By Bianca Fernet, The Bubble:
You know that soul-shattering moment when reality hits? Your stomach drops to the floor and everything goes numb. Time seems to slow down for a few painful, aching moments while your brain struggles to absorb the fact that he’s secretly married, likes to use fake names and sleep with strangers as a hobby, or is in reality much, much younger than he said he was.
The thing about a good gut-twisting, life-altering moment of shock and betrayal is that it has to come from somewhere you were least expecting. About the only quality I share with my fellow “millennials” is an over-healthy dose of apathy. I’ve learned to exorcise my demons over late night bitter cocktails paired with expensive cigarettes, and mask my humanity with glib humor about the fact that I actually quite prefer to cry a little bit. It gives my mascara that smudged, smokey look that all the gals in the magazines have these days.
It’s no secret that, sad as it may be, I see an economic crisis (quite likely of the currency/debt variety) as unavoidable for mi querida Argentina. Is it technically possible to avoid? Yes. Is it possible to politically survive the repercussions of putting in place the necessary steps to do so? Bianca thinks no.
And so, alas, Argentina finds itself in an economic game of hot potato. Except in this case, when the music stops, the consequences will be insecurity, instability, destroyed purchasing power, aggravated poverty, soaring inflation, and other fun outcomes that will be born principally on the backs of the members of lower socioeconomic classes that supported Kirchnerism based on unsustainable socialist measures in the first place. Irony, right?
As a student of economics, I focused on economic crises. I studied their roots, debated their origins, picked apart and created regressions of their consequences, all with the idealistic shiny naive idea that by understanding crises, I could someday participate in helping humanity by preventing them, or at least mitigating their brutal effects. Life to date has taught me that crises are not caused by economics. Their seeds are sown by politicians whose vote-maximizing behavior incentivizes medium-term, hot potato-style decision-making.
And if you ever choose to study the modern history of economic crises, you will learn that in this tale, George Soros is not so much a guest appearance; he is practically Evita’s Che Guevara (in the musical, not real life). This ever-present, vocal and proud force, boldly acting, taking strokes that in the short term brutally crush developing economy currencies and systems with the guiding principle that he was expediting market corrections and bringing to the fore economic dislocations that, if left to fester, would produce far more detrimental effects than the crisis and forced rapid correction.
George Soros didn’t invent shorting and speculatively attacking weak currencies, but he certainly made it an art.
To understand how rich indeed is Mr. Soro’s relationship with economic crises, lake a look at some of the greatest hits from the 90s:
- 1992: Soros breaks the Bank of England by short selling US $10 billion worth of GBP (pounds)
- May 1997: Soros’s Quantum Fund takes short positions in Thai baht, betting the dollar peg was unsustainable
- July 1997: Soros attempts to “double play” the Malaysian economy by simultaneously shorting the pressured ringitt and the Malaysian Stock Market.
- October 1997: Soros’s Quantum Fund borrows in Hong Kong dollars and shorts the Hang Seng index futures, positioning itself to gain if the HK dollar depreciated and putting pressure on the market to make this happen
In addition to these noteworthy showstoppers, Soros is also suspected of having a hand in the 1997 collapses of the Indonesian rupiah, the Filipino peso, the South Korean won, and the Singapore dollar.
In his own book, Open Society: Reforming Global Capitalism (his own book!), Soros opines that:
“Of course, this exposes them [hedge funds] to criticism when the change is undesirable, but if a trend is unsustainable it is usually better if its reversed sooner rather than later.”
While I don’t completely believe in the altruism behind Soros’s statement that hedge funds scour the globe purging unsustainable market inefficiencies, preventing long-term woes for the price of short-term suffering, I did at least believe that he believed it.
He even went back to South Korea in 1998 after thrashing the won to meet with the President-elect and pledge US $1 billion in investment, contingent on economic reorganization including strengthening banks and letting foreigners buy controlling stakes in South Korean companies. Chopsticks and carrots, my friends.
So you can imagine my utter shock on Monday when it was announced that Cristina Fernandez de Kirchner, one of the strongest candidates for culprit numero uno of putting in place unsustainable trends that should be reversed sooner rather than later, was to meet with George Soros in New York. Cristina is in New York for the UN meeting to seek support in resolving the technical default brought about by the infamous “vulture” funds.
