Sunday, November 20, 2011

Remembering Argentina

In my normal readings this weekend, I came across something quite disturbing.... it seems that there has been a run on Greek banks for the last month or so. People who have large amounts of money in Greek banks {shipping magnates, industrialists and other wealthy folk} are closing their accounts and setting up savings accounts in Swiss banks, which have always been seen as a safe haven. This run on Greek banks has the potential to force them to collapse. These people are rightly fearful of what may happen to their money with the Greek government essentially insolvent and increasing rumors that the Greeks might re-introduce the Drachma {their old currency}. In response, I found this:

"BRUSSELS—The European Commission is helping Greece negotiate an agreement with Switzerland to repatriate as much as $81 billion believed to be hidden in Swiss bank accounts, a high level European Union executive body official said Nov. 17"

This type of response, if it's actually enacted, could set off a chain reaction these officials don't want. Other nations-- Spain, Italy and Portugal specifically-- are slowly stumbling towards insolvency. If I were a Spanish business owner with a large amount of money in a Spanish bank and I see what happened to the Greeks, I'd think long and hard about moving my money-- very quickly-- and out of reach of EU bureaucrats. Banco de Bolivia anybody ? If enough people do this, Italian and Spanish banks could very quickly find themselves in even more trouble than they already are. The most important thing in today's banking world is confidence. If the guy in the street feels his money is about to be taken, he panics and withdraws. As always, those with the most money are the first to see it coming and they move very, very fast at the first whiff of trouble. Then we come to the delightfully complex problem of what these moves to do bank leverage ratio's. 

We also need to take a look back in history at what might happen when a banking system collapses and the government moves to stem the outflow. In 2001, investors and others began to lose faith in Argentina and began withdrawls from Argentine banks. The richer members of Argentine society saw something bad coming down the road and they also began mass withdrawls from Argentine banks, setting up accounts in Switzerland, the US, and other nations. The Argentine government, rightly fearing a banking collapse, enacted a set of laws designed to stop this. They were called "corralito" laws, and they limited withdrawls from Argentine banks to $250 per week. The people of Argentina, rightly fearing for their money in the bank, began a series of disturbances called "cacerolazos", which were mainly peaceful marches accompanied by wives banging pots and pans out of their balconies. The disturbances grew in size and intensity, with much of the anger being directed at banks and big foreign {mainly US} companies, who responded by erecting metal barriers at their gates after rioters set them alight. Increasingly violent confrontations between rioters and police eventually led Argentina's President, Fernando De La Rua, to declare a state of emergency. This did nothing to stop the mayhem, and on the night of December 21, 2001 De La Rua himself fled the Presidential Palace by helicopter, leaving Argentina without a government. Within a few weeks, the leader of the Senate leader Adolfo Saa officially defaulted on Argentina's external debt. 

Argentina shortly thereafter ended their policy of pegging their currency to the US Dollar and let the Argentine Peso float, which resulted in the Peso being devalued and the price of most goods doubling or tripling overnight. The money in Argentine banks was also switched to the new Peso, resulting in them being worth far, far less. The common people in Argentina paid a fearful price over the next two years as unemployment skyrocketed. Tens of thousands of people were reduced to scavenging, with copper and cardboard being the scavengers' favorite items. In 2003, Argentina elected Nestor Kirchner as President, who wisely kept the previous finance minister Roberto Lavagna in his job. By the end of 2003, Argentina's economy roared back from the precipice, growing some 8% after Kirchner's election. 

The lesson here is that artificially attempting to halt the flow of money in any way, even forced repatriation, usually leads to problems that are far worse than the ones they're attempting to resolve. The EU's pressure on the Swiss is both wrong and will most certainly backfire in places like Spain and Italy, possibly leading to a chain of events nobody wants. 

Update 11/22pm: It seems that last week's post in regards to Syria might've been quite prophetic: it seems that the Arab League, along with Turkey, might be applying a no fly zone over Syria: