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The Argentine Crisis

Joseph Halevi teaches in the Political Economy Discipline at the University of Sydney and is associated with the Institut de Recherches Economiques sur la Production et le Développement (IREPD) at the Université Pierre Mendès France in Grenoble, France. The author wishes to thank the CEMAFI (Centre Études en Macréconomie et Finance Internationale) of the Université de Nice for hosting and supporting him while writing this paper.

The Conceptual Setting


There is a substantial difference between hyperinflation and hyperdeflation. In hyperinflation, prices race endlessly forward at ever-increasing speed. Those classes whose incomes are not fully indexed to prices and who do not own houses and other fixed assets quickly lose ground. In hyperdeflation, however, prices will not race backwards. Today, in just about any part of the world, the system of monopoly capital prevails. Large corporations, large retail companies, and concentrated financial capital are its hallmarks. As a consequence of monopoly capital, deflation, even when made so severe as to become hyperdeflation, will not result in falling prices. Prices will keep rising, albeit at a moderate pace. In this context, the prices of public services (transportation, medical fees, municipal rates, etc.) are actually increased to raise revenues for budgetary purposes. The national government’s budget has to be austere, with little or no deficit, especially in matters not related to capitalist interests, such as social security expenditures—thus a deflation policy is officially dictated by the need to pay the external debt. Meanwhile, on the very same austerity principle, a wage freeze is imposed upon workers. Wage earners now lose, because their wages are frozen while prices grow slowly and social services are curtailed. Therefore, hyperdeflation does not imply a dramatic fall in prices but rather a collapse of real demand, production, and employment.

The Argentine hyperdeflation is the direct result of attempting to integrate the economy into the international financial capitalist system by permanently enforcing an anti-inflationary and anti-expansionary policy. In so doing, Argentina’s capitalist class, supported and prodded by the U. S. Treasury and by the International Monetary Fund (IMF), first destroyed the domestic social security system and welfare network and, in the last two years, engendered a total breakdown in the economy up to the point of blocking currency circulation. The entire episode constitutes an important historical case in which domestic class interests converged with international financial interests, eventually leading to the destruction of the livelihood of the bulk of the Argentine people, 50 percent of whom are now living below the poverty line.

The Mechanics of the Crisis

The political crisis of this important South American country formally erupted when, in the first week of December 2001, the IMF decided to withhold a $1.3 billion loan approved for servicing the country’s $142 billion external debt. The IMF claimed that the government, then led by President Fernando De la Rua of the Radical Party, was not meeting its commitment to further cut its spending. This claim was false. From the fall of 2000, when the Argentine government entered yet a new round of negotiations with the IMF, until the Buenos Aires uprising of last December, the government has systematically cut spending. It privatized social security and cut the provinces’ funds, forcing many of them to use surrogate (scrip) money to meet their payments. During the summer, the economic minister, Domingo Cavallo—a darling of the IMF who, by the way, was undersecretary of the interior (Federal Police Department) during the bloodthirsty military dictatorship in 1981—set the goal of a zero budget deficit. If the target was not attained, it was not for lack of trying, but because of the galloping social crisis, with unemployment reaching 18 percent and an equal percentage classified as underemployed. Immediately after the withholding of the loan by the IMF, the government embarked on an even tougher round of cuts, which included freezing people’s bank accounts and limiting withdrawals to $250 a week. It was at this point that the people of Buenos Aires rose up against the government.

The Argentine Debt

The explosion of the country’s debt began with the military regime in power from 1976 to 1983. Overall, external debt rose nearly four times, from $9.7 billion in 1976 to $35.7 billion in 1981. The public component of the debt was significantly expanded by armament purchases, to the great pleasure of the U.S. government, which supported the repression of the popular forces by the Argentine military and wanted the dictatorship’s participation in repression and torture in Central America. However, despite the increase in government spending, the private sector was the primary external borrower. The public component of the external debt was actually smaller in 1981 (56 percent) than it was in 1976 (68 percent). It follows that the expansion of the debt was more pronounced on the private than the public side.

