El ‘Lunfardo’ de Cavallo: The Minister’s Words Preface During and after his tenure as Finance Minister, Cavallo was an active proponent of his own ideas. He regularly gave speeches, granted interviews, and lectured international economic groups on Argentina’s reforms, which provides a range of materials that I can use to examine his thoughts on privatization and borrowing. This analysis will begin with his paper titled, “Lessons From Argentina’s Privatization Experience,” published in 1997 for the Journal of International Affairs.
Lessons from Argentina’s Privatization Experience, 1997
This article, which predominantly deals with the economic gains and the political implications of privatization, also touches upon the link between privatization and borrowing. In describing the reasons for the privatizing push, Cavallo provides us with a historic account of the relationship between debt and the soon-to-be-privatized companies. According to Cavallo, during the 1980s, the losses of Argentine state-owned businesses were financed by public debt.72 Thus, there was a connection between these particular companies and the issuance of government bonds. Take, for example, the case of Telefonica (or any other unprofitable state- owned company). The capital necessary to cover the company’s losses was obtained either through IMF loans or through sovereign bonds sold to private lenders. This set a precedent in which companies like this began depending on Argentina’s ability — and willingness — to indebt itself.
This relationship remained, though in an altered manner, during the privatization policies of the 90s. Cavallo once again weighed in on this subject. He claimed that the process of privatization “…itself gives the country the opportunity to attract foreign direct and indirect investment, as well as domestic private investment that can raise capital productivity.”73 The first and third parts of this statement are quite standard. Foreign direct investment refers to international companies spending capital in another country by purchasing assets, a pattern that Argentina’s privatizations followed. For example, Iberia — a Spanish company — acquired stakes in state-owned Telefonica, infusing capital into Argentina. The third part, domestic private investment, refers to a process similar to foreign investment but involving national companies as the purchasing party. Argentine conglomerate Techint, for example, also bought a stake when Telefonica was sold. Thus far, this thesis has used the term investors for such companies.
The second part of this statement is more interesting and more relevant to the relationship between privatization and borrowing that I am focusing on. For Cavallo, privatization attracted indirect investment, specifically through securities such as stocks or bonds in companies that were not privatized and in government debt. In this case, the majority of investments came through the acquisition of Argentine bonds, as they were safer than buying stock. So, Cavallo claimed that the policy of privatization acted as a signal that encouraged lenders to commit capital to Argentina beyond the assets being sold, in hopes of high returns. The financiers, influenced by the outcome and message of privatization, invested in the country. The main outcome of the policy was that Argentina improved its budgetary position, as the state gained cash from selling its assets, while the message also influenced the lenders. Argentina, through privatization, showed signs of commitment to free market economics, which was considered the de facto optimal policy at the time. Privatization was thus influencing private lenders to purchase part of the country’s debt.
Thereafter, the relationship between privatization and borrowing still existed in the 90s, as it had in the 80s. Nevertheless, this relationship had been altered in this 10-year span. Borrowing was no longer a source used to fund the deficit of state-owned companies since these companies had been sold to private investors. Instead, privatization was enabling further borrowing in the international market. Through the mechanisms described above, privatization was signaling Argentina’s economic improvements, making the country more attractive to foreign lenders. At the same time, the Argentine government was financing the convertibility plan with the gains from privatization and the loans from borrowing. Though Halevi explains this development in his article, “The Argentine Crisis”— which I quoted in the previous section — he does not mention the link between both. This is one of Cavallo’s key arguments, crucial to understanding Argentina’s political economy during the 90s.
Analysis of the data supports this point. Although it is difficult to discern/measure the direct impact of privatization on sovereign bond loans, it is clear that the amount of loans increased as privatization policies were being enacted. Correlation does not imply causation, but in this case it supports Cavallo’s argument, considering Argentina’s actual economic experience in the 90s. Argentina’s external debt rose consistently from 1992 until 2000. The beginning of this trend coincided with Cavallo’s inauguration as Finance Minister and his acceleration of privatizations since the early months of his ministry.74 Furthermore, during 1993 and 1994, when privatizations were under full swing, Argentina’s external debt increased by an unprecedented amount of roughly 15% each year.
Total External Debt (in US$) for Argentina from 1988 to 2000:75