Politics in Banking - Argentina Style

(PATAGONIA, Argentina) - While The US continues to dither about whether and how to reform its banking practices, Argentina has taken concrete and controversial steps to gain control over its financial future.

Direct government control over its central bank, payment of long-term debt and opening banking to foreign investment have helped restore public confidence in both the banking system here and in our mostly unpopular president, Cristina Fernandez de Kirchner.

Unsurprisingly, the big banks up north, the very same ones who are now fighting regulation and reform proposals by the Obama administration, are taking a dim view of Argentine reform and are likely to continue putting pressure on Argentina to pour its assets in their direction.

This week, the Argentine senate confirmed the president’s appointment of Mercedes Marco del Pont as the President of its central bank. The appointment was made to replace the old bank chief, Martin Perez Redrado, who had refused President Fernandez de Kirchner’s request to transfer some four billion US dollars in central bank reserves to the national treasury for payment on foreign debt. Redrado had insisted that the bank was an independent entity that had no responsibility to bail out the government if it could not pay its bills. Redrado was fired by the president in a move that essentially asserted government control over the central bank.

Argentine President Cristina Fernández de Kirchner
Photo courtesy: xinhuanet.com

The senate vote to confirm the new appointment was quite dramatic. At the end of the roll call on the confirmation, the vote count stood 35 in favor and 34 against with one senator left to vote. A vote against would have produced a tie, giving vice-president Julio Cobos his opportunity to again vote against the president and ruling party.

However, the last senator to vote was Saul Menem, Argentina’s president in the 1990’s, who is generally credited with wrecking the economy and causing the great financial meltdown and depression in 2001.

Apparently, Menem feared that a vote against this new appointment would result in a return to the international financial community friendly policies of his fateful administration. So not wanting to risk taking blame for a second meltdown, Menem abstained, thus giving the Fernandez government control over central bank policy.

The key claim by the government was that the bank was not operating in the public interest. Under Redrano’s guidance, the bank had piled up huge reserves, which it used mainly to manipulate currency rates, while it held back funds that could lower interest rates or fund public expenditures. The move by Fernandez to replace Redrado with a more compliant manager signaled that the government -- and not the international finance community -- would control Argentina’s financial future. Putting public interest ahead of profit as the primary motive for national financial policy, clearly establishes the current government’s socialist credentials.

During the Menem years, Argentina had followed financial policies dictated by the IMF and the international banking community. Public services were cut, and the banks borrowed heavily to keep the country awash in cash, which the middle and upper classes used to buy imported goods. The trickle-down philosophy of economics did not, however, work in Argentina. By the end of that decade, no investment in infrastructure had been made and the volume of debt was impossible to support. The few business owners and bankers who had benefitted from the flow of loan money into the country during those years fled the country as the economy imploded and their businesses collapsed.

The current government has no wish to return to the debt bubble of the 1990’s. Had Argentina not been able to use bank reserves to make the current four billion dollar debt payment, the government would have had to go out into the international loan market and borrow the loan payment money with new money at more than ten percent interest. Such steeply profligate borrowing would have been in the interest only of the big international investment banks and hedge funds who tie up and repackage public debt in much the same way they manipulated mortgages on homes in the USA. It has never mattered to CitiBank or Goldman Sachs that Argentina or any other debtor country could not pay their debts, as they simply repackaged the debt into bonds or sold debt wholesale to each other on a secondary debt market.

The big banks and investment houses still do to the United States the same thing they did to Argentina in the 90’s. They have been creating credit by repackaging impossible-to-pay loans into financial instruments which they use to make more credit. Unlike Argentina, however, the US government did not renounce the unsupportable debt and allow its banking system to collapse. Instead, American central bank reserves have been used to support shaky banks and pay off on some of the bad loans. Such is the capitalist method of dealing with a financial crisis, to put the interest of the banks and financial community first.

