Argentina’s recent descent into economic chaos has been as tragic as it’s been predictable.
If you’ve listened to this programme over the past year, you’ll have heard experts forecasting that tinkering with the currency board system that fixed the Argentine peso to the US dollar would end in tears.
And yet, the tampering by the country’s economy minister - Domingo Cavallo - got worse, causing confidence in the system to evaporate,
leading to soaring interest rates, a deepening recession and finally - in January - the decision to abandon the currency board.
We’ve also heard on this programme why the subsequent decision to let the peso float was only likely to make matters even worse.
There are few exporters in Argentina to enjoy the competitive benefits from a weaker currency, while on the other hand the disruption
caused by tearing up the peso-dollar fix was bound to have crippling effects.
The banking system is bankrupt, people have been unable to get hold of their savings, normal economic life has been made almost impossible and unemployment has soared.
The peso has lost 70% of its value in the past four months.
The poverty may still not match many of the poorest nations of Latin America, but for the proud Argentines it’s a terrible humilation to bear.
Many people on the streets of Buenos Aires say have around $2 a day to live on - just enough to avoid starvation, but they can no
longer afford to eat meat, something that’s ironic in a nation known for its cattle heards grazing on the open pampas.
Argentina’s notoriously high spending provincial governments have run out of cash and are now reduced to printing their own money.
One of the 15 provinces, Entre Rios, has been paying its state employees in a currency it calls the “federales”.
Businesses who accept payment in federales can’t then use the money to buy any supplies in from outside the province.
Juan Hazana runs the main hotel in the capital of Entre Rios, Parana. He told us what he made of the federales.
“This is something like a game you know. It’s like playing Monopoly - it’s that kind of money - sort of fake money. But we must work with it. We must live with that.”
Argentina has has already had six different teams at the economics ministry since December.
In the past week, the latest set of officials stepped up their efforts to persuade the International Monetary Fund (IMF) to hand out billions of dollars to Argentina to stave off a complete economic collapse.
The IMF wants action to cut back the numbers of state employees and an abolition of the regional currencies.
But Argentina insists there’ll be no reforms until they get new IMF loans.
It’s stalemate, as the BBC’s reporter Robin Denselow heard from the country’s trade minister Martine Redrado.
“If you don’t have credit, clearly Argentina will continue to drop and clearly the provinces will need to continue printing this fake currency. It will mean more isolation for Argentina and it will mean also problems in the region.”
“So Argentina could become more inward looking with people just staying in their own provinces producing what they can themselves?”
“People will live on what they can grow - they will be a more self-sustaining economy.”
How then are the ordinary Argentine people coping?
Lourdes Heredia of the BBC’s Latin America service told me about the strength of feeling on the streets of Buenos Aires.
“Well they are really angry because they don’t know what is going to happen. And of course they worry about their savings, I mean you can see protests everyday outside the banks.
“And the people on the streets as well, I mean normal people, people who are not protesting, they are really worried. I have been talking to some of them.”
“We are trying to survive. I don’t know if I am going to have a job next week and if I got it I don’t know in which money I am going to be paid”
“The situation in my country is absolutely wrong, everything is wrong.”
“My main concern is about my job because I am working for an Argentine company right now - it is not a very safe thing. You don’t know when your next payment is going to be.”
So we heard there ordinary Argentines very angry with the government, losing faith in government policy. Is there also a sense that the anger is mounting against the international institutions, the International Monetary Fund?
Do you think that that’s sort of spontaneous anger against outside institutions or do you think that there is an element perhaps that the government in Argentina is trying to orchestrate sort of anti-IMF protests?
“The message of the government is saying ‘look we want to make more progress but we are not going to be able to do it if we don’t get IMF help.’
“Just for example the President Eduardo Duhalde this week said that to improve conditions it was necessary to get the IMF support.
Eduardo Duhalde in Spanish
“For example he is saying the unemployment is the worst problem for the Argentines but to resolve that we need to get some international support. Duhalde has been in the government for four months and he has been negotiating with the IMF without any success. So people here believe that the IMF could be more flexible and on the other hand they believe that probably the IMF is right to think that Argentina and the Argentine government has to do something more drastic to receive more money.”
How disorganised is the situation? We hear that there are up to 15 different currencies circulating the country at the moment.
“For example in Rioja you have evitas because they have on the front Eva Peron’s face and you have all kinds of different currencies.
