External Debt

Mr. Martínez de Hoz was accused of promoting as Minister of Economy- an oversized external indebtedness, this being the root of all the evils of the Argentine economy.
The external debt incurred during Martínez de Hoz’s term was not as large as some would have us believe- and was undertaken under the best market conditions. Additionally, the proceeds of such indebtedness were used to build essential infrastructure that is still in use today and that –against the most widespread criticism- contributed to the modernization and industrialization of Argentina.
The figures provided throughout this account were obtained from the Argentine Central Bank and the Federal Ministry of Economy.

Comparative Figures

The Argentine external public debt amounted to US$14,459 million at the end of Martínez de Hoz’s term in office (December 31, 1980) which compared to the US$ 4,021 million existing at the end of the previous administration (December 31, 1975), involved an increase of approximately US$10,000 million, i.e. an increase of almost 260%. But if the external public debt is compared to the aggregate exports of the relevant years, as of December 31, 1975 the external public debt-to-exports ratio was equivalent to approximately 2 years and 2 months of exports, whilst as of December 31, 1980 this ratio improved since it was equivalent to approximately 1 year and 9 months of exports. Therefore, although external public debt increased substantially, exports grew more (320%), resulting in an increase in Argentina’s payment capacity. And this is what really matters when measuring the strength of an economy.

As of December 31, 2009, after the drastic external public debt reduction made in early 2005 through an exchange offer, in different currencies and at extended terms (including the amount of the debt held by creditors who refused to accept the exchange (holdouts), the Argentine external public debt amounted to US$84,815 million. If the same comparison is made, with exports at the end of 2009, ratio is similar to the one existing in1980, since the external public debt at that time was equivalent to nearly 1 year and 6 months of exports.

Such ratio peaked in 1987, when 8 years and 2 months of exports were necessary to cover the external public debt, due to the fact that external public debt increased by 260% during the 7-year period after 1980, while exports declined approximately 20% from their 1980´s figures.

If, instead the public debt-to-GDP ratio, were to be used for comparison purposes, as of December 31, 1980 external public debt was equivalent to 7.58% of GDP, whereas as of December 31, 2009 external public debt was equivalent to nearly 29% of GDP. This ratio peaked in 1989, when external public debt actually exceeded the GDP in current dollars (107.24% of GDP).

It should be borne in mind that in 2001 Argentina’s defaulted on its payments to foreign creditors, and that as a result Argentina’s access to international financial markets was barred. Consequently, the Argentine Government replaced such deficiency by tapping several domestic revenues, such as advance payments from the Federal Treasury, Argentine Central Bank´s foreign exchange reserves, the funds of the Social Security Agency (ANSES), private pension funds (AFJP), as well as by defaulting on judgments and breaching laws that mandated readjusting pension payments.
The above comparisons rebut the repeated accusation in attributing the difficulties of the Argentine external sector to the external public debt incurred during Mr. Martinez de Hoz term in office as Minister of Economy.

General rationale of the indebtedness

External indebtedness is not a foul instrument in itself. First, it is essential to promote growth in developing countries that have scarce domestic capital and credit. But additionally, the underlying rationale is fair. In fact, there are some investments that benefit not only the present generation but also future generations. Thus, it is fair that the burden of financing such investments be borne not only by current taxpayers but also by those who shall benefit from such investments in the future. Moreover, credit has the advantage of permitting that a portion of the investments be paid when they are already yielding their benefits.

All highly industrialized nations, including the United States, have resorted to external indebtedness to promote their growth.

Was the external public debt incurred during Martínez de Hoz’s term in office really high?

The determination of whether an external debt is high or low cannot be made in the vacuum without drawing some comparisons similar to the above ones. The debt cannot be measured in absolute terms but must be measured in relative terms, i.e. by comparison with other indicators that reflect the country’s payment capacity, such as for instance:

1º) The volume of exports in relation to the aggregate external public debt.
2º) The volume of the external public debt service (including principal and interest).
3º) The external public debt-to-gross domestic product (GDP) ratio.

Use of the debt

Before Mr. Martínez de Hoz’s term in office and the favorable conditions generated by his economic programme to obtain external credit in advantageous conditions, Argentine public and private infrastructure was very old and outdated.

The external financing that was incurred under these favorable conditions contributed to the execution of works such as the construction of hydropower, thermal and nuclear plants, electrical transmission lines, oil and gas pipelines, bridges, ports, dredging of ports and waterways, modern telecommunication systems, railway, merchant navy and commercial airlines re-equipment, water works, IT systems, and a significant medical re-equipment throughout Argentina, among many other things.

According to official figures that were never challenged, public investments between 1976 and 1980 amounted to US$50,000 million, a substantial portion of which was covered by external financing.

The proceeds of external loans were also useful to substitute imports and to promote Argentine exports, such as the case of oil and gas. Between 1977 and 1980 Argentine natural gas proven reserves trebled. Oil production, which had declined to 23 million m3, increased above 28 million m3 in 1980, thus covering 90% of domestic demand, precisely at the time when the second oil crisis had increased oil prices and significantly aggravated the cost of oil imports.

Additionally, the private sector benefited from such favorable borrowing conditions by building new industrial plants and re-equipping existing ones, in a broad range of industries such as metallurgical, steel, cellulose, textile, petrochemical, cement, vegetable oils and capital goods sectors. It was during such period that computing was introduced at a large scale in Argentina.

The debt incurred since 1976, thanks to the confidence created by the economic plan, obtained the best market conditions as to term and interest. International financial agencies such as the World Bank, the Development Inter-American Bank and the International Financial Corporation granted loans to Argentina with maturities ranging from 8 to 25 years.

Thus, the criticism contending that foreign debt in Argentina had no counterpart in investments and that was merely speculative, is untrue. The infrastructure that still remains useful today and statistics easily rebut such assertions, for anyone willing to look into the matter.

2. The alleged de-industrialization

Another widespread disqualification used against José Alfredo Martínez de Hoz’s ministerial administration consisted in saying that his policies caused the “de-industrialization” of Argentina. This is also untrue:
According to a 1983 poll conducted by FIEL for the Unión Industrial Argentina, industrial investment in Argentina between 1976 and 1980 increased by 19% compared to investments during the 1970-1975 period.

The same source reflects that during Martínez de Hoz’s term in office, industrial production capacity grew by 20%. Conversely, such capacity declined after 1983.

The referred FIEL report also reflects that industrial productivity doubled during the first quarters of 1976 and 1981. The drop occurred after Martínez de Hoz’s term in office. During the 1976-1980 period, total Argentine exports increased by 200% and industrial manufactured exports also doubled, in constant currency.

During the 1976-1980 five-year period, capital goods almost doubled their level when compared with the preceding to 1971-1975 five-year period. Such levels were never surpassed.

During Martínez de Hoz’s term in office, the construction sector grew 30% in the private sector and 59% in the public sector; such peak was never surpassed.
During the same period, industrial promotion was boosted in the Argentine provinces, thus marking a clear de-centralization trend.

During the 1976-1980 five-year period, 370 industrial promotion projects were approved in the provinces, involving committed investments in excess of US$3,000 million, generating more than 30,000 jobs. To grasp the magnitude of such effort, during the preceding 17-year period (1958-1975) industrial promotion projects amounted to US$2,000 million.

Real public investment between 1976 and 1980 amounted to US$40,000 million, especially flowing to economic and social infrastructure works.

Heavy industry –contrary to what is baselessly repeated- was definitely developed, by means of the installation of steel production new plants and the modernization of the existing ones. This is reflected by the fact that, at the end of the period, crude steel imports (which had been very large) were fully substituted.
As to pretrochemicals, the Bahia Blanca Petrochemical hub and other plants were brought into operation in other regions of Argentina.
Cellulose and the paper industry received a strong boost; new plants were opened in the industry and existing ones were modernized.

In the energy sector, production was fostered, especially oil production which had declined to 23 million m3 in 1975 and increased by 24% between 1976 and 1980 -to 28 million m3 in 1980- thus covering 90% of domestic oil demand. In order to encourage investments in the sector a law was passed –the so-called Risk Contracts I Law- and record levels were achieved in seismic exploration lines, both in land and off-shore.
As to natural gas, proven reserves trebled from 200 to 625 million m3. With the construction of new gas pipelines, Argentina not only became self-sufficient in natural gas supply, but also achieved surplus capacity to export to Brazil, Uruguay and Chile. In this way Argentina was able to overcome its import dependence from Bolivia’s exports.

In the electricity sector, the efforts allowed for the incorporation of approximately 2,800 kv, of which 2,090 kv were hydropower power. Hydropower generation accounted for 42% of the generation in 1980, compared to 21% in 1975.