President Fernandez did not wish to place any further financial burden on the people of her country. Had the central bank not released the funds to pay the current debt obligation, the resulting increased borrowing would have been passed on to the people in the form of higher taxes and reduced public services. Argentina is currently enjoying a robust 8% economic growth rate and the national poverty rate has been steadily declining since 2001. Neither President Fernandez nor her political opposition were willing to risk all that for the sake of the health of the finance sector.

So far, the fallout of this decision for the central bank and the Argentine banking sector has not been all bad... Initially, many shareholders, mostly foreign, in the Argentine central bank, bailed out and sold their shares. Bank stock fell precipitously until the slide the was stopped by a massive influx of cash and stock from Banco do Brasil, Brazil’s biggest bank. Despite the four billion dollar outlay that former director Redrano had feared would damage the health of the bank, the Argentine central bank is now better capitalized than it was before the recent moves. Moreover, Banco do Brasil has just announced a purchase of controlling interest in Banco Patagonia, Argentina’s seventh largest, and arguably most stable bank.

Eddie Zawaski is a contributing Salem-News.com writer based in Patagonia, Argentina.

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Bob Jones April 30, 2010 1:53 pm (Pacific time)

The United States does have the largest known energy reserves, and it is true that our known oil reserves are down on the list. With upcoming energy tech. we will soon be an exporter of energy and current countries that rely on oil exports for revenue will be facing a constantly diminishing cash stream. Canada will probably start exporting fertilizer or something, as their main revenue source, oil will not be in a marketable demand rate for them. Tough being a one-trick poney in the modern world. Tough luck for them. I guess we can let them come down on mass visa's to glean our agricultural fields and orchards in the fall and maybe even in the winter months depending if their nutritional needs are being met. Poor guys. Broke and hungry. But it's a good way to stay trim. LOL

Largest known energy reserves? Apparently you're the only one who knows this.

Even if you were correct, they would be years away from production. Canada has them now DJ

Sorenson April 29, 2010 10:06 am (Pacific time)

Actually the United States has the largest energy reserves in the world and the technology to extract that energy in a cost effective manner. It boils down to a cost benefit situation coupled with dealing with environmental groups that have been putting up legal roadblocks. A future congress could easily bypass this court nuisance in the interest of national security, and I imagine this will be done. If we quit importing oil from Canada or from the dictator Chavez I'm sure other countries would want that supply and would quickly switch to maintain that revenue. The earlier argument I read was that Canada needed American expertise and exports to survive on it's current level, well that's pretty obvious. Since we are very close trading partners and intertwined in many other ways I sincerely doubt that we would ever get involved in some type of harmful and prolonged boycotts. Though it does appear a very small minority of folks would like that, and I imagine these are people who really do not understand economic reality or much of anything else. As a veteran I'm quite happy the draft dodgers headed to places outside of America and good riddance. As far as us having over 100 million firearms, I have read it may be over 200 million with about 1/3 of us being armed. In Canada it is about 1/2 of you being armed, and I frankly would like to see everyone of sound mind having access to firearms. So in that regard, way to go Canada you are showing the world how safe firearm ownership is when law abiding people have firearms. Just the same, Canada is highly dependent on America for a significant amount of your needs, essential and nonessential. Just look around and see what you have that we produced via our technology. Not just in Canada, but around the world.

US has largest energy reserves in the world? The CIA Factbook lists the top 17 countries with oil reserves. Canada is #2 with 14.4% of the total. US is #12 at 1.7%. Of course, you could always annex Iraq and make it a state, then you would have another 9% or so. Check it out here: http://en.wikipedia.org/wiki/Oil_reserves

If you have further sources on American oil reserves I (and I'm sure many readers) would like to know about them.

As for Canada needing American expertise "well that's pretty obvious": It's only obvious to a myopic American who believes that the US is the centre of the known universe. Not true. I see American expertise in action today in the Gulf of Mexico and of course there was the Exxon Valdez. Need I go on?

I look around and see lots that has been produced as a result of American technology. But as I look around, I see very little of it that was actually produced in the US. Someone mentioned that Canada has a small manufacturing base and is dependent on the US. Not true. America's manufacturing base has also left the continent and most of what I see has been produced in places like China and Japan.

I don't know where you get your estimate of half of Canada being armed. I think that's quite high. From my personal experience, other than a couple of 22s when I was a kid, I have only ever known one person who owned a handgun. That's in a large city. I've known rural people who have owned shotguns and hunting rifles. In fact, my brother-in-law committed suicided with a hunting rifle. Check it out here: http://en.wikipedia.org/wiki/Gun_politics_in_Canada DJ

Bill Griffith April 28, 2010 6:38 pm (Pacific time)

I stand by my previous post(s) as accurate. If our economy continues to fall or stagnate for much longer, the Canadian economy will worsen to a higher degree than ours, and will take much longer to recover. In regards to Alberta and how things are going there it is obvious that the type of politicans in power there are doing much better than other provinces and the types of political leaders thay have there. I prefer the empirical over the unreasoned and unseasoned assessments. Canada could be self-sufficient, how? Maybe if you were totally rural, but you have no industrial capabilities to maintain your population centers, nor the facilities to train the people, and that is why you import the vast majority of your essential needs, ranging from healthcare supplies and infrastructure needs. We can easily be self-sufficient, and in time we will be forced to do just that. Canada will always need to import from us, and export products to us for the cash you need to operate. By next year at this time, we all should start seeing vast improvements in the world economy, but we will have other far more serious problems facing us as we continue to balkanize. I will be shocked if our cities this summer are not unlike the summers of 1965 and 1967, but far worse.

Without oil from Canada and Venezuela (the two main exporters to the US), the US would quickly descend into anarchy. And with 100 million (at least) private firearms laying around, I'll be happy to watch the fireworks from this side of the border. The good Americans would already have fled to Canada and been welcomed with open arms. Vietnam, for example, gave Canada a lot of good (far and above the draft dodgers) Americans. Our gain, your loss. DJ

Bill Griffith April 28, 2010 11:48 am (Pacific time)

81% of Canada's exports go to the United States, and 67% of Canada's imports are from the United States. Trade with Canada makes up 23% of America's exports and 17% of its imports. Rather significant differences. This is not what one would call an "Even-Steven" balance, so, as goes our economy, Canada's economy will have a time-delay impact, whether good, bad or neutral. My guess is it would be a real positive for Canadian exporters and importers to want to see us have a robust economy. As of June 2009, Canada's national unemployment rate stood at 8.6% (you're 8.2% now) as the effect of the world economic crisis settled in and more people looked for work. Provincial unemployment rates vary from a low of 3.6% in Alberta to a high of 15.6% in Newfoundland and Labrador. Needless to say Alberta has some top people involved in running the economy there. Essentially there is a looming global environmental crisis that Canada (and Argentina in ref. to article), on their own, can do little about. It will be the United States of America that will shape the world's economy, and that is the "exceptional" nature of America, solving problems, both on a domestic and global level. If we fail, which surprisingly many uninformed people (they're anarchists, many don't even know it, blinded by myopic agenda's) want us to, then a massive struggle will be coming. If that happens, I would certainly rather be in America than any other place on the planet.

Bill/T.C.: Shows how little you really know. Alberta is not run by "top people". The premier is a farmer and his cabinet is top heavy with rural people. Without the oil resources, our backward government would probably have us at about the same level as NF. Actually, no oil would probably be a good thing. It would mean we would not have had Texans come up here over the last 70 years to twist and distort our culture. We might then be more like a normal province.

As for the trade imbalance, Canada could be self-sufficient, whereas the US could not. Sorry.

And, as the almost single-handed cause of global environmental problems, you think Americans should be heroes? In your dreams. DJ

gp April 27, 2010 7:33 pm (Pacific time)

Hey Bernie, You would be well served to read Naomi Klein's Shock Doctrine to find out what the US, the IMF and the World Bank did to help the Argentine Crash along. Not only Argentina either. Now after having rushed in like condors to eat up the remains of the rest of the pillaged world they are doing the same to the USA.

