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Argentina Didn't Fall on Its Own

Wall Street Pushed Debt Till the Last

By Paul Blustein
Washington Post Staff Writer
Sunday, August 3, 2003; Page A01

BUENOS AIRES -- Ah, the memories: Feasting on slabs of tender Argentine steak. Skiing at a resort overlooking a shimmering lake in the Andes. And late-night outings to a "gentlemen's club" in a posh Buenos Aires neighborhood.

Such diversions awaited the investment bankers, brokers and money managers who flocked to Argentina in the late 1990s. In those days, Wall Street firms touted Argentina as one of the world's hottest economies as they raked in fat fees for marketing the country's stocks and bonds.


The human scale of Argentina's crisis: People wait to search for food in garbage from a produce market outside Buenos Aires in May 2002. (File Photo/Diego Giudice -- AP)



____Photo Gallery____
Click for Photo Gallery Argentina's Road to Ruin: The economic crisis in what was once Latin America's richest nation has ravaged Argentina's middle class, forcing millions into poverty. (Flash required)

____Timeline____
Argentina's Economic Collapse: 1991 to present

____Graphics____
Biggest Underwriters of Argentine Government Bonds; The More Argentina Borrowed, The More Investors Bought

____Live Onlines____
Transcript: Washington Post reporter Paul Blustein.
Transcript: Mario Diament, a columnist for one of Argentina's daily newspapers.
Tuesday, 10 a.m. ET: Dr. Michael Mussa, senior fellow at the Institute for International Economics, will be online to discuss Argentina's economy.

_____Post Archive_____
Scrap by Scrap, Argentines Scratch Out a Meager Living (The Washington Post, Jun 7, 2003)
Gulf Between the Rich and the Poor Grows in Argentina (The Washington Post, May 16, 2003)
As Crime Soars, Argentines Alter Outgoing Ways (The Washington Post, Jan 27, 2003)
Argentina Defaults On Debt Payment (The Washington Post, Nov 15, 2002)
Despair in Once-Proud Argentina (The Washington Post, Aug 6, 2002)
_____Outlook_____
Argentina, Shortchanged: Former World Bank economist Joseph Stiglitz explains why the once-prosperous country is in economic meltdown: because it followed the advice of the International Monetary Fund.

Thus were sown the seeds of one of the most spectacular economic collapses in modern history, a debacle in which Wall Street played a major role.

The fantasyland that Argentina represented for foreign financiers came to a catastrophic end early last year, when the government defaulted on most of its $141 billion debt and devalued the nation's currency. A wrenching recession left well over a fifth of the labor force jobless and threw millions into poverty.

An extensive review of the conduct of financial market players in Argentina reveals Wall Street's complicity in those events. Investment bankers, analysts and bond traders served their own interests when they pumped up euphoria about the country's prospects, with disastrous results.

Big securities firms reaped nearly $1 billion in fees from underwriting Argentine government bonds during the decade 1991-2001, and those firms' analysts were generally the ones producing the most bullish and influential reports on the country. Similar conflicts of interest involving analysts' research have come to light in other flameouts of the "bubble" era, such as Enron Corp. and WorldCom Inc. In Argentina's case, though, the injured party was not a group of stockholders or 401(k) owners, it was South America's second-largest country.

Other factors besides optimistic analyses impelled foreigners to pour funds into Argentina with such reckless abandon as to make the eventual crash more likely and more devastating. One was Wall Street's system for rating the performance of mutual fund and pension fund managers, who were major buyers of Argentine bonds. Bizarrely, the system rewarded investing in emerging markets with the biggest debts -- and Argentina was often No. 1 on that list during the 1990s.

Within the financial fraternity, some acknowledge that this behavior was a major contributor to the downfall of a country that prided itself on following free-market tenets. That is because the optimism emanating from Wall Street, combined with the heavy inflow of money, made the Argentine government comfortable issuing more and more bonds, driving its debt to levels that would ultimately prove ruinous.

"The time has come to do our mea culpa," Hans-Joerg Rudloff, chairman of the executive committee at Barclays Capital, said at a conference of bank and brokerage executives in London a few months ago. "Argentina obviously stands as much as Enron" in showing that "things have been done and said by our industry which were realized at the time to be wrong, to be self-serving."

Compounding the financial industry's sins, Rudloff said, were its sales of Argentine bonds to individual investors, mostly in Europe, when the pros balked at buying them. Moreover, in mid-2001, as Argentina was hurtling toward default, Wall Street promoted an expensive and ultimately futile "debt swap" that gave Argentina more time to pay its debts but jacked up the interest cost. The fees on that deal alone totaled nearly $100 million.

Wall Street firms assert that their enthusiasm for backing Argentina's borrowing was motivated by a sincere, if misplaced, optimism about the country's economic strengths. But critics contend that the same forces that fueled the U.S. tech-stock frenzy were at work in Argentina, in effect causing economic globalization to play a cruel trick on the country.

Charles W. Calomiris, a Columbia University economist who was one of the earliest prophets of Argentina's financial doom, wonders why government investigators have not intervened, given the danger that the same fate could befall other countries.

"How come we have one standard for private-sector deals, where everybody is getting all upset about conflicts of interest, and nobody in Washington has raised an eyebrow over the obvious conflicts of interest involving research and underwriting activities by U.S. financial firms in the area of emerging-market sovereign debt?" Calomiris said.

Sales Pitch

"A Bravo New World." So proclaimed the title page of a report on Argentina and other Latin American markets that Goldman, Sachs & Co. sent to clients in 1996.

The report hailed Argentina for shucking policies that had afflicted the country for decades with stagnation, bouts of hyperinflation and repeated currency devaluations. The government of President Carlos Menem was accelerating reforms launched in the early 1990s aimed at deregulating the economy and turning inefficient state-run enterprises over to the private sector. Particularly important, the report's authors observed, was Argentina's determination to maintain its currency "convertibility" system, which guaranteed that the central bank would exchange pesos for dollars at a fixed rate -- one peso for one dollar. Implemented in 1991, that system was remarkably effective in keeping inflation at bay, imparting a sense of stability among consumers, savers and businesses that had been absent for generations.


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