In Argentina, the military dictatorship of 1976-1983 was the avant garde of neoliberalism. It introduced a new foreign investment law facilitating acquisitions and financial investment while freeing the exchange rate from government controls. Forshadowing what would come two decades later, these measures attracted capital from abroad while international financial companies and banks, awash with money from oil price increases, were aggressively pushing loans onto third world countries. Though not a traditional third world country, Argentina was no exception. It must be stressed, however, that the neoliberal orientation of the military would not have been possible without the physical extermination of the activists of the popular forces. The military dictatorship led to a tight alliance between multinationals, financial capital, and local business elites, an alliance which became dominant througout the 1980s. This bloc reversed the import substitution strategy that characterized Argentina’s substantial industrial growth in the 1960s. It was under this alliance that the external debt explosion occurred, while the productive system started to suffer from chronic deindustrialization.1

By 1981, the military regime undertook the task of absorbing the private external debt, obtaining, in the process, the support of the International Monetary Fund. After the fall of the dictatorship, the policy of debt socialization was continued by President Raul Alfonsin of the Radical Party, under the explicit request of the creditor countries. As detailed by Eduardo Basualdo (see endnote 1), the Central Bank and private companies would agree on a particular exchange rate, relative to the dollar, for the reevaluation of the dollar denominated external debt in the steadily devaluing local currency. At the moment of the transfer of the debt to the state, companies would then receive a subsidy corresponding to the difference between the agreed and the actual (and now depreciated) exchange rate. Thanks to various schemes, all based on this principle, private companies were relieved of most of their debt. Initially, the main beneficiaries were the multinationals, which had also been the main borrowers, but the policy was subsequently extended to Argentine businesses as well.

This socialization of private debt had harmful consequences for the economy. Before the U.S.-supported military dictatorship of 1976–1983, Agentina’s external economic relations were characterized by cyclical balance of payments crises. In a semi-industrialized country, bouts of growth generate a rise in imports of industrial products greater than the exports of primary products. The ensuing external deficit then compels the authorities to slow down the economy (to reduce imports) by engineering a domestic recession. However, the private-turned-public debt incurred during the military regime changed the nature of the problem. The external problem was no longer cyclical but permanent, while the link with the domestic economy became much more malignant as the debt burden caused the disruption of public finances and the drift towards hyperinflation, as the government printed money to pay for its domestic expenditures.

By the end of the 1980s, the new president, the Peronist Carlos Menem, vowed to end hyperinflation and stagnation through a plan that would also bring Argentina’s capitalist classes back into the fold of international finance. Very quietly in 1991, the Menem government passed a law, designed by the aforementioned Domingo Cavallo. It legislated a monetary reform whereby the new money unit, the peso, was legally linked to the U.S. dollar on a one-to-one basis. The need to fight the vicious cycle of hyperinflation-devaluation-hyperinflation was taken as the justification for the strict dollar-peso parity. The ensuing stabilization was supposed to stop the endless revaluation of the dollar-denominated external debt, thereby allowing Argentina’s ruling classes to become citizens of the world “financial community.”

Since the 1991 law, private debt expanded about eleven times, while the public debt grew by less than 60 percent, totalling together $142 billion by the end of 2001. In essence, during the last twenty years, the Argentine population has been subjected, in sequence, to the following mechanism. The state takes upon itself the burden of the private external debt. The private sector keeps running up additional debt, while the state sells out its public activities through privatization policies, thereby generating financial profits (rents) for the private corporations whether national or international. The state then unloads the burden of debt onto the whole economy, especially the working population, by compelling the population to deliver a financial surplus at the expense of wages, social services, and public investment.

Stabilization and the Collapse into Hyperdeflation

The economic validation of the law passed in 1991 depended on an automatic mechanism whereby domestic monetary creation had to correspond to the net amount of dollars entering the country. Theoretically, the balance between the net inflow of dollars and domestic monetary creation can be guaranteed through (a) large surpluses in the current accounts (exports greater than imports) or (b) net capital inflows. To make the current account sustain the whole process of monetary creation is impossible as it would require a very big surplus in relation to national income. Furthermore, throughout its post-war history, Argentina tended to have a surplus in the balance of trade but a deficit in the balance of payments. This is a common situation for countries whose productive links with the rest of the world are through the raw material sector.2 The surplus in the trade sector is more than offset by the payment abroad of interest, dividends, insurance, and other services. As to capital inflows, they can be stimulated by (1) the buoyancy of demand so that foreign companies want to invest there; (2) the transformation of the country into a cheap export platform like Mexico; (3) privatization of public activities such as utilities where a steady flow of rents is always guaranteed; and (4) borrowing on international financial markets. The first condition, the buoyancy of demand, was nonexistent, as the country had been mired throughout the 1980s in an economic crisis with hyperinflation. The fixed parity between the dollar and the peso reduced the attractiveness of the country as an export platform, so that the implementation of the stabilization program based on dollar-peso parity depended on privatization and further borrowing.