Bernie April 27, 2010 6:28 pm (Pacific time)

Editor did you read my 10:40 AM post? That is documented history I wrote and has nothing to do with any American political party. Argentina has faded and has been fading fast no matter how one wants to spin the facts. Please note Argentina started to fade approximately 80 years ago, and as beautiful a country as it is, it has some serious financial problems that are not being addressed realistically, which is also the same thing happening here. If we don't watch it we will have a permanent underclass of over 50 million souls. For example look at our school dropout rate, it's increasing quickly, faster than the birthrate. Also see how the population of those who do not speak english is increasing, you get the idea? Not to mention that no jobs of any note are being developed for those who stayed in school and speak english. So whose in charged? What have they done in the last year and a half? And no I am not a republican or a democrat, just a citizen that sees what's going on and has some background in economics, along with American and world history. All we're seeing now is a big drive to seperate us on many different levels, from race to socioeconomics. Many are talking about illegals' civil rights, well American's civil rights trumps those, and watch the "professional" polls unfold in the weeks and months ahead. Hot summer coming? I read one economist state that if 300,000 new jobs were created monthly for two years we would still have over an 8% unemployment rate. When the stimulus bill came online it was to keep it from going above 8%, so yeah we have some things in common with Argentina when it comes to poor leadership. Canada's economy will drop like a stone if we discontinue trade with them if our economy worsens, and that is nothing to laugh about, just a clear fact.

Daniel Johnson April 27, 2010 3:54 pm (Pacific time)

You posted the debtclock.ca to be scary, no doubt. But it's the exact opposite. (from a Canadian point of view)

It shows a total federal debt of $521 billion about 24 times smaller than the US debt of about $12 trillion.

Second, it shows an average share of debt for each citizen at about $15,000 compared to more than $42,000 for each American citizen--nearly triple.

If Canada is a dictatorship, I like it just fine LOL

Daniel Johnson April 27, 2010 3:52 pm (Pacific time)

Stephen: You need a little more knowledge before spouting off. When the logician Kurt Godel was up for citizenship (along with his best friend Albert Einstein--both at the Institute for Advanced Study at Princeton in the 1940s) he conscientiously studied the Constitution. He found logical errors that would allow the establishment of an American dictatorship. Others, since have found other loopholes. This is from Wikipedia under "Kurt Godel":

"On December 5, 1947, Einstein and Morgenstern accompanied Gödel to his U.S. citizenship exam, where they acted as witnesses. Gödel had confided in them that he had discovered an inconsistency in the U.S. Constitution, one that would allow the U.S. to become a dictatorship. Einstein and Morgenstern were concerned that their friend's unpredictable behavior might jeopardize his chances. Fortunately, the judge turned out to be Phillip Forman. Forman knew Einstein and had administered the oath at Einstein's own citizenship hearing. Everything went smoothly until Forman happened to ask Gödel if he thought a dictatorship like the Nazi regime could happen in the U.S. Gödel then started to explain his discovery to Forman. Forman understood what was going on, cut Gödel off, and moved the hearing on to other questions and a routine conclusion."

Here are references to Godel's argument: http://morgenstern.jeffreykegler.com/

As for Canada already being a dictatorship, I would like reliable input on that so I can see what I am not seeing.

historian April 27, 2010 1:35 pm (Pacific time)

thanks Daniel, you saved me having to type. :-)

Daniel Johnson April 27, 2010 1:28 pm (Pacific time)

Well, Bernie, you're living in a world of denial (or maybe you're just a Republican provocateur--psychologically the same thing). Read Stephen Kinzer's Overthrow--detailing more than a century of American government/CIA destabilizing and overthrowing of legitimately elected governments. The two most egregious examples are Iran in 1953 and Chile in 1972. In both those cases the governments were popular with the people, just not popular with American business. As a player on the world stage, America is not a very nice country, no matter how much they donate to earthquake victims in places like Haiti. Or read Naomi Klein's Shock Doctrine, for another take on America, Rogue Nation.

