2001 crisis: the real reason

I’m going to do something extremely hateful: talk about myself. I will do it to show that the fall of President De la Rúa —which marked the 20th anniversary of 21 days ago— was foreseeable for a long time. And that it did not occur for any of the reasons to which it is usually attributed.

Many times I had wrong convictions about various things and made prophecies that were not fulfilled. This was not the case with my forecasts for the 2001 crisis. I knew it was going to happen, and I even thought it would happen much earlier.

It is true that there were differences between the UCR and the Frepaso. And that the President lacked the necessary vigor. And that the resignation of Vice caused a political crisis. And that the bribes to senators nicked the government. And that Peronism pushed. And that radicalism ignored it.

However, none of this led to the economic cataclysm of 2001 and the subsequent collapse of that government.

The fault of that fall was a policy that I fought at the time of President Menem and that President De la Rúa continued. A policy that I attacked as a presidential candidate in 1999. A policy that I vainly proposed to abandon as Chief of Staff. A policy for which I had to leave the government in 2000. A policy against which I argued in three books. A policy that I contested as a candidate for senator in the elections I won in 2001, six weeks before the “corralito”.

Over the course of eight years (1993-2001) I repeated ad nauseam that “convertibility” was leading us to a catastrophe.

During the Menem government (1993) I held a televised debate on the subject with Minister Cavallo, and then I realized how dangerous it was not to remove the “plaster” that had been correctly placed two years earlier from the economy.

Cavallo had ended hyperinflation on the basis of a parity: 1 peso = dollar. But that parity could not last: the currency of a country is worth what its economy is worth and the Argentine economy could not be worth the same as the North American one. With an overvalued peso, producing would be more expensive and importing cheaper. It would be increasingly difficult to export, and imported products would flood our market. At that point, reserves would decline, convertibility would become unsustainable, and its abrupt abandonment would have disastrous effects.

It wasn’t going right away. The privatizations had brought an avalanche of dollars, and a large amount of swallow capital had landed in Argentina.

But the privatization dollars would soon be reduced, and the swallow capitals would fly to other lands. The sooner it got out of convertibility, the better.

Of course it would not be easy, and it would have side effects. The 1 to 1 had created confidence in the peso (confidence that the dollar “lent” it), and abandoning that parity would produce a dangerous disappointment in society. It was necessary to have a strategy that would mitigate the negative effects and ensure, in the medium term, permanent stability.

I proposed the gradual correction of the parity, the linking of the peso to a basket of currencies, the redesign of the budget and the restructuring of the debt. But I felt that, to propose an effective preventive treatment, I had to consult with experts. In Germany I spoke with Hans Tietmeyer, a guru of international finance and then president of the German central bank (Bundesbank), who is considered the forerunner of the Euro.

Tietmeyer told me: “The rest of the world is not clinging to a monetary standard and, therefore, sooner or later the fixed exchange rate will put Argentina in serious trouble.” The ideal replacement (but in the short term unfeasible) was a Central Bank independent from the government, which would manage monetary policy without political pressure.

Regarding the situation, Tietmeyer suggested analyzing, among other things, the advisability of a limited convertibility, the limitation of the expenses of the unproductive bureaucracy and the prohibition of monetizing credits from international organizations.

In the United States, I consulted Joseph Stiglitz, an adviser to President Clinton and a future Nobel Prize winner. He argued that if Argentina failed to devalue and restructure its debt, it would end in catastrophe. He recommended an “orderly exit” from convertibility and a negotiation with creditors, anticipating that the alternative was default.

I spread the Tietmeyer and Stiglitz suggestions, hoping the government would at least study them. It was not the case.

That year I had my second debate with Cavallo, who is a respectable economist, but before whom I had to starkly expose what I saw. We were losing $ 11 billion per year. Argentina had the largest trade deficit in its history. Unemployment was also the highest in history. The funds from the privatizations had been used up and the swallow capitals were being blown up.

Soybeans were the artificial respirator that allowed to extend the life of the convertibility.

A respirator that would soon become insufficient.

In November of that year I assumed the presidency of radicalism. The following Sunday, La Nación published on its cover an interview titled “Terragno wants to get out of convertibility.” Tomás Abraham remembers: “Nobody discussed the system except Terragno.”

De la Rúa did not dispute it either. He took office in late 1999 and decided to continue convertibility. With that, he started the clock that would explode two years later.

At the beginning of 2001 there could be no doubt: the explosion was about to occur. Nobody lent him Argentina. The country risk became the highest in the world. The Monetary Fund had let go of our hand. The state was running out of dollars. You didn’t have to have a crystal ball to know that we were about to have a banking crisis, default, devaluation, a social stampede and violence.

It could happen at any time. It occurred in December.

The lessons are clear: (1) The worst way to combat inflation is to manipulate the exchange rate. (2) Great political and social crises are inevitable when governments persist in serious economic mistakes.

Rodolfo Terragno is a politician, diplomat and journalist. He was a minister, chief of staff, national senator, national deputy and ambassador to UNESCO.