Argentina Bonds Now? Part 1

by | Jan 21, 2002 | Archives

Here is the opportunity…and the risk

Dear International Friend,

Its about time to look again at what the Argentina fiasco, as it continuesto unfold can offer to us as investors. However we can gain a lot more than just money from the events tat are taking place there. We can learn many lessons, about economics, nations and our own lives. So we'll share a series of short lessons over the next several days looking at what has happened in Argentina and what this can mean to us in many ways.

We recently shared a message about the International Monetary Fund and how it tried to coerce governments into accepting economic models that were not necessarily good for the country.

Argentina in trying to accept its IMF plan, pegged the peso to the USdollar in an attempt to gain more fiscal control. (ie. the government could not just print pesos unless it had dollars to match). The idea in this peg was to reduce inflation and control government spending.

This did not work as eClub advisor Steve Rosberg (a banker in BuenosAires) explained when he wrote:

“Gary, . I agree with your view on the restrictions on consumerism for everybody and it not being a panacea. However, the IMF'S FOUR STEPS TO DAMNATION article contains a basic flaw. It is the following: The necessary precondition for all this cycle to happen is that the victim country must have a public sector that is spending beyond its means. That is to say, that its expenditure exceeds its revenues (which is why they resort to borrowing or high inflation, or both!). A well run country will not have this problem.

Taken to a family level, if the family habitually spends more than it earns, it will incur debt. First, low cost (f. ex. a mortgage), then higher and higher, credit card debt and then, finally the loan sharks. Are the lenders guilty? To a point. But the root of the evil is with the individuals (orgovernments) who believe that actions can be separated from consequences.Or, in the case of governments (better still!), spend today, we'll borrowand leave the mess for the next administration. Thank you, all the best, abrazos,Steve”

Steve's point is absolutely correct. Argentina pegged its currency to theUS dollar to stop inflation, but continued to spend. Instead if financing its excess by devaluing the peso, it financed its short falls with borrowing. Eventually debt service was so huge that the system couldn't stand even one pitfall. This meant of course that the pitfall was bound to come along and that the government would not able to pay its debt. We'll look at the pitfall in tomorrow's message and end this message by looking one more time at the message Argentina's debacle gives us. No one, individual small or government large can afford to continually spend more than it earns. Until next message, good global business and investing!