Paul Martin’s Argentine PR Miracle

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 MinisterPaul Martin defending the bank. Also on side is David Dodge, governor of theBank 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 weekendof International Monetary Fund semi-annual meetings in Washingtonportrayed Mr. Martin -- and the IMF -- as champions of Scotiabank'sinterests. Mr. Martin even went so far as to say that the Argentinefinancial crisis "would not have happened" if his version of an IMFrestructuring plan had been in place. If Mr. Martin can pull off portraying Ottawa as a defenderof 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'sdecision to abandon the dollarized peso and return to a floating currencyregime. Through a series of confiscatory moves, the government turnedScotiabank's hard dollar assets into wallpaper pesos. And guess who fullybacked the Argentina government's de-dollarization? Through late lastyear, Mr. Martin endorsed peso devaluation and the illegal nationalizationof Canadians assets as a solution to Argentina's economic crisis.

On the currency issue, Mr. Martin has aligned himself with EduardoDuhalde, Argentina's President. In an op-ed in The Washington Postyesterday, Mr. Duhalde said "the fixed exchange rate we had for 10 yearshad becomean economic straitjacket that meant Argentina could never again grow."The fact is that Argentina had respectable economic performance under itsdollar-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 estimated27% since the devaluation in January.

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

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

It's a little late, given Ottawa's past silence on Argentina's variousattempts to confiscate corporate and individual assets. (For an estimateof the losses created by those policies, see Steve Hanke's article below.)EvenArgentina's courts support the legal rights of local depositors who insiston being able to withdraw their U.S. dollar assets. To dodge the courts andpretendto 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 inArgentina: money laundering. Ottawa has been a big backer of toughinternational money laundering regulations that would clamp down on peoplewho try to keep their money out of the hands of corrupt governments andabusive tax systems. When residents of Argentina began moving money out ofthe country to protect against illegal confiscation, the governmentaccused the banks -- including the Bank of Nova Scotia -- of participatingin money laundering. Bank executives were placed under house arrest. Andwhy not arrest the bankers? Under current Ottawa-backed global definitionsof money laundering, Argentines are guilty of the crime, as would be anybanker who participated in helping people protect their legal assets.

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

Terence Corcoran