“This doesn’t make any sense,” said Gabriela.
We stopped ourselves. We wondered whether it was the idea or the way we chose to express it. Spanish is not our mother tongue. In fact, it’s no relation to us at all – not even a distant cousin.
“Una economia es siempre victima de sus proprios ventajes,” we had said.
We hoped it meant what we thought it meant – that an economy is always the victim of its own advantages.
“Oh, I see…it’s a paradox…but what does it mean?” asked our Spanish teacher.
Eduardo Elsztain knows what it means. Eduardo is the man behind IRSA (NYSE:IRS) and Cresud (NASDAQ:CRESY)…Argentine companies that have learned to do business, invest, and profit from Argentina’s many disadvantages. The firms were worth about US$150 million during the crisis of 2002. Now, the stock market judges them to be worth about US$800 million. Our friend Steve Sjuggerud thinks they’re worth considerably more. Cresud controls 410,000 hectares of farmland in Argentina – and dozens of office buildings and shopping malls.
So, yesterday, after our Spanish lesson in the beautiful Galerias Pacificas, we wandered down Avenida Florida to the Plaza Mayor. Eduardo’s handsome office is just off the square.
“You can learn a lot by looking at the Argentine economy,” he said. “You don’t learn anything from watching people who do things right; you learn from watching people who make mistakes. Down here, we make lots of them.”
The most recent lesson is what happens to a country when it borrows too much from foreigners. Back in the ‘90s, Argentina was flying. President Menem, with the help of American-trained economic advisors, had pegged the Argentine peso to the US dollar. One to one. No questions. No second thoughts. No need to worry.
Since the US dollar seemed like the safest bet in the world, the Argentine peso seemed like a good bet too. Suddenly, everybody wanted to lend the Argentines money. Why not? The rate of return was good…and the currency was as solid as the US dollar. What a great advantage. All that money coming into the country!
The only little, teeny-weeny worry was that the dollar-peso peg wouldn’t hold…that when it came to take that money back out of the country, it wouldn’t want to leave. That is, there was some lingering doubt about how strong the peso really was. Not long before this, the country had had annual inflation rates over 1,000%. That was why they pegged the peso to the dollar.
But at the time, with the dollar strong and getting stronger…Argentina was expensive. Our friend, Paul Terhorst, told us he had to leave – it was too expensive to live here. Argentina’s exports were suffering too. The nation is one of the top producers of wheat, soy and corn in the world. Not to mention beef. The strong dollar was making the Argentina’s food more expensive than its competitors’.
We recall putting the question directly to Carlos Menem himself. We were traveling with a group of American investors in the mid-’90s. Menem agreed to see us…and made a short pitch about what a great place Argentina was for American investors.
“But will you be able to hold the dollar-peso exchange rate at one-to-one?” we wanted to know.
“Yes…of course…” was his answer.
No was the fact of the matter.
On Christmas Eve, 2001, Adolfo Rodríguez Saá was sworn is as interim president of Argentina. His first, and only, important act as president (his term lasted only seven days) was to declare a default on the country’s foreign debt. Then, another short-termer, Ramon Puerta, went home for the holidays and decided not to come back. The crisis deepened until Eduardo Duhalde was elected president – Argentina’s fifth president in 12 days. He promised to save Argentines from the “neo-liberal” policies of his predecessors. Ordinary citizens had become “victims of the financial system,” he said.
(Hillary Clinton ought to go back and read some of the speeches from that era; they could be useful.)
Five days later, the peso was devalued…it subsequently sank to about 3 to 1 with the US dollar – where it remains today. Domingo Cavallo, the economist largely responsible for the dollar peg system, was later arrested.
A dollar is a pound, is a euro, is a peso…
We had dinner last night at a Spanish restaurant on the Avenida 9 de Julio – Palacio Espagnol. We have always admired the building. It has a marvellous dome on the roof…with a statue of Mercury on top. You can’t miss it. And it’s probably one of the best-known restaurants in town.
A party of four…champagne…hors d’oeuvres…starters…huge chunks of meat…wine…dessert…coffee – the bill came out on a silver tray. It came to 263 pesos.
Ten years ago, that would have seemed like a reasonable price – the equivalent to US$263 dollars. Now, it is still 263 but the peso isn’t worth as much on international markets. So, if you’re starting with US dollars or euros or pounds…it seems very cheap. Only about US$85.
Wherever you have a meal like that – Paris, London, or Buenos Aires – the bill will come to about 263. But the actual cost will vary with the currency. In London, the actual cost would be over US$500. Here, it was a London cab fare.
Eduardo’s stock company had been worth about US$800 million before the crisis. Now, it is worth about US$800 million again – even though it has added a lot of property. Eduardo used the crisis to expand his holdings.
“Some of these places that we bought were so cheap…they were practically a gift,” he says.
The firm owned seven large farms in 1995. Now, it owns 17. One of the farms in Salta province is 44 times larger than Manhattan. He paid US$4 per acre for it.
“I think the whole world’s financial system is headed for trouble,” he says. He’s seen plenty of trouble. We listened. “Many of these hedge funds are going broke. Many of these derivative contracts are going to turn out to be worthless. I’m only interested in investing in things of real value…things that will survive. I only buy land, productive farms, valuable buildings…and gold.”
Back in the late ‘90s, the central bank of Argentina was doing, predictably, silly things. For example, the bank had a hoard of gold coins.
“Gold was only about US$250 an ounce, back then,” Eduardo explained. “And the central bank wanted to get rid of its gold coins. Who needed gold coins when you had the dollar, right? Well, they put the coins up for auction. No one was especially interested…even though these were valuable coins…mint condition…from the 1880s. So I bought them. I bought all I could. I paid about 52 pesos for each of them…”
We took a look at one of the coins…a pretty thing…about a quarter of an ounce of gold. Let’s see, the gold alone should be worth about US$180. And what’s 52 pesos worth? Hmmm…about 16 bucks.
“Good trade,” we commented, making a mental note: Dear Readers might want to make the same trade with their pesos…oops…dollars.
“I’ve done better. I found a gold mine out in Chile. Nobody seemed to be paying much attention to it. I bought it very inexpensively. It has hundreds of thousands of ounces of gold – still in the ground. I could do like you do…buy gold coins and bury them in the ground. Why bother? I just buy them before they ever leave the ground. It’s a very cheap way to buy gold…”
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