And a little known, but well documented fact, is that your Constitution has enough loopholes in it to allow for the legal establishment and maintenance of a dictatorship. Some people currently argue that America is on the edge of dictatorship at this moment.

Bernie April 27, 2010 1:05 pm (Pacific time)

My below post was just providing an overview flow of some Argentine history. As far as what someone suggested that America did to destabalize Argentina, no, they did that on their own at least a half century before Ford took office. The purpose of my post was to show what our people in DC are doing in comparison to the steps Argentina began taking many decades ago. There is room for some comparison, but we have a different form of government that at least so far does not allow for a dictaitorship, and that is part of the problem Argentina had and why they have gone from 4th in average per capita income to number 76. To blame the ills of the world on America is sport for many it seems, though I have yet to see the below allegation be anything other that conspiracy legend, like the ranch of unicorns that exist near San Francisco. Of course when you have bills being pushed through that no one reads, who knows, maybe we have a scenario not unlike early Argentina?

Editor: Oh come on, you would pose that crap to anyone over anything as long as the U.S. is the dirty culprit. I know you guys all learned the strategy of repetitive lying and implanted falsehoods via reporters during the Bush years, but that crap doesn't fly here, it is dead weight, like almost every single GOP politician in office. They will be the end of America, Viva Argentina! Long live all nations that have the courage to rise above the fray and haul the garbage out back where it belongs.

Daniel Johnson April 27, 2010 10:55 am (Pacific time)

Bernie: You're presenting a biased and limited view of Argentinian history. Argentina is just one of many countries that the U.S. has helped to destabilize in the interests of its own banking sector. In 1976, the year of Argentina’s coup, when thousands of young activists were snatched from their homes, the junta had full financial support from Washington. Eighty-one percent of the thirty thousand people who were disappeared were between the ages of sixteen and thirty. (“If there are things that have to be done, you should do them quickly.” Kissinger had said.) That year Gerald Ford was president, Dick Cheney was his chief of staff, Donald Rumsfeld was his secretary of defense, and Kissinger’s executive assistant was a young man named Paul Bremer.

Bernie April 27, 2010 10:40 am (Pacific time)

Eddie Zawaski Argentina has an interesting financial history and certainly is not the model for us. A century ago, if you had told typical citizens of Argentina (which at that time was enjoying the fourth-highest per capita income in the world) that it would decline to become just the 76th richest nation on a per capita basis in 2010, they probably would not have found it believable. They might have responded, "This could not happen; we are a nation rich in natural resources, with a great climate for agriculture. Our people are well educated. We have property rights, the rule of law and an open free-market economy." But the fact is, Argentina has been going downhill for eight decades, and it has the second-worst credit ranking in the entire world - only Venezuela has a lower ranking. Argentina, despite its natural resources and human capital, has managed to throw it all away. Argentina did not become relatively poor because of having been involved in destructive conflicts. It became poor because it has had a series of both democratically elected leaders and non-elected dictators who never missed an opportunity to make the wrong economic decisions. It is, once again, trying to renege on paying principal and interest on Argentine government bonds to foreign bondholders, hence New York state (where many of the bonds are serviced) may take further action against Argentina, including fines and asset seizures. In the 1930s, the Argentine government increased its interventions in the private economy. Juan Peron took over in 1946 and ended up nationalizing the railroads, the merchant marine, public utilities, public transport and other parts of the private economy. Argentina has engaged in a series of erratic monetary policies, often resulting in periods of very high inflation and economic stagnation. Because of their political power, the unions have been coddled, resulting in unsustainable wage-and-benefit programs.

Douglas Benson April 27, 2010 6:40 am (Pacific time)

This is what we need to do .For far too long we have allowed the fed and central banks to be private and play shell games with our monies . The big problem is what will happen next to Pres.Fernandez ,look out here comes the hit squad .

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Politics in Banking - Argentina Style

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