Menem’s monetary reform sat very well with the interests, views, and aspirations of private financial institutions, both local and international, and his policy received full backing from Washington, without which implementation would not have been possible. Privatization and budgetary austerity attracted capital, thereby expanding domestic monetary creation and leading to a euphoria that, between 1991 and 1995, generated a growth rate in excess of 4 percent per year, among the highest since 1945. The Argentine ruling classes thought that they were truly back in the fold of the advanced capitalist world. But as soon as the monetary reform got underway, the country lost its traditional surplus in the balance of trade, although not in a dramatic way. However, it kept showing a growing outflow of investment income for payments on interests and dividends abroad. As a consequence, the overall current account balance deteriorated sharply, so that reliance on capital inflows increased. The flimsy nature of the growth phase has been underscored by the recession caused by the Mexican crisis of early 1995; in its wake, the Argentine economy contracted by 3 percent.

Fearing a fate similar to that of Mexico, financial capital became apprehensive, but the crisis was temporarily overcome due to trade expansion within the Mercosur area (a common market integrating Argentina, Brazil, Paraguay, and Uruguay), where Brazil is by far the largest economic unit. The government of that huge country was also following a policy of deregulation and of anchoring the local currency (the real) to the dollar, although not as strictly as Argentina’s peso. This kept the value of the real high, while Brazilian inflation remained high relatively to Argentina’s. This factor entailed a revaluation of the Brazilian currency, thereby stimulating Argentina’s (now cheaper) exports. In 1989, around 11 percent of Argentina’s exports went to the Mercosur area. By 1995, that percentage had risen to 31.7, and by 1998, just before the inevitable Brazilian crash, Mercosur absorbed 35 percent of Argentina’s exports. International financial companies were treating both Brazil and Argentina as emerging markets, with highly-valued and high-risk currencies. Thus, on one hand, they were pushing loans onto them—which the voracious and rapacious local capitalists were quite willing to see granted, since it would be left to the wage and salary earners to pay anyway—but on the other hand, they wanted to protect themselves against so-called country risk. Financial companies and security houses are no fools. They know that Brazil and Argentina are not the United States, whose external deficit can be financed by issuing bonds which will be accepted by the rest of the world without placing limits on U.S. monetary authorities. In the case of peripheral countries, a persistent and rising external deficit is immediately translated into a threat of insolvency. In both Argentina and Brazil, external deficits were rising because the stabilization of the currency involved loss of domestic production in favor of imports. Hence, with the Mexican crisis of 1995, the additional “country risk interest rate” charged on Argentine borrowing increased considerably. When Brazil collapsed in 1998, leading to a 40 percent devaluation of the real, the game was up also for Argentina.

The Brazilian crisis put to rest any illusion regarding the possibility of long-term growth in the Southern Cone countries of Latin America. It also highlighted a fundamental truth for those not blinded by the mirage of spectacular gains from financial speculation: real production could not possibly sustain the enormous debt and interest burden of Argentina. This is indeed the crucial point. No reasonable level of net exports could have sufficed to help the country out of the debt trap. Without the debt burden, Argentina’s deficit, while getting worse, was not dramatic, especially in merchandise trade. Most of the damage was done by the outflow of financial payments on interests, repatriation of dividends, and services. To this one must add the export of capital engaged in by the Argentine capital-possessing classes. After the Brazilian crisis, the country risk interest rate shot up and kept growing when it became clear that Argentina would not be able to generate even a minimal net flow of funds from its operations with the rest of the world. As a consequence, the peso-dollar parity which sustained the new wave of privatization and financial speculation could not be maintained much longer. The U.S. treasury and the IMF knew this all along but insisted on austerity plans, the real purpose of which was to put the country’s assets on sale.