In addition to the financing obtained for large hydropower works (such as Salto Grande and Yacyretá), investment efforts were made in the field of nuclear energy, where a programme set a 1,500% growth goal for nuclear energy by the end of the century. Consequently, during the Martínez de Hoz period the works for the completion of the then-paralyzed nuclear power plant Embalse Río III were completed through great financial efforts, and the works for the construction of nuclear power plant Central Atucha II were awarded and commenced.

Due to the amendments introduced to the Argentine Foreign Investments Law (Ley de Inversiones Extranjeras) and, particularly, the confidence generated abroad by the progress of the Argentine economy, direct foreign investments doubled first between 1977 and 1979 and again between 1979 and 1980. At the end of Martínez de Hoz’s term in office, committed and approved investments exceeded US$3,000 million. In the 1977-1980 period, 250 investors entered into Argentina, nearly 50% of which were newcomers. This triggered new job sources and larger contributions for the country.

It was also thanks to Martínez de Hoz’s policy that medical care modernized as a result of a large scale state of the art re-equipment of hospitals throughout the country, e.g. computed tomography, new X ray equipment, ultrasound imaging and other medical instruments that, unquestionably, contributed to improve the quality of life of the people.

Subsequent political criticism created the myth of the destruction of the industrial production capacity, contradicting the evidence stemming from actual figures. Thus, although some companies closed their plants -as may happen in any period of time- it was later determined that most companies undergoing hardships had failed to take advantage of the great chance they had to renew their outdated equipment (some actually dating back to 1920 or 1930). Proof of this is the fact that those domestic industries whose owners invested in their own production -instead of trying to obtain easy profits at the expense of the public and their workers- significantly improved their condition and were in shape to compete under better conditions, not only with players in Argentina, but also with those from abroad.

That no de-industrialization ever occurred is evidenced by the fact that within a same industrial sector, those companies who modernized taking advantage of the circumstances created by the economic programme, prospered. Instead, those who failed to do so, faced difficulties and some went bankrupt.

This scenario, solidly supported by rates and documentation, practically reveals the opposite of what was reflected by an intense propaganda bombardment, unsupported by statistical basis or support in reality, launched by several interested sectors against the policies of Martínez de Hoz.

Sectors interested in keeping a large and inefficient State with whom to make into easy business, instead of betting on the industrial modernization of Argentina, have existed at all times.

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3. The Scheduled Crawling Peg (La Tablita)

The “Exchange Rate Adjustment Program by means of Pre-announced Decreasing Targets”, known as the “tablita” (scheduled crawling peg) was adopted in 1979 and became the center of the most severe and persistent criticism against Martinez de Hoz’s economic policy, to an extent such that even today, when the possibility of a similar proposal is mentioned, the crawling peg is referred to as the “Martínez de Hoz’s crawling peg” (tablita). This, in spite of the fact that the proposal was not actually made by the former Minister but by the Argentine Central Bank, as a mechanism to cope with certain problems that affected the population.

The so-called “tablita” intended to be, above all, an instrument against inflation, which annual rate at that time stood at approximately 100%, even when it had declined to such level from its 920% annual rate before Martinez de Hoz took office.

However, once inflation reached 100% a kind of standstill followed, given that inflation would not decline below such level.

Against what many believe, the reason for such standstill stemmed from the positive features of the Argentine economy at that time, as will be explained below.

Contrary to common belief, the –much criticized- import tariff reduction was preceded by an excessively slow gradualism. There was also an explosive growth of exports -particularly agricultural and livestock products- that resulted in the inflow of large amounts of foreign currency, in excess of the amounts that the market could absorb.

In light of this situation, by the end of 1978, the Argentine Central Bank (BCRA) proposed a program of pre-announced foreign exchange and tariff targets, starting from January 1, 1979. Such targets led to a gradual reduction of the foreign exchange rate adjustment. (i.e. the devaluation rate of the Argentine peso) The purpose of the program was mainly to attain a better balance in international trade accounts, which favored the reduction of the inflationary drive. However, the program also sought to promote the modernization and re-equipment of the Argentine production capacity, in order to allow the industry to enjoy a competitive structure.
The program was, thus, pro-industry and not anti-industry.

But, at such stage, an event that significantly jeopardized the success of the program occurred: the fall of the Shah of Iran in March 1979, and the outbreak of the revolution of Ayatollah Khomeini that triggered an oil shock causing oil prices to treble.