“One of the IMF requirements is that the provinces have to stop printing them but the provinces are saying I cannot do that because I have all these state workers - so they are really in a vicious circle that is difficult to get out of .”
So what policies might rescue Argentina from the abyss?
Economics Professor Steve Hanke is a senior fellow at the Cato institute in Washington.
He says the policy of floating the peso has caused such a collapse of confidence since it robbed the Argentine people of their legal guarantee
that one peso could be exchanged for one dollar.
Professor Hanke thinks that for stability to return - Argentina must follow the lead of nearby Ecuador - and simply adopt the US dollar as its currency.
“What they should have done is simply got rid of the Central Bank once and for all, made it illegal for the provinces and various other governmental entities to issue quasi-monies of one sort or another, and just adopt the dollar as the money that would be used in Argentina.”
Compared to the chaos that we’ve seen in Argentina, with the floating exchange rate, your solution sounds very simple. Why wasn’t it adopted? Were the Americans against having a country as large as Argentina adopting the US dollar?
“Well, I don’t think the Americans were against it. In fact, in hearings before the US Senate, Under-Secretary John Taylor, of the US Treasury, indicated that he thought what they should have done back in December was actually dollarise the economy.
“So I don’t think the US government was against it. I think mainly this floating idea on pesofication came from the IMF.”
Back in January, there were heavy reserves of dollars in the Central Bank. It was part of the convertibility system that they had before. Are those dollars still there? Have they not all been frittered away in trying to prop up the peso on the foreign exchange market?
“That’s another problem. Because, at the time in January, they had almost $19bn in foreign reserves, and now they’re down to around $12bn.
“So they have frittered away a lot of foreign reserves just trying to maintain some semblance of stability. Even though the peso has been devalued by about 70% against the dollar, they’ve expended a lot of foreign reserves propping it - even at the low level that it is right now, it’s being artificially propped.”
So how long do you think those reserves will last?
“Well, you can more or less figure it out yourself. If we’ve gone through roughly half their foreign reserves in four months, by the end of the year there’ll be nothing left in the cupboard.”
So do you say the IMF advised the Argentine government to go through this flexible depreciation route. How would you characterise the quality then, of that advice from the IMF?
“It’s just mind-boggling that they ever would advise something like this in a place like Argentina, where you can start in about 1810 and look at the history of money and banking in Argentina, and they’ve gone through these bouts of chaos that’s always associated with a floating exchange rate and with the issuance of these quasi-monies by the provinces.
“This has happened over and over and over again. Floating the peso required them to tear up contracts, and pesofying the economy required Argentina to tear up contracts. And how in the world the IMF can recommend that a country start tearing up contracts and not respecting property rights is just mind-boggling, because that’s the basis for any kind of economic system.”
But these people in the IMF - they are the world’s guardians, if you like, of financial stability. They’re there; they have billions of dollars of tax-payers’ money around the world at their disposal; there was an alternative of dollarisation, which you indicate the American authorities weren’t opposed to; isn’t it a scandal then, that the IMF was recommending something different?
“Well, it is scandalous that they overlooked the fact that this was not a normal devaluation like the one we had in Russia, Brazil or South-East Asia or Mexico before that.
“Because all those devaluations involved currencies where there was no redemption pledge, and in which the local domestic money had reserves backing up the domestic money, and the holders of the domestic currencies were promised the property right in those foreign reserves.
“And the dollar was actually legal and circulating in parallel with the peso, and a lot of the economy - over 50% of the economy - was already dollarised, even in January. And, with the change that took place in January, all the assets and liabilities in the economy that were denominated in dollars were redenominated into pesos, at an unfavourable rate, and at a differential rate.
“Assets were redenominated into pesos at a different rate than the liabilities were redenominated into.”
Professor Hanke, you’ve made a persuasive case for adopting the dollar. But do you see any politicians in Argentina who support that policy who stand any chance of getting into power in the current confused situation?
“Just before we started this interview, I had a call from former President Menem’s office, and he still embraces the dollarisation option. And he’s done so since early 1999.”
“But Carlos Menem has got a pretty bad reputation amongst many Argentines. Do you think he can really overcome Argentines’ natural distaste really for abandoning your national currency and adopting the currency of another country?
“He’s not the only politician. I just mentioned that, since he is a visible player on the scene, and he’s always had a consistent view about sound money, and in particular, the dollarisation option.
“But he’s not the only one, and I think, as things deteriorate, it is becoming clearer and clearer to everyone that ultimately they’re going to have to go to dollarisation.”