S.American economy...a little off topic

[Hoda]

Morning Folks,

Seems like Argentina has been taking some SERIOUS BODY BLOWS to their economy lately. Argentina has even started distributing substitute money. Nineteen Governments representing South & parts of Central America went to the extreme step of calling Dubya to insure the passage of the loan from the IMF. My question(s) for you World Econonmy Wiz kids, is Argentina the only country in S.America needing this type of infusion of cash from the IMF. How long & how much longer will this be going on? Judging by the amount of this request (estimates range from 6 to 16 billion), Colombia's economic problems seem to pale by comparison.

If Argentina and/or Brazil sneezes, you know the rest of S.America is going to catch that cold. Any idea of the worse case scenario, if the Argentine economy goes belly up? Has anyone traveled to Argentina lately for business or pleasure? What's the mood of the people? I want more than what one can read from the internet. C'mon, there's gotta be a couple of you out there!

[Pete E]

... in response to S.American economy...a little off topic, posted by Hoda on Aug 27, 2001

Howard,
I'm not an expert on the situation but can comment a little.
Problem number one:Argentina has their currency pegged to the dollar,one to one.This may be a great idea in general,but if the real value is not at that level it can cause big trouble.A few years ago Russia had an official rate on its currency that was much more than its real value.The IMF pumped in about 20 Billion dollars to prop it up and it was gone in a couple of weeks to currency traders.

Problem number Two.They can't make their debt payments to international banks.This is probably related to #1 but also shows consumption higher than income.Now they want the banks to forgive debt,or the IMF to give them money to pay it.Brazil went through something similar 10-15 years ago.I am thinking these banks are so carefull making a loan on real estate of established value and then they go and lend billions to third world countries.Duh!.Bank of America got burned big time on that one.

Problem number three:Related to the others.There is a tendency to get out of short term problems by playing with the money supply.A band aid on a broken back.Won't work.On the other hand the international banks solution is usually austerity programs that bring big political turmoil.

Conclusion:Be glad you live in an economically stable country.The economic nonsense of these third world countries can bite them on the A-- big time.All of latin America is not doing too good right now ,but this particular problem seems to be unique to Argentina at this time.
The IMF and the banks,with a push from the US will probably help.Its better to try to solve the problem before it really takes them down.
Maybe there are some buying opportuities there now.Remember our friend Silvia?She owned 2 properties that she couldn't even collect the rent on.She didn't want to sell because they were down in value 50%.They are probably down 90% now.

To quote an old Chuck Berry song"I'm so glad I'm living in the USA."

Pete

[newby Jim]

... in response to Re: S.American economy...a little off to..., posted by Pete E on Aug 27, 2001

Nice job, Pete. I think that ultimately there will need to be a bail out package for the Argies. It'll get done before this problem spreads to Brazl too. Argentina will likely peg her currency to the Euro from now on as the US$ is so high that it makes Argentine exports uncompetetive.

[El Diablo]

... in response to Re: S.American economy...a little off to..., posted by Pete E on Aug 27, 2001


Good observations Pete.  It's not clear to me whether the pegging is a problem.  In the 80's Argentina had hyper-inflation and I believe they decided to try to bring inflation under control by pegging their currency to the dollar.  They pegged it about 10 years ago I believe and my recollection is that inflation was brought way down.  As long as they keep their money supply growth in line with the dollar's growth, I would think the two currencies would retain a similar relative value.  On the other hand, as people lose confidence in the Argentianian curreny and economic situation, they are exchanging their currency for dollars.  As the dollar reserves decline, there may come a day when the government can no longer support the currency and it may be forced to float it in the open market.

I think they biggest problem is deficit spending compounded by a shrinking economy.  About three or four years ago, the Argentina economy went into recession or negative growth however they continued to borrow money from foreign banking institutions.   So as debt increased, the GDP decreased.  Now we have a situation where Argentina is unable to pay off their external debt and they are looking to the IMF to bail them out with fresh dollars.  Usually the money comes with conditions (austerity measures) however and as you suggested they aren't always well received by the masses.  The  $8 Billion in the latest agreement is not much when you consider their total foriegn debt is approaching $130 billion.  I believe they are also trying to re-package large parts of this debt, kind of like refinancing your house to borrow an analogy.

I don't know the figures but I don't believe Argentina's economy is large by western standards, about 4% of the U.S. economy and about a third as large of say Mexico or Brazil. Their per-capita income is large by L.A. standards but Mexico and Brazil are much more populous.  If they default, I'm sure it will cause major problems in L.A. but it's impact should be much less than if Brazil or Mexico did the same.