Such significant sudden rise of oil prices triggered a general increase of international prices, an event that also affected Argentina.

The crawling peg (“tablita cambiaria”) was thus neutralized by an unforeseeable and uncontrollable event.

Consequently, the interested sectors demanded correction of what was referred to “a gap or delay in the exchange rate” -meaning the actual appreciation of the Argentine currency against the dollar- that is to say, they were insistently asking for a devaluation. However, the economic team decided not to validate increases in the price index with the exchange rate. On the contrary, the idea was for production units to make serious cost reduction efforts through market competition.

The decision was adopted, inter alia, because the foreign exchange rate is the result of several causes that impact on its level, prices being only one of them. A devaluation that would have accompanied price increases would have only have stimulated the recycling of inflation due to cost increases, something that actually happened after April 1981, when Martinez de Hoz’s successor at Ministry of Economy (Lorenzo Sigaut) decided a strong devaluation.

As from September 1979, with the stabilization of international prices, the positive results of a more competitive market began to be perceived as regards monetary stability.

Thereafter, retail and wholesale price indexes in Argentina gradually began to drop month after month.

In the last quarter of 1980 –discounting the impact of VAT, which began to be levied on a general basis- wholesale prices rose by 26% per annum and the average increase of both wholesale and consumer prices average was equivalent to 38.8%. During that same period, the foreign exchange rate adjustment plus 1.5% for international inflation, represented 37% on an annual basis.

Thus, a convergence between the adjustment of the foreign exchange rate and price increases was obtained, without sharp sudden changes or artificial remedies.

The crawling peg (tablita) terminated on December 31, 1980. Thereafter, its prolongation became unnecessary and another foreign exchange policy could be adopted.

In fact, the Argentine Central Bank allowed for an administered floating currency or “dirty flotation” (“flotación sucia”), between a minimum and a maximum.
The foreign exchange rate floated within bands, without reaching any of its limits; thus no Central Bank intervention became necessary.

This evidenced that, had a change of government not occurred -with General Viola taking office and replacing the whole economic team- the foreign exchange system could have been finally normalized, without having to resort to large devaluations, as the one decided by the new administration on March 29, 1981.

Thereafter, devaluations followed one after the other –this was precisely what Martínez de Hoz wanted to prevent- reaching 350% in nominal terms, without bringing about the slightest improvement in the economy. On the contrary, this represented a serious step backwards, at a time when the few remaining problems were about to be solved.
When the Martínez de Hoz’s team established the crawling peg (“la tablita”), the idea was that its duration should not extend beyond one year. The members of the team considered that they could require the exporters –that had been benefited up to such time with the economic measures- to make an effort limited in time, for the benefit of the population at large, since the final goal was to terminate with the scourge of inflation.

The prolongation, provoked by the mentioned external events, became counterproductive.
Juan Carlos de Pablo, in his monumental work: “La Economía Argentina en la Segunda Mitad del siglo XX” (The Argentine Economy during the second part of the XX century) states that “in late 1978 the economic policy officials, desperate efforts to solve a problem, encountered a market of professional ideas that offered an easy and, above all, non conflictive solution: the crawling peg (‘la tablita cambiaria’).

De Pablo quotes a phrase of J.J. Nogués, who explains that as a result of both politicians and journalists repeatedly referring to the “crawling peg”, public opinion ended up believing that the crawling peg was Martínez de Hoz’s sole contribution “during his five years in office”. “There are also people –he added- who think that the only thing that Beethoven composed was his fifth symphony”.

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4. Sweet Money (Plata Dulce)

Another criticism against Martínez de Hoz’s economic policy – although not exclusively to it- is the alleged flight of foreign currency due the increase in the travelling by Argentines abroad during his term in office. First, the impact that such expenses abroad had on the balance of payments has been grossly magnified. Additionally, arguments lacking any basis have been raised, for example that trips abroad partly triggered the external debt increase. This argument confuses payments on account of tourism, that are financed with current revenues, with debt, that as explained in another section (see: External Debt), had its counterpart in significant infrastructure investments, which still exist today. Moreover, many industrials took advantage of a favorable foreign exchange rate to modernize, re-equip and refurbish their plants, after having had the chance of seeing what happened in other countries. The foreign exchange policy was useful to improve the existing technological levels and to equip hospitals, clinics and medical laboratories with state of the art technologies.

