Argentina was unable to escape the vicious circle, which gradually intensified over three years. At the big Wall Street firms, few realized how dire the country's predicament was -- with one notable exception.
Long before Argentina's default, Desmond Lachman, chief emerging market economic strategist at Salomon Smith Barney Inc., saw that the Argentine economy had no way to break out of its slump and would hit the wall one way or another. Many people in the emerging-markets business recall the gloom Lachman conveyed in conversations with clients as recession began to grip Argentina, while analysts at other firms predicted a recovery.
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)
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)
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.
But Lachman's pessimism was not spelled out in reports published by Salomon, a part of Citigroup, which was a major underwriter of Argentine government bonds. Written research reports are important in influencing where capital flows, partly because money managers want to have material in their files to back up their investment decisions.
Officials in Argentina's economy ministry knew that Lachman was describing the country's prospects in very dark terms. They continued to include Salomon among their underwriters anyway, but they told the firm to "make sure you have a variety of views" besides Lachman's, a former Argentine official recalled. Published research on Argentina by other Salomon analysts tended to be relatively sanguine about the country's chances for pulling through, even in the turbulent months of 2001 leading to the default.
Lachman, who left Salomon to become a scholar at the American Enterprise Institute, declined to be quoted for this story. Asked why his negative assessment of Argentina wasn't published, Arda Nazerian, a spokeswoman for Citigroup's securities arm, cited Salomon's merger with Citibank in the fall of 1998, which created a firm with an abundance of analysts, enabling Lachman to spend more time privately with big clients. "The expansion of our emerging-markets research team reduced Desmond's responsibilities for writing on individual countries," she said.
Lachman's story is emblematic of Wall Street's reluctance to offend major issuers of securities. "It's a lot of self-censorship," said Federico Thomsen, who until recently was chief economist of ING Barings's office in Buenos Aires. "It's like, if you have something good to say, you say it, but if you have something bad to say, just keep your mouth shut."
The reports that Wall Street firms published on Argentina, to be sure, became much less bullish as the recession deepened in 2000 and early 2001. Analysts increasingly stressed the importance of the government cutting its deficit and reforming labor laws. But in general, the reports predicted that Argentina would muddle through. An example was a report published in October 2000 by J.P. Morgan, the biggest underwriter of Argentine bonds in the 1990s, titled, "Argentina's debt dynamics: Much ado about not so much."
By contrast, the analyst who most publicly warned of Argentina's impending doom was Walter Molano, head of research at BCP Securities, a Connecticut firm that does no underwriting of sovereign bonds.
Such evidence of bias among analysts is misleading, according to some current and former analysts who maintain that their overriding objective has always been to serve investor-clients well by providing the best advice possible. "My incentive is to be able to predict what will happen," said Siobhan Manning, emerging market strategist at Caboto USA. "If I can predict accurately, hopefully I gain credibility, and the firm does, and I'm able to make money."
But others acknowledge that they cannot help being influenced by the fact that their compensation is likely to be greater if their investment banking colleagues win deals to sell bonds. For one thing, success for the investment bankers means the pool of money available for bonuses will be larger, and at some firms, the analysts' bonuses are decided by groups of managers that include investment bankers.
"Your salary will be about one-third of your compensation in a decent year, so your bonus is everything," said Christian Stracke, who covered Latin American economies at Deutsche Bank and other firms in the 1990s and is now with CreditSights, a much smaller outfit specializing in research. "You'll never know what percentage of that bonus came from the recommendation of [investment bankers], but you do know that without the recommendation of [investment bankers], your bonus is just not going to be very big."
Although analysts want to make the right calls, Stracke said, "they're in it for the money. If they were in it to be smart, they'd be professors."
A Perverse Situation
It wasn't just rosy analyst reports that enticed big investors to buy Argentine bonds. Many money managers thought they had to be big holders of the bonds because their jobs depended on it. The word "perverse" is repeatedly used by people in the industry to describe what happened.
Just as in the world of stock market investing, where money managers aim to beat the Standard & Poor's 500-stock index, many professional investors in emerging markets are judged every quarter or so by how well their portfolios fare in comparison to a benchmark. Their job security and annual bonuses have often depended on whether they outperform an index called the Emerging Markets Bond Index-Plus, developed by J.P. Morgan, which tracks the prices of bonds issued by various emerging economies.
During much of the 1990s, Argentina had the heaviest weighting in the index of any nation, peaking at 28.8 percent in 1998 -- not because of its economic size, but simply because its government sold so many bonds.