Social Policy and Development Programme Paper 1: External Dependency and Internal Transformation: Argentina Confronts the Long Debt Crisis
29 Aug 2000
- Author(s): Jorge Schvarzer
In this paper, Jorge Schvarzer analyses the structural impact of the foreign debt crisis that erupted in Latin America at the beginning of the 1980s and persists today. Focusing particularly on Argentina, he traces attempts to deal with the crisis and shows how, far from resolving the problem, these efforts have gradually drawn many countries into a form of "debt bondage" that fundamentally restricts their capacity to improve social conditions.
In the early 1970s, transnational banks started to offer abundant credit to Latin American countries. Under the Argentine military government such loans were largely destined to prop up the exchange rate and to provide windfalls to a small number of elites. The situation for all borrowers worsened in 1981 as an outgrowth of the decision of the US Federal Reserve Board to combat inflation through sharp increases in interest rates. These tripled—reaching 20 per cent in 1981—and were applied to all Latin American loans as they were renewed. This situation was unsustainable, and creditors and their governments developed a salvage operation based in part on their reading of the crisis as one of liquidity, not of solvency. This meant that it could be resolved using classic adjustment measures. Debtors were thus subject to classic prescriptions for stabilization and adjustment. And the Argentine government was constrained to devote almost 40 per cent of the budget to debt servicing, which left very little for maintaining the quality and coverage of basic public services.
In the early 1990s, unable to cope with its debt servicing obligations, the government began to privatize major public companies. This continued until virtually all had been handed over; but privatization did not significantly improve the public accounts over the longer term. The state continued to operate with limited resources, and the debt continued to grow.
Argentina currently confronts capital maturities on the order of $10 billion per annum. Consequently, the treasury must negotiate new credits every year, solely to postpone payment. Moreover, rates of interest on new borrowing are variable, rising when international rating agencies perceive greater "country risk". This generates a narrow and continuous dependence on capital markets, and forces the government to adopt economic policies that are "acceptable" to global financial interests. This circumscribes the room for manoeuvre within societies that continue to suffer extremely high levels of poverty, unemployment and inequality.
Jorge Schvarzer is Director of the Centre for Economic Studies of Enterprises and Development (Centro de Estudios Económicos de la Empresa y el Desarrollo, CEEED) of the Faculty of Economics, University of Buenos Aires.