On the other hand, Martínez de Hoz never believed that travelling abroad could be something bad per se. On the contrary, he considered that such alternative would be a means of breaking our mental and technological isolation, of witnessing the progress of other countries and of fostering the will to imitate good examples.
Martínez de Hoz believed that Argentines should not be second-class citizens in a modern world, with nearly no frontiers for travelers, and where citizens from all parts of the world move freely without anybody believing that in doing so he/she is harming his/her country.

The devaluation and the ensuing controls could only serve to increase corruption and interrupt the industrial modernization.

In any case, there were other periods in which Argentines, under similar exchange rate conditions, plunged again into travelling and buying, such as in 1985, in the ’90 and from 2008 onwards.

Simultaneously, the opening up of imports has been profusely attacked. In a world of exchange, it is impossible to develop exports if imports are not simultaneously opened up, because no country will purchase from a country which, in turn, refuses to purchase. This could have happened during a very specific period (such as the post war) when Europe was devastated and in desperate need to purchase, without any conditions, but once such stage was overcome, it is impossible to plan the development of trade without opening to exchange.

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5. Grain Embargo

The left-wing propaganda has permanently accused Martínez de Hoz, of being an agent of U.S. interests. However, there is an event that totally refutes such hypothesis, i.e. Martínez de Hoz’s opposition to have Argentina follow the grain embargo decreed by the U.S. government against the then Soviet Union.

These events are described in detail in the book: “El oro de Moscú” (Moscu’s Gold), authored by Isidoro Gilbert, who at that time was head of the Soviet State Agency, TASS, in Argentina –thus, his connections with the Communist party and Russian government, at least at that time, are evident.

Gilbert starts his account by referring to a telephone call made by Robert Bergland –at that time, U.S. Secretary of State for Agriculture -to David Lacroze, head of the Argentine Grain National Board (Junta Nacional de Granos) in January 1980. In such communication the U.S. official informed Mr. Lacroze that the U.S. had declared a grain embargo –followed by Canada and Australia- against the USSR. The embargo was declared in response of the Soviet invasion to Afghanistan.

The book specifies that Argentina, Australia, Canada and the U.S. formed the so-called “Club of the 4” (“Club of the 4”) that concentrated large grain producers.

Bergland also called Alejandro Estrada, Argentine Secretary of Commerce and International Relations, and Jorge Zorreguieta, Argentine Secretary of Agriculture of the Ministry of Economy at that time.

Upon being interviewed by Gilbert, Martínez de Hoz stated that he had just opened up grain commerce and that adhering to such embargo would have been inconsistent. Moreover, it would not have served any practical purpose, given that exporters could have reported one destination and then re-routed the cargo to Russia.

The Soviets purchased –as Gilbert describes- a large portion of the harvest and paid for it in cash, at a price that was 25% above the market price.

Martínez de Hoz explained U.S. officials that maize was very important for the Argentine economy, but that this was not the case of Australia and Canada since they had no exportable maize. He added that if European countries would, in turn, be required to refrain from selling technology to Russia, and all would make joint efforts, the situation could be analyzed, but that an embargo exclusively involving grains was unfair for Argentina, that would end up being, accordingly, the only adversely affected country.
In the same account Gilbert tells an anecdote that Martínez de Hoz narrated during the interview held at his apartment. Martínez de Hoz told him that upon asking the German chancellor, Helmut Schmidt, if he would have banned capital goods exports to the USSR at the U.S.’s request, Mr. Schmidt had answered: “Over my dead body”.

Isidoro Gilbert describes Martínez de Hoz as “the man who best understood the U.R.S.S ‘s market needs to close its fiscal figures”. He also reveals that it was Martínez de Hoz who had advocated for the renewal of the trade agreements executed with the U.R.S.S. by Gelbard (former Minister of Perón), whilst other officials of the military government opposed to such agreements.

The former head of the Russian agency TASS adds a paragraph criticizing the Soviet’s press as having a “double standard” (SIC), since on the one hand it “continued reproaching the Ministry of Economy for all the economic problems of Argentina, while on the other it continued describing the “Three Vs” (Viola, Videla, Villarreal) as “democrats and realists” according to the view of the PC and PCUS” (i.e. Communist Party and USSR Communist Party).

Certainly, Martínez de Hoz wished to maintain excellent relations with the U.S., but he gave priority to Argentine interests, just as the U.S. government privileges its own interests.
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