December 1, 2001 is a day that has been seared into
the collective memory of the Argentine people.
On that day, the then Minister of Economy, Domingo Felipe Cavallo,
announced the implementation of the freezing of bank deposits, popularly known as "el Corralito".
From that moment on, Argentines could not withdraw more than
250 pesos – at that time equivalent to $250 dollars – from their bank accounts.
Of course, the popular reaction was not long in coming, and for days the protests grew and grew.
The iconic image that has remained in the collective memory has been that of groups
of people gathered in front of bank branches and headquarters, banging pots and pans and
demanding the full return of their deposits. The chaos was so great that a little more than
two weeks later, on 20 December, President Fernando De la Rúa was forced to resign
after a day of protests in the Plaza de Mayo that resulted in at least 29 deaths.
Twenty years have passed since then and here on VisualPolitik we are wondering
a few things: Why exactly did the corralito happen? What were the real reasons for the
biggest economic crisis in Argentina's history? And perhaps the most important question of all:
Is there a chance that we will see a similar situation again?
Listen up. (ROAD TO THE ABYSS)
You know that on VisualPolitik we love Argentina. And, what do you want me to say? I think that if
one thing has become clear after the long list of videos we have published about
this country – this is the 21st one by the way – it is the clear predilection that Argentina has
for having an enormous government. And, let's not kid ourselves,
in practice there are only three ways to finance a gigantic government:
A suffocating tax burden; Chronic indebtedness
Or an uncontrolled monetary release. Well, throughout history we can find
governments that have tried to spend lavishly by resorting to one of these sources of financing.
However, the peculiarity of the Argentine case is that, since the 1940s, practically
all governments have relentlessly used and abused these three tools at the same time.
That is what explains the eternal gaucho crisis. The mother of all Argentina's ills,
a constant of all governments, of any flavour: unaffordable public spending.
A policy that has lurked since the 1940s, and look how much it has rained,
always reaping the same results: crisis, crisis and more crisis.
Because, basically all the cards are on the table:
The problem with debt is that it has to be repaid and refinanced.
And when you don't do that, then financing becomes scarce and more expensive. Then on
the taxation side, it’s the same old story: As private sector incomes fall and contract,
revenue collection ends up decreasing in the medium term and the informal economy
is also encouraged. Therefore, the various governments were left with no other choice
but to throw themselves into the arms of monetary issuance to keep up with
their policies of more and more public spending. The abuse of this tool has been such that it has
made skyrocketing inflation a chronic evil of the Argentine economy. An economy that
went through a process of very strong hyperinflation between 1989 and 1990,
which, as economists Pablo Guido and Gustavo Lazzari argue, meant "the death of money".
As we covered in a past video entitled "The time when ARGENTINA almost CHANGED PATHS",
the only time when it seemed that Argentina really wanted to change course was under the government
of Carlos Saul Menem, who with the help of his Minister of Economy, Domingo Cavallo,
launched a broad process of reforms, including the privatization of many of the public companies.
What did not disappear, however, was the mother of all evils: skyrocketing public spending.
Basically, the only difference was that instead of financing it with inflation,
that is, returning again and again and again to the money printing machine, Menem's governments
financed their spending policies first with the money coming from privatizations
and then with more and more indebtedness. In other words, what Menem did was to put out
the fire of hyperinflation set by the presidency of Ricardo Alfonsin, his predecessor in office,
and to set a new course for the country. But he didn't bring about all the changes
Argentina needed to get off the ground: Public spending continued to grow, the early
days with Mercosur were very limited, regulation continued to be excessive, especially with regard
to labor legislation – In Argentina they make it so difficult and costly to create jobs, that
in the end, no jobs are created, and when they are, they are created in the informal economy.
Check out how things were at the beginning of the new century.
("For every $100 that appears as gross income on a worker's pay stub, only $82
goes into his pocket. Meanwhile, the employer has to pay $133 for that $100 of gross income.
This means that for every $82 that a private worker actually receives, the employer has to
pay $133. Pablo Guido and Gustavo Lazzari, Apuntes Sobre la Economía Argentina, 2003)
[And, be careful, because today things are still the same... Or worse.]
To make matters worse, going back to the Menem era, many of the privatizations were done in such
a way as to create captive markets that remained in the hands of friends of the government.
Things got better... But not so much in the background. So
when Menem left the government the country still had many problems.
Argentines didn't know it but the corralito was already in the making.
(TICK TOCK)
December 1999: Fernando De la Rúa becomes the new president of Argentina. The economic
situation was already complicated at that time. It was urgent to make adjustments,
for example, to stop the hole, I mean gaping hole,
the gap in the public accounts that threatened to turn the whole economy upside down.
The countdown to economic destruction was underway.
And at this point I want to ask you a question: What on earth do you think de la Rúa did? How
did he hope to deal with the public deficit? Cutting public spending? 3, 2,1…. No way. We're
talking about Argentina, Argentina, Argentina. The government's proposal was basically based
on raising taxes instead of cutting spending. Of the slightly more than $7 billion in public
deficit adjustments included in the government's plan for 2001, almost $6 billion would come from
tax increases. Just over $1 billion was to come from spending controls. It was an 80-20 ratio.
Of course, a political proposal is one thing and reality is quite another.
After several political crises, in November 2000,
De la Rúa finally acknowledged that the deficit reduction would be far from what was expected.
