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Politics in Banking - Argentina StyleEddie Zawaski Salem-News.com
Argentina takes control of its finances.
(PATAGONIA, Argentina) - While The US continues to dither about whether and how to reform its banking practices, Argentina has taken concrete and controversial steps to gain control over its financial future.
Direct government control over its central bank, payment of long-term debt and opening banking to foreign investment have helped restore public confidence in both the banking system here and in our mostly unpopular president, Cristina Fernandez de Kirchner.
Unsurprisingly, the big banks up north, the very same ones who are now fighting regulation and reform proposals by the Obama administration, are taking a dim view of Argentine reform and are likely to continue putting pressure on Argentina to pour its assets in their direction.
This week, the Argentine senate confirmed the president’s appointment of Mercedes Marco del Pont as the President of its central bank. The appointment was made to replace the old bank chief, Martin Perez Redrado, who had refused President Fernandez de Kirchner’s request to transfer some four billion US dollars in central bank reserves to the national treasury for payment on foreign debt. Redrado had insisted that the bank was an independent entity that had no responsibility to bail out the government if it could not pay its bills. Redrado was fired by the president in a move that essentially asserted government control over the central bank.
The senate vote to confirm the new appointment was quite dramatic. At the end of the roll call on the confirmation, the vote count stood 35 in favor and 34 against with one senator left to vote. A vote against would have produced a tie, giving vice-president Julio Cobos his opportunity to again vote against the president and ruling party.
However, the last senator to vote was Saul Menem, Argentina’s president in the 1990’s, who is generally credited with wrecking the economy and causing the great financial meltdown and depression in 2001.
Apparently, Menem feared that a vote against this new appointment would result in a return to the international financial community friendly policies of his fateful administration. So not wanting to risk taking blame for a second meltdown, Menem abstained, thus giving the Fernandez government control over central bank policy.
The key claim by the government was that the bank was not operating in the public interest. Under Redrano’s guidance, the bank had piled up huge reserves, which it used mainly to manipulate currency rates, while it held back funds that could lower interest rates or fund public expenditures. The move by Fernandez to replace Redrado with a more compliant manager signaled that the government -- and not the international finance community -- would control Argentina’s financial future. Putting public interest ahead of profit as the primary motive for national financial policy, clearly establishes the current government’s socialist credentials.
During the Menem years, Argentina had followed financial policies dictated by the IMF and the international banking community. Public services were cut, and the banks borrowed heavily to keep the country awash in cash, which the middle and upper classes used to buy imported goods. The trickle-down philosophy of economics did not, however, work in Argentina. By the end of that decade, no investment in infrastructure had been made and the volume of debt was impossible to support. The few business owners and bankers who had benefitted from the flow of loan money into the country during those years fled the country as the economy imploded and their businesses collapsed.
The current government has no wish to return to the debt bubble of the 1990’s. Had Argentina not been able to use bank reserves to make the current four billion dollar debt payment, the government would have had to go out into the international loan market and borrow the loan payment money with new money at more than ten percent interest. Such steeply profligate borrowing would have been in the interest only of the big international investment banks and hedge funds who tie up and repackage public debt in much the same way they manipulated mortgages on homes in the USA. It has never mattered to CitiBank or Goldman Sachs that Argentina or any other debtor country could not pay their debts, as they simply repackaged the debt into bonds or sold debt wholesale to each other on a secondary debt market.
The big banks and investment houses still do to the United States the same thing they did to Argentina in the 90’s. They have been creating credit by repackaging impossible-to-pay loans into financial instruments which they use to make more credit. Unlike Argentina, however, the US government did not renounce the unsupportable debt and allow its banking system to collapse. Instead, American central bank reserves have been used to support shaky banks and pay off on some of the bad loans. Such is the capitalist method of dealing with a financial crisis, to put the interest of the banks and financial community first.
President Fernandez did not wish to place any further financial burden on the people of her country. Had the central bank not released the funds to pay the current debt obligation, the resulting increased borrowing would have been passed on to the people in the form of higher taxes and reduced public services. Argentina is currently enjoying a robust 8% economic growth rate and the national poverty rate has been steadily declining since 2001. Neither President Fernandez nor her political opposition were willing to risk all that for the sake of the health of the finance sector.
So far, the fallout of this decision for the central bank and the Argentine banking sector has not been all bad... Initially, many shareholders, mostly foreign, in the Argentine central bank, bailed out and sold their shares. Bank stock fell precipitously until the slide the was stopped by a massive influx of cash and stock from Banco do Brasil, Brazil’s biggest bank. Despite the four billion dollar outlay that former director Redrano had feared would damage the health of the bank, the Argentine central bank is now better capitalized than it was before the recent moves. Moreover, Banco do Brasil has just announced a purchase of controlling interest in Banco Patagonia, Argentina’s seventh largest, and arguably most stable bank.
Eddie Zawaski is a contributing Salem-News.com writer based in Patagonia, Argentina.
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