 “Show Me the Money:” The Argentine Boom At the debut of the twentieth century, Argentina was one of the world’s wealthiest countries “The Argentine and seemed to have a brilliant future. However, the country squandered its opportunities. authorities chose In 1991, after the country underwent decades of hyperinfl ation and poor economic not to confront performance, Argentina’s new Economy Minister Domingo Cavallo adopted a radical enough powerful interests to ensure new system to force fi nancial discipline on the country. The essence of “the convertibility the adoption of system” was to remove Argentina’s discretion over its money supply by fi xing the exchange a more prudent rate at one Argentine peso to one U.S. dollar. Despite numerous doubters and skeptics, this fi scal policy.” convertibility system made it possible to tame Argentina’s hyperinfl ation from 1991 to 1994, and to establish the monetary foundation for economic growth. Meanwhile, to address other problems that had stymied economic progress, the Argentine government deregulated industry, removed trade barriers and privatized government enterprises. Notwithstanding some problems with corruption in the privatization program, and some serious shocks to groups that had benefi ted from the previous protectionist regime, on the whole the new economic order seemed to succeed splendidly. It passed “Today, remorse runs deep at a diffi cult test in 1995, when a fi nancial crisis in Mexico tainted all emerging markets the IMF on this investments. Argentine fi nancial markets suffered but quickly rebounded. point, and many economists’ Cavallo was a national hero, and foreign investors were eager to pour funds into the postmortems Argentine success story. In 1997, the IMF (whose ranks included many people who agree: Fiscal policy was one had been skeptical about the convertibility program) gave its blessing to Argentina by of the crucial establishing a “precautionary” program to provide the nation with emergency monies junctures where if needed. But little evidence indicated that Argentina would ever need the emergency Argentina went wrong.” funds; it seemed safe and sound. Notwithstanding the Asian fi nancial crisis that erupted that year, investors continued to buy Argentine bonds. Unfortunately, investor avidity for those bonds made it easy for Argentina to incur debts beyond prudent levels. As Argentina’s debt-to-GDP levels climbed, IMF analysts began to raise troubling questions about the country’s long-term solvency. In April 1998, IMF offi cials warned fi nancial markets that a meltdown could occur. The market shrugged off the warning. Later that year, the IMF prepared to deliver an ultimatum to Argentina: reform the labor market or “Argentina had face the withdrawal of IMF support. However, the Russian default and the collapse of a skirted around a major hedge fund put the entire global fi nancial system in jeopardy. Rather than exacerbate squall – the crises uncertainty by confronting Argentina, the IMF backed away from its ultimatum. Instead affl icting Asia and Russia.” of disciplining Argentina, global fi nancial regulators invited Argentine President Carlos Menem to address the annual meeting of the IMF and World Bank. The Argentine Recession or “This May Not Be Paradise” In 1999, Brazil precipitated a crisis by devaluing its currency. Since Brazil was a major export market for Argentina, its devaluation made Argentina’s exports considerably more expensive. Argentina’s exports fell – just as one would expect. Meanwhile, worldwide commodity prices also were falling, cutting Argentina’s hard currency earnings from “But the place