by Patrick Dugan
The Argentine economy is basically one big call option on soybeans, it expires sometime after the next election. A call option is a bet that the price of something (GMO soy in this case) will increase over a certain level before the option expires. It's an all or nothing bet; if you win you can win big time, but if the thing expires, well, thanks for playing.
All the people you see walking around in suits in downtown Buenos Aires, making their 5k pesos por mes, are probably living off of the exports business or international companies that operate in Argentina because the exporting foundation makes the place seem relatively stable, and thus makes the lower costs sound like a good deal. The meat, wine, fruits and so forth are all great but not enough to keep the foreign money flowing up the Rio de La Plata like so much dirt but in reverse. Soybeans are it, and for a while, soy was a hot commodity. This all changed last Summer, when commodity prices imploded along with everything else, due to enormous amounts of money suddenly no longer being pretended into existence (in finance-speak: "leveraged positions were unwound"). Should have cashed that bet Kirchners.
Bubble Gum
See, while the whole Center-Left, Menem-lite, export driven recovery was happening between 2002 and 2008, with pretty good annual growth in the Argentine economy, the government was happily suckling on those beautiful flows of cash. Nestor Kirchner had himself a sort of slushee flavored with a syrup made from billions of digital dollars and funky accounting rules in the congressional budget. That budget may have looked something like this:
2007 Argentine Federal Budget (All n pesos)
Welfare - $500,000,000
Water Infrastructure - $250,000,000
Army - $1,200,000,000
Roads Maintainence - $50,000,000
Railway - $200,000
Mas o Menos - $3,500,000,000
Not a great budget estimate, but probably more work was done in the past minute typing that than the Argentine congress does in a year. In case you missed it, the Mas o Menos part is like a blank spot on the map, its there, but it doesn't mean anything. Thats the kind of money that pays expenses on trips to Europe, that gets laundered into real estate buys in Villa Angostura, that pays back favors. Its like Looney Toons subtlety in larceny: "mirra aquella!" and then "yoink!" or whatever the Castellano equivalent of that expression is. This is in contrast to the United States where the thieves use advanced mathematics coupled with brilliant PR and slogans like "Quantative Easing" (as in: "easy, easy there... yeah, thats it.")
Paid Politics
For a while everything was great. Jobs were being conjured into existence by contracts with foreign companies and the keystrokes of bankers who seemed pretty cool about the whole corallito thing - you know, in retrospect. Lavagna, the econ guy at the time, juggled price controls to keep poor people feeling rich on steak and wine - its so much easier when their expectations are lower, in some countries they have to engineer huge credit expansions to get people SUVs and PS3s with HDTVs. Meanwhile, the Central Bank played floating-currency-peg chicken with the train of international hot money flows. There was this incident where the Kirchners made a stand about some policy to the global banking cabal and were threatened with a speculative attack, but they bent over and got even drunker on slush funds, like sovereign sorority girls. It was a time of innocence, 2005, when everthing was right. The local agriculture oligarchs were making great commodity and foreign exchange profits at the expense of national inflation, the political oligarchs kept ripping off their piece, the global oligarchs thought everything was bastante neo-liberal, and the welfare checks arrived on time by Argentine standards, mas o menos.
Gran Buenos Aires is driven by a few big sectors: tourism, government, and international companies. Patagonia has fossil fuels and minerals, though these mostly under-tapped due to being in both the middle of nowhere and Argentina. The breadbasket is all ag, mostly GMO soy. The rest of the country? Old money and welfare recipients.
Guess how the old money got to be young at one time? Agriculture and savings made from working for international companies. Guess what the welfare recipients are being payed for? You guessed it, re-electing the Kirchners! After all, they're not working for the government, the government is working for them, giving them the basic living money they deserve, manana. It is a grand pretzel, or perhaps a really twisted empanada, whose absurdity and beauty are at once awe-inspiring and sickening. Kind of like one of those microwaved, month-old empanadas so many restaurants serve over the counter because they don't want to throw it away and take a loss.
In the up years of the decade-long Argentine cycle, the country was kind of like a forward contract, the price goes up, you're worth more, simple, efficient, hold it and let it ride. You could sell and lock in that profit, or you could use your value at the moment as the basis to buy more, because you know there was plenty of borrowing behind the initial position. When you buy with leverage and the thing goes up, you don't have to bother yourself with selling, you can just double up, and why not, you're feeling lucky. The thing is, gravity, karma, probabilistic mean reversion, whatever you want to call it, if you're rolling strong year after year you're probably due for crisis, if only to take you down a peg. Its ok Argentina, most other countries fell into the same trap.
About Last Year...
In the first half of 2008 there was a premature food crisis, money was in the process of zipping all over the globe trying to chase profits, resulting in a series of bubbles (still is). Grains became expensive on paper and lethally expensive for many. Then it happened with oil, then global stock markets. It was on the news, people were getting stressed out. In the second half of 2008 the price of soybeans fell 40%, other grains fell even more. Argentina had its own little crisis-ito to deal with because, unlike its smug neighbor Chile, the Argentines were basically blowing the benefits of the good times. Instead of investing in any long-term infrastructure, like say a revamped rail system, renewable energy manufacturing, a lightened tax load to encourage small business, they spent it on European vacations, welfare and wine subsidies. I can't generalize to all Argentines, but the government fucking blew it, bottom line. So what they'd do when the bill arrived? Scrambled for a solution is what they did. They ended up cannibalizing the pension system, which is currently in process in the States via more subtle means. It bought some time. It´s the Argentine way.
So basically, the Argentine response to the crisis was to cash out the benefits of the last several years, but instead of investing those benefits into something lasting, they double down on the exact same thing. And this time around, the bet is time sensitive. The metaphorical option expiration, in this case, is the government becoming insolvent and no longer being able to maintain the living standards of millions of welfare recipients, which means 2001 all over again.
Better Luck Next Time
Why would anyone make this decision? Picture three archetypical people you're likely to see on the subway: the fourty-something in a suit, the reggeton kid with the rooster hair and the morocha girl with the small nose and the quiet eyes. Imagine a decision making entity that is a blend of all three, you've got the desperate climb toward comparative wealth, the casual fuck-all attitude and the alternatively sensible and reactive temperament. Then put this decision maker in charge of a $600 billion dollar fund with the incentive to make a bunch of money off of that fund and no real repercussions for failure. Hit me with that call option on soybeans.
What's really cool about Argentina is that it manages to not only swing between extremes but also defy probability in how it manages to spectacularly fumble and also how it happens to resurrect from the rubble. This time around, the most likely scenario that can be predicted based on available information is the China rescue, though to be fair about half of Latin America, most of Africa and all of Oceania is banking on that too. China is a whole other post, or five, but basically they've got the plata and they've got a lot of hungry people with not enough land or water to feed them. The swap line between the People's Bank and the Banco Central is a promising signal, allowing the country to tap a credit line of about 60 billion Yuan Renminbi, which would be worth even more if the Yuan starts appreciating as a reserve currency. Maybe China will start buying up soy futures, along with most other commodities, on the open markets, and that'll prop up the prices and make Argentina solvent again, in which case they'll elect a new populist cum criminal who'll keep repeating past mistakes. And the wine will keep getting better.
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