Soros himself is exposed to Argentina. He has skin in the game. He holds restructured bonds, as well as a 3.5% stake in YPF, Argentina’s state-controlled energy company. Soros’s hedge fund Quantum Partners is one of four creditors that sued Bank of New York Mellon in London last month for obeying US Judge Griesa’s stay forbidding that they process the payment from Argentina to holders of restructured debt. In other words, as a holder of said restructured debt, Quantum Partners would quite like to get paid.
According to Soros spokesman Michael Vachon, Kirchner and Soros “discussed a range of topics, including the prospects for Argentina’s economy, recent positive developments in Argentina’s energy and hydrocarbons sector, and drug policy reform in Latin America.”
It is fairly clear what Cristina gets out of the association. Support from an evil hedge fund, who conveniently happens to be on her side in this matter, in her crusade against evil vulture-type hedge funds who aren’t, as well the ability to continue citing Soros’s decision to invest in Argentina as a signal of investor confidence in the economy.
What couldn’t be less clear to me is how in the world George Soros, the same George Soros who has bent emerging market governments backwards forcing them to enact structural reforms, promote transparency, and put in place investor-friendly tax and legal structures, could sit next to Cristina and associate his face and reputation with the idea that investing in Argentina under Cristina’s Kirchinerism is a savvy idea.
Argentina today does present an investment opportunity. The infrastructure, the educated workforce, and the well-trained experts and professionals are all here. Taxes are high. I would argue too high, but I would entertain an argument with one who defended them as necessary to have the infrastructure. Red tape is outlandish, restrictions to foreign ownership are pervasive and opaque, and corruption exists at high levels. Yet this is par for the course for doing business in emerging markets. I’d like it if heavy hitters like Mr. Soros were to throw their weight around a bit in favor of making my life a bit easier by improving transparency, but again, this is part of life south of the equator.
What Argentina presents in spades is country risk, currency risk, and political risk, and these need to change. The Argentine peso isn’t just weak, it’s a lie. There is talk of the government devaluing to 10 pesos to the dollar, when today the Argentine peso is trading on black markets at ARS $15.45 to the dollar, and the implied value of the peso relative to the dollar based on stocks and bonds traded in both currencies is ARS $14.53 to the dollar. In case you didn’t study at the London School of Economics like Mr. Soros did, both of those numbers are already bigger than 10. Although he did earn his degree in philosophy, so it’s possible that I’ve missed something transcendental of importance.
Argentina’s reserves reportedly sit between US $20 billion and US $30 billion, and they’re about to take a mega-hit from falling soy prices. Soros’s estimated net worth is roughly the same, a cool US $20 billion. And while it would fulfill a college girl’s dream to see Mr. Soros swoop down on the struggling peso and smash it to bits in the name of restoring order and economic rectitude, I get it, he’s older now. But he could at least make a public statement saying that multiple currencies, nearly complete restriction of imports, and rent-seeking export licensing schemes are bad, and abolishing them would spur investment and thus economic growth. He could open his mouth and say how inflation hurts consumers, businesses, and basically everyone with exposure to Argentina.
Mr. Soros owns property and has an equity stake in Argentina, true, and may even see an ideological difference between speculatively attacking weak currencies for profit (good evil hedge funds) and buying defaulted debt and suing for face value (bad vulture evil hedge funds). But evil hedge funds and power players like Soros can serve the purpose of forcing governments and the politicians who make them up to act in ways that transcend a scramble for votes to win a popularity contest every few years.
That’s right, we’re back to politics. In the least popular article I ever wrote, I asked how democracies in South America can tackle socially unpopular but I argue necessary steps like abolishing unsustainable subsidies that slowly gnaw down reserves until the inevitable crises point, leaving an expensive mess in their wake. Soros can do what he wants, but I think his approach to Argentina is off the mark and in fact tarnishes his laurels.
Intelligent little girls all over the world are likely developing George Soros issues over this. He has acted like a politician and should not be proud. By Bianca Fernet, The Bubble
Argentina is an adventure. Even for the Argentines. We greatly admire their willingness to experiment with policies others have already proven don’t work. But the country will get worse before it gets better. Read…. Shining a (Hilarious) Light on Argentina’s Black Economy