Commentary

Canada Sleeps As Argentina Plunders

This article originally appeared in the National Post.

Last Friday, the Argentine government shut the doors at Scotiabank Quilmes, SA, an Argentine subsidiary of the Bank of Nova Scotia. To add insult to injury, the Argentines made it clear that the bank’s doors will remain closed unless fresh capital is transferred from Toronto to Buenos Aires. This is just the most recent example of Argentina’s propensity to trample on property rights.

In November, 2001, Domingo Cavallo, who was minister of economy in the de la Rúa government, engineered a local debt swap in which domestic financial institutions, including banks and private pension funds, were forced to provide credit to the government. This destroyed billions of dollars worth of assets at these institutions and also replaced liquid tradable assets with illiquid, non-tradable assets.

On Jan. 6, 2002, the Duhalde government scrapped the Convertibility Law and devalued the peso, which is now floating (sinking). In addition, the government began the process of “pesofying” the economy.

Argentina’s devaluation differs from other devaluations in that it involved what Frédéric Bastiat termed legal plunder. The Convertibility Law gave a peso holder the right to freely convert a peso into a U.S. dollar. Argentina’s redemption pledge was credible because the central bank was required by law to hold foreign reserves to fully cover its peso liabilities. This right of redemption made the convertibility system unique and distinguished it from typical fiat money systems. Accordingly, with the repeal of the Convertibility Law, the redemption pledge was thrown to the winds and the peso holders’ claims on foreign reserves held at the central bank were revoked. Consequently, Argentina’s devaluation represented a great bank robbery, one in which the rights to US$17.8-billion in foreign reserves were abolished by the government. For the Duhalde government, that was just the beginning. Indeed, the government has passed a string of new laws that trample on property rights, make a mockery of the rule of law and are worthy of the Bolsheviks. Much of this centres on the pesofication of the economy.

Dollar reserves held by commercial banks were seized by the central bank and converted into pesos at 1.40 pesos per U.S. dollar. As of Feb. 1, dollar reserves held by commercial banks plus dollar vault cash was US$5.4-billion. At two pesos per U.S. dollar (the rate at that time), the windfall loss for commercial banks, and the corresponding windfall gain for the central bank, is about US$1.6-billion.

All bank loans originally made in dollars were converted into pesos at 1 peso per U.S. dollar, generating a windfall gain for borrowers of dollars and a corresponding windfall loss for lenders. As of Feb. 1, the last business day before the new measures were announced, dollar loans were US$45.8-billion. At two pesos per U.S. dollar, the windfall gain for borrowers and the corresponding loss for banks was thus about US$23-billion.

All bank deposits originally made in dollars were converted into pesos at 1.40 pesos per U.S. dollar, generating windfall losses for depositors and windfall gains for banks. As of Feb. 1, dollar deposits were US$39.8-billion. At two pesos per U.S. dollar, the windfall loss for depositors and the corresponding windfall gain for banks was thus about US$12-billion. Overall, then, banks suffered a windfall loss of about US$12.6-billion (US$1.6-billion plus US$23-billion minus US$12-billion. The capital of all privately owned banks, which constitute roughly three-quarters of the banking system, was US$12-billion.)

Under privatization agreements with private utilities, many which are foreign-owned, utility rates were denominated in dollars and indexed to the U.S. inflation rate. These agreements have been redenominated in pesos at 1 peso per U.S. dollar. The contract nullification costs, as yet to be calculated, will run into the billions of dollars.

Now the government has declared an indefinite bank holiday so that it can put the final touches on a plan to confiscate long-term bank deposits by turning them into what will probably become worthless government bonds.

And where has the Canadian government been in all this? To put it politely, it has been asleep at the wheel. If it isn’t bad enough that the Argentine government is robbing Canadians, it’s even worse to have the Canadian government sitting on its hands while the heist is taking place.

Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore, a Senior Fellow at the Cato Institute in Washington and chairman of the Friedberg Mercantile Group, Inc., in New York.