Argentina’s Comeback Will Be Oversold
by Alejandro Rebossio – November 23, 2015
Argentina’s voters have chosen Mauricio Macri, the outgoing mayor of Buenos Aires and a former businessman, as their new president. After 12 years of mercurial interventionism under first Nestor Kirchner and then his wife Cristina Fernandez, Macri’s market-minded pragmatism suggests a dramatic shift. In fact, judging by the markets’ bullish reaction, Argentina may be on its way to becoming the nextfashionable Latin American nation.
With the Latin American economy as a whole shrinking for the first time since 2009, the continent could use some economic good news. Yet the fate of past market darlings should give pause to their would-be champions. Recently, for instance, Goldman Sachs closed its BRIC fund — an investment vehicle that it created after coining the acronym in 2001 to sell stocks and bonds from the booming economies of Brazil, Russia, India and China. After years of mounting losses, Goldman told the Securities and Exchange Commission that it did not see “significant asset growth in the foreseeable future.” The fate of BRIC poster-child Brazil is particularly instructive: It earned acover on the Economist for stellar growth during the worldwide crisis of 2009; four years later, with the economy stagnating, the Economist recanted. Next year, Brazil’s economy is expected to shrink by as much as 2 percent.
Why do Latin American market darlings emerge and then stagnate or collapse? To answer that question, you must return to 1989, when the International Monetary Fund, the World Bank and the U.S. Treasury Department adopted the Washington Consensus as a strategy for developing nations and the Brady Plan was launched, leading Latin America to seek a solution to its debt crisis by swapping bank loans for bonds saleable to clients. JPMorgan then created the Emerging Markets Bond Index (EMBI) funds with the stocks and bonds of those countries, sales force management systems to place them with clients, and groups of economists who would tout the potential of economic reforms and the bright future such investments were likely to have. It worked: Everyone from high-powered funds to Italian retirees snapped up debt from countries such as Argentina.
The countries and multilateral organizations backing the Washington Consensus pointedly praised those places whose reforms were going well, even if that progress only lasted a few years. Thus, in the 1990s, Mexico and Argentina became fashionable, though the former suffered its so-called Tequila Effect in 1994, and the latter entered into a recession in 1998 and crashed three years later. Even though Chile’s smaller economy slowed its formerly intense rhythm of growth during the 1990s, it earned praise as the only country that saves during boom times in order to face the collapses afflicting economies that are as cyclical as the prices of commodities and interest rates. As the Chilean economist Jose Gabriel Palma has noted, certain countries were also glorified for the sake of demonizing other countries or because their “internal political groups want something less abusive and inefficient. And since there is no country in the region that has grown in a sustained way, it is necessary to regularly change the country that is idealized.”
As the Argentine economy plunged after its 2001 default, the myth of Brazil took hold. In 2003, leftist trade unionist Luiz Inacio Lula Da Silva took office with a combination of orthodox macroeconomics and increases in the minimum wage and social spending that lifted 40 million of his compatriots from poverty. Jose Antonio Ocampo, a professor of economics at Columbia University, suggests this was the first time a Latin American nation that was not altogether faithful to the Washington Consensus had captured market affections. A decade later, accompanied by its own Economist cover, came the inevitable downfall. “Appearing on the cover of The Economist is the beginning of the end, because that’s the spot for countries who have been doing well up until now — who are at a high point in their cycles — but then they collapse,” says Eduardo Levy Yeyati, visiting professor at Harvard Business School who previously worked at Barclays creating acronyms for fashionable countries.
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