It’s a great word, Quilombo, the perfect Argentine slang for a total nightmare, disaster, cluster, mess.
And now, the Argentine economy is once again a total Quilombo. The economy was barely eking along before the primary election August 11, with inflation zipping past 50%, businesses strangled by high interest rates, and unemployment on the rise. But now, with the Macri government floating the idea of a debt restructuring, the AR peso is falling further, contributing even more to a vicious devaluation.
I’ve been doing business in Argentina since 1989, and I’ve seen all the cycles. This one reminds me, and many of my friends and colleagues, of the 2001 corralito in waiting. This was not supposed to happen.
President Mauricio Macri came from the business sector with a promise to bring his business sense to the Casa Rosada and reform the economy. He didn't. It’s that simple. He has failed completely. He didn’t effectively address inflation, which would mean fighting the unions and not printing money, and he had no stomach for the first, and couldn't resist the second. So, four years later, Macri is at risk of being voted out of office. Actually, I think it's certain he will lose….so once again we will have Cristina.
Right, she will technically be Vice President, but get real, she will call the shots. Everyone knows it. And the reason Argentina is in this mess is Cristina’s fault to begin with. But fault doesn’t make a difference in the daily lives of the Argentine people, who are the ones suffering their fools in government.
And so it’s come to this….a friend tells me he went to the bank yesterday to cash a check for 350,000 pesos. The bank tells him, sorry, we can only give you 100,000 or we’ll run out of cash. (FYI – at today's exchange of 59 AR pesos to 1 USD, that’s about $1,695 USD.) Another friend went to Western Union to collect about 59,000 AR pesos, about $1,000 USD sent by a relative from Spain. Sorry, Western Union said, they didn’t have enough cash to pay it out. Come back tomorrow. Maybe.
This is a super Quilombo. And this is the sort of situation that can lead to a run on the banks. Adios, amigos, the banks close just like the corralito, and no one can get their money out. And if you have a USD account, be aware of pesification. (The authorities declare your dollars to be AR pesos, have fun and enjoy the devaluation.)
And of course, worldwide markets aren’t thrilled about this situation. And the IMF, well, what were they thinking when they gave Macri his bailout? If you love irony, think it over. Macri was elected to take the government out of default and, upon leaving, he might be putting it back there.
So, will Argentina default again? Actually, that’s the least of the worries of the Argentine people. They just need to live; pay their gas and light bill, buy some food, make their rent, have an asado. And the government will have to step up subsidies; which is why the Fernandez-Fernandez ticket will win. All the people know this, and they know Cristina never meet a subsidy she didn’t love.
Que Quilombo. Que triste. The cycle repeats, the central bank will print pesos to pay for the subsidies, what else can it do. Cristina will call the IMF buitres (vulture) again, and the peso will continue its devaluation spiral.
So, default? That’s a political decision. It needs a legislative majority, and if it happens it shows a country that chooses default over economic reform, time after time.
Y bueno, veremos. We’ll see, another great Argentine expression, and one I’ve adopted over the years in coming to terms with living in and doing business in Argentina.
And that “perspective” means that none of this surprises me. People with access to USD, and the ability to play the devaluation and inflation game, have made a ton of money recently. It’s a tricky game, though, the way we play it, requiring genuine local knowledge, so not one we recommend to those averse to risk.
For now, if you are interested in investing in Argentina, there are some good plays to be made in real estate, as that is where everyone turns in times of crisis. Argentine’s believe in real property, since they can’t believe in their government or its currency, whatever its called. And here again you have brutal irony. Argentine’s know they have to hold real estate, yet their need for cash means they often have to sell at super low prices. That’s happening now.
But just wait. If/when Fernandez and Fernandez win the election, things will get worse. Blood in the streets, famous investors call it. I sit here now feeling horrible for many of my Argentine friends, that they have to go through all this again, and again. But I also know they are resilient, and they live by another great saying; es lo que hay. It’s what there is, or in slang English, it is what it is.
Advice for investors? Get in touch, plenty of opportunities in the works, and more to come. It could be 2003 all over again….in the very near future.
Advice for the new government? Easy, default, call all your creditors vultures, and abandon the AR peso. Be like Panama and Ecuador and adopt the US dollar as your currency. It’s the only way to end inflation because you can’t fight the unions, and the Argentine government can’t print US dollars. Cristina can do the first, but never the second. No way her unimaginable arrogance would ever allow it. Es lo que hay.
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Stephen F. Vletas - Founder of Southern Cross Advisors.