The class-based connection between international and local finance capital can be seen from the fact that the entire adjustment of the external debt burden was imposed on the real economy, while capital was enticed with promises of easy gains through privitazations, monopolistic rates indexed to the dollar in the event of devaluation (in utilities, for example), and the freedom to exit the country quickly. The debilitating and, indeed, devastating effects of these policies are evident in the persistent deindustrialization and increased exploitation of workers, which affected the country even during the years of the growth euphoria. From 1992 to 2000, hourly labor productivity increased about 45 percent, while money wages stagnated and real wages fell. During the same period, unused productive capacity remained high, at around 30 percent of potential capacity. It increased further as growth stalled and the crisis deepened. These factors taken together created, from the period of the growth euphoria onward, a persistently high rate of unemployment and underemployment now affecting more than 40 percent of the active population. Furthermore, the structural impact of the financial liberalization period is jeopardizing the possibility of some kind of recovery, even assuming the rise to power of a progressive alliance. The value of imported capital goods and spare parts for machinery rose from 25 percent of total imports in 1991 to 45 percent in 1998. This means that deindustrialization has gone so far as to prevent the establishment of a minimal autonomy in the working and planning of the productive apparatus. In this respect, Argentina has moved further down the ladder of undeveloping economies and is now in a much weaker position to undertake programs aimed at ending poverty and recession.

The year 2000 witnessed the formation of a large social front against the alliance of the government, the IMF, and financial traders. Mass demonstrations occurred against negotiations with the IMF, which were correctly seen as leading to further austerity and economic crisis. But neither the government nor the Peronist opposition, which went so far as to suggest a total dollarization of the economy, were interested in getting out of the mechanism of financial dependency. The IMF tried to open the door to financial liberalization still further. Each round of talks involved new austerity measures, and, as if the whole thing was actually stage-managed, international lenders increased the pressure by jacking up the risk interest rate on loans. Thus, financial institutions—national and international—were the usurers, and the IMF was the debt collector empowered with strangulation techniques. Yet the loan package negotiated during the fall of 2000, which brought about the explosion of the crisis, shows the tight linkages between local capital and international groups. The privatization of the social security system was the most important and explosive component of the deal with the IMF. This measure was not in the original package, but the De la Rua government wanted it in order to give a huge gift to private insurers. Too cowardly to present the measure directly before Congress, the government asked the IMF to include privatization as a condition for new loans. The bonanza for private companies is evident from the 30 percent commission they get for managing the funds that they then transfer to the government at risk-adjusted, exorbitant interest rates!

For the comprador classes and government of Argentina, the only way to maintain the currency agreement with the dollar—on which the entire domestic monetary creation depended—was, after having sold all possible national assets, to borrow more. However, each additional borrowing augmented the risk premium demanded by lenders. In July 2001, the routine issuing of three-month treasury bills turned into a crisis when the requested interest rate was increased from 9 to 14 percent, despite the ongoing deflation, which makes the real burden of interest payments much worse. The government’s response was to introduce additional restrictions, with Economic Minister Cavallo announcing an impossible zero budget deficit policy. Obviously unable to achieve this objective, the government was notified by the IMF in early December 2001 that a $1.3 billion loan was being withheld (exactly the same sum in exactly the same period was granted to strategically pivotal Turkey). The IMF decision led the government literally to steal the money from the public by blocking checking accounts and bank deposits. This was the last straw and brought a rather diverse array of classes onto the street, chasing De la Rua from office. But even in the hours of agony, the political establishment wanted to benefit the wealthy classes and the financial companies by temporarily keeping the peso–dollar parity while inventing a new currency, the argentino, not tied to the dollar. Prices, rents, and interests were supposed to stay in dollars or pesos, whereas pensions and wages were to be paid in argentinos, whose value was suspected to collapse relative to the dollar or the peso. The population caught on immediately to the swindle engineered by the interim president, the Peronist Rodriguez Saa, and chased him out in turn. The present president, Eduardo Duhalde, is now walking a tight rope between re-establishing ties with the IMF and avoiding the next explosion of popular anger.

From adjustment to adjustment, from deflation to deflation, the Argentine authorities and the IMF have succeeded in imploding the currency, without which a capitalist economy cannot function. However, a stable restoration of capitalist relations in Argentina is unlikely in the current climate of world financial crises. It would be much more practical to abandon any connection with the IMF and its clients and proceed directly towards the construction of a planned economic system based on social needs.


  1. Fernando Hugo Azcurra, La “Nueva” Alianza Burguesa en Argentina ( Buenos Aires: Dialectica, 1988); Eduardo M. Basualdo, Deuda Externa y Poder Economico en la Argentina (Buenos Aires: Editorial Nueva America, 1987).
  2. The U.S. current account deficit is of a totally different nature. The United States has a deficit in the balance of trade and a surplus in services, most of which are financial. Moreover, the origin of the U.S. deficit is not in structural dependency relative to other industrialized countries. It is rather the outcome, as Paul Sweezy put it, of the costs of imperialism, including the necessity of supporting Japan and Eastern Asia during the wars in Korea and Vietnam.
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