And the following month, Congress approved a budget with a deficit of 7 billion pesos, that is,
70% more than the government's initial plan. The clock was still ticking and it already seemed
clear that 2001 would be very difficult. And that is exactly how it turned out.
The year 2001 was a catastrophe. Investment fell by 45%, consumption by almost 10% and unemployment
continued to rise. The unemployment rate reached 18% and protests led by the Peronist opposition
intensified. De la Rua faced eight national strikes in his two years of government, in which
pickets also emerged, that is, organized groups linked to trade unions that during their protests
cut off roads, streets and economic activity. In such a context, distrust was almost total,
which caused bank deposits to plummet by 20%. Nobody had any confidence in the future
of the Argentine economy. Everything that could be saved had to be saved.
To try to reverse the situation, De la Rúa decided to place an economist in favor of adjusting public
spending, Ricardo López Murphy, at the head of the Ministry of Economy. He lasted 15 days.
The government had only one bullet left: to throw itself into the arms of the father of the reforms
of the Menem era, Domingo Felipe Cavallo. In order to maintain public spending,
banks and pension funds were forced to buy public debt, while a mega-swap was approved
to convert short-term debt into long-term debt at higher interest rates. Which is to
say: to kick the problem into the future. As you can see, there was all kinds of
juggling in order not to put their hand where it was needed: in public spending.
What did you expect? That something different would happen this time? Well... evidently not.
It was an impossible situation: the government no longer had valuable assets to privatize and raise
money. International financing was closed, the IMF said that without spending cuts they could
not count on it; and if the government resorted to monetary issuance, that is central banking,
people immediately ran to exchange their pesos for dollars in anticipation of what might happen,
making it harder to maintain the exchange rate while reducing foreign
exchange reserves. Things went from bad to worse.
All that remained was to wait for the outbreak of the crisis.
(THE EXPLOSION)
Argentines knew that the situation was extremely serious. Between January and November 2001,
bank deposits fell by another 20 billion pesos ($20 billion). Of this, 1.5 billion was withdrawn
from the banks on Friday November 30. It was an unsustainable pace. So the
government's "solution" was to decree a bank holiday and restrict
withdrawals from savings and checking accounts. The measure was announced on Saturday, December
1 and came into effect on Monday, December 3. A withdrawal limit of 250 pesos per week,
per account was established. That is, if you had 10,000 pesos in your account you
could only access 250 pesos per week. And watch out, because then the maximum number of accounts
that a person could have was reduced to 2. [Note: The rest of the money could be used
through debit cards or electronic transactions, but, of course, we have to take into account that
at the end of 2001 very few people were doing those kinds of transactions in Argentina.]
It was the corralito. A corralito that, as approved by the government,
would be in effect for 90 days. Of course, those 3 months were enough to change the history of the
country and cause irreparable economic damage. The measure had the opposite effect to that
intended by the government. Instead of generating tranquility, it generated uncertainty and
chaos. The measure sank consumption and many small businesses, but Argentines were
also beginning to understand what it meant to lose their savings from one day to the next.
Because the end of the 1 to 1 convertibility with the dollar
would inevitably mean a tremendous devaluation of the Argentine peso,
hence the urgency to get the money out. Either you took out your savings or you lost them,
and since the government wouldn't let you take them out... It was a kind of slow-motion ruin.
The government at the time sought an IMF bailout,
but when Cavallo traveled to the United States he was met with a categorical response:
- No, no, no, enough of your excuses. If you don't put the public accounts in order and cut
public spending, we, the IMF, are not going to put more money in. No way, not even as a joke.
Soon the situation degenerated to such a level that desperation, looting and clashes
with the police became a daily occurrence. Finally, on December 19, President De la Rúa,
unable to contain the protests and looting, decreed a state of siege: the same instrument
used by the various military dictatorships in Argentina to control the population.
It meant throwing gasoline on the fire. On December 20, clashes with the forces of
law and order left 29 dead. The government was finished. Minutes before 8 p.m. the
president presented his resignation and left the Casa Rosada by helicopter.
(PAIN AND RUIN) From De la Rúa, power passed to Ramón Puerta,
three days later, the Legislative Assembly elected the governor of the
province of San Luis, Adolfo Rodríguez Saa, as president, who, it turned out,
held office just 7 days before resigning, from December 23 to 30, a period he used
to declare the default of the foreign debt to the unanimous applause of the entire Congress.
Then power fell into the hands of Eduardo Camaño and finally to Eduardo Duhalde,
an incumbent who had encouraged the protests and who took office on 1 January 2002.
In less than 10 days Argentina had five different heads of state. Those were the darkest hours.
During the following months poverty multiplied, the peso continued to devalue from 1:1 to 1:3,
deposits were not returned, those who had had dollars in the bank
were robbed and their money was exchanged for pesos that were worth less and less.
Of course all this meant the end of the peso and the Argentine financial system. No one
in their right mind would ever again leave their savings in the hands of politicians.
Twenty years later Argentina is still in the same situation. The country is more indebted
than ever, has the highest tax burden in its history and annual inflation exceeds 50%.
It is what is already known as the Argentine tragedy.
But having reached this point, it's your turn: this time I'm going to be
direct. Do you think Argentina has a solution? If you found this video interesting don't forget
to like and subscribe to VisualPolitik. Take care and see you next time.