Paul Martin’s Argentine PR Miracle

April 23, 2002 • Commentary
By Terence Corcoran
This article originally appeared in the National Post.

Now that the Bank of Nova Scotia’s operations in Argentina are padlocked, and possibly on the brink of nationalization, up pops Finance Minister Paul Martin defending the bank. Also on side is David Dodge, governor of the Bank of Canada. Both met with Argentina officials to “complain” about the “unfair” treatment of Scotia’s subsidiary, Scotiabank Quilmes.

This PR miracle comes with the aid of the media, which through a weekend of International Monetary Fund semi‐​annual meetings in Washington portrayed Mr. Martin — and the IMF — as champions of Scotiabank’s interests. Mr. Martin even went so far as to say that the Argentine financial crisis “would not have happened” if his version of an IMF restructuring plan had been in place. If Mr. Martin can pull off portraying Ottawa as a defender of Canadian interests in a country run amok, then he deserves the Hill & Knowlton award for Spin Master of Year.

Let’s look back to see what caused what in Argentina. Scotiabank Quilmes’ plunge into insolvency can be traced to the Argentine government’s decision to abandon the dollarized peso and return to a floating currency regime. Through a series of confiscatory moves, the government turned Scotiabank’s hard dollar assets into wallpaper pesos. And guess who fully backed the Argentina government’s de‐​dollarization? Through late last year, Mr. Martin endorsed peso devaluation and the illegal nationalization of Canadians assets as a solution to Argentina’s economic crisis.

On the currency issue, Mr. Martin has aligned himself with Eduardo Duhalde, Argentina’s President. In an op‐​ed in The Washington Post yesterday, Mr. Duhalde said “the fixed exchange rate we had for 10 years had become an economic straitjacket that meant Argentina could never again grow.” The fact is that Argentina had respectable economic performance under its dollar‐​linked currency regime. Now that Argentina has a floating peso, however, growth is in free fall. GDP this year could plunge by up to 20% in an atmosphere of grave political unrest and economic uncertainty. Unemployment is running at 23% and consumer prices have risen an estimated 27% since the devaluation in January.

As more than a few economists have noted, a devalued peso will do little to bolster exports (the intent of devaluation) or the local economy. Argentina has never been much of an exporter and is unlikely to turn into an export machine just because it suddenly has a near‐​worthless currency.

Still, Canada supports the program and now Mr. Martin is trying to pressure Argentina to treat the Canadian banks that have been cheated out of their assets with some sense of fairness. The Argentine government is favouring local banks by giving them reserves that are not offered to foreign banks unless the foreign banks cough up new batches of U.S. dollars. This is unfair, says Mr. Martin.

It’s a little late, given Ottawa’s past silence on Argentina’s various attempts to confiscate corporate and individual assets. (For an estimate of the losses created by those policies, see Steve Hanke’s article below.) Even Argentina’s courts support the legal rights of local depositors who insist on being able to withdraw their U.S. dollar assets. To dodge the courts and pretend to obey the law, the government has developed a plan to convert the U.S. dollar savings of Argentines into peso bonds. Nobody’s buying.

Another of Mr. Martin’s global governance themes got a good workout in Argentina: money laundering. Ottawa has been a big backer of tough international money laundering regulations that would clamp down on people who try to keep their money out of the hands of corrupt governments and abusive tax systems. When residents of Argentina began moving money out of the country to protect against illegal confiscation, the government accused the banks — including the Bank of Nova Scotia — of participating in money laundering. Bank executives were placed under house arrest. And why not arrest the bankers? Under current Ottawa‐​backed global definitions of money laundering, Argentines are guilty of the crime, as would be any banker who participated in helping people protect their legal assets.

Over the next couple of weeks, the IMF is probably going to capitulate to international pressure by giving Argentina new airlifts of U.S. dollar cash to replace the U.S. dollar cash that left the country in the wake of the IMF‐​backed devaluation. Where will that money go? Back into the banking system, perhaps to bail out the banks that have been ruined by devaluation.