BUENOS AIRES, Argentina -- Roberto Lavagna is well-versed in how a country goes from being the darling of international investors to seeing its banks shuttered and riots in the streets. Lavagna, 67, served as economic minister of Argentina from 2002 to 2005, and is widely credited with helping the county's economy recover from the brink of disaster. Shortly after resigning from office, he ran for president of Argentina in 2007, finishing third with 17% of the vote. He would not discuss whether he plans to run again in 2011, but with Argentina's current president, Cristina Fernandez de Kirchner, deeply unpopular, her political opponents clearly see an opportunity. Lavagna is now Director General of Consejo Una, a think tank. He recently published a book called "The Argentina We Deserve." In a recent interview with TheStreet.com in his modest offices near the Supreme Court building in downtown Buenos Aires, Lavagna says the U.S. can take at least one important lesson from Argentina's recovery, which is to draw a firm line in the sand in its dealings with banks.
When Argentina's banks ran out of funds to pay depositors, Lavagna told the banks, many of which were foreign-owned institutions like Citigroup ( C) HSBC ( symbol) and Banco Santander ( STD), that their parent companies would have to come up with the money on their own. That stance went against the recommendations made to Argentina by the International Monetary Fund, which said Argentina should bail out its banks either by guaranteeing deposits or by inflating its currency so the banks' obligations to its depositors would be easier to meet, Lavagna says.
Of course, the U.S. and Britain cannot appeal to the corporate parents to bail out their subsidiaries as Argentina did, because it is now the parents themselves who are in trouble. But Lavagna sees temporary nationalization as a comparable move from a philosophical point of view. In fact, Argentina did take over some of its banks, and Lavagna believes the U.S. should do the same, as the U.K. did with Royal Bank of Scotland ( RBS). "The discussion today concerning AIG ( AIG) shows you must be very tough and in this way I believe
British Prime Minister Gordon Brown was in my view more clever and tough than the Americans. You need to create conditions where the owners of the banks pay for what they did," Lavagna says, stressing that he sees nationalization as a temporary move to protect depositors and the broader economy. In addition to being tough on banks, Lavagna says Argentina's recovery hinged on drastically reducing its debt level. The U.S., on the other hand, can afford to carry a much heavier debt load, he argues. "The U.S. is a unique case, because it has a hard currency. When you are a country that issues hard money you can maintain a higher rate of debt, but in the case of a developing country I think 30% to 35% of GDP should be the maximum level of debt," Lavagna says. Prior to its crisis, Argentina's debt was 150% of its GDP, more than twice that of the U.S. at present, Lavagna notes.
"In the case of Argentina, the only reason to reach this level of debt was because that was very good business for the financial sector: no more than that. If you want, the case of Argentina is more similar to Enron or WorldCom that to some other country in the world." In order to reduce its debt level, Argentina got 76% of its foreign creditors to accept 35 cents on the dollar for its obligations. As a result, he says Argentina is now exiled from the international capital markets -- a status that, ironically, has protected it somewhat from the global crisis. Nonetheless, Argentina is now fighting rising inflation and has seen two million people, roughly 5% of the population, drop below the poverty level in the last two years. Lavagna believes it will be many years before Argentina ever has a chance to attract global capital again in a meaningful way. That is a harsh comedown for a country that, during the 1990s, was seen as a model for emerging markets economies around the world. Lavagna does not see a similarly harsh fate for Brazil, Argentina's neighbour and the current envy of emerging market economies. The iShares MSC Brazil Index ( EWZ) exchange-traded fund has fallen 60% amid the global economic crisis from its 52-week high in the summer of 2008. "Brazil is too big to be left
to default by the developed countries," Lavagna says. "Certainly the U.S. and other countries will do all that is necessary to sustain the country."
Other important countries that some might see as at risk of default because of their large deficits, such as Turkey, will be bailed out by other nations, if necessary, because of their political or strategic importance, Lavagna says. He points to Mexico, which received $20 billion in loans from the U.S. during the tequila crisis in 1995. "Argentina was not a country in any special situation," he says. Despite Argentina's state of exile from the capital markets, it retains a place at the discussion table via its position in the G-20 global economic summit to kick off on April 20. Lavagna recently published an opinion piece in El Clarin , an Argentine newspaper, with several points he hopes will get an airing at the summit, including detailed proposals on bank capital requirements and ratings agencies. "I have the impression that Gordon Brown´s regime and the Europeans are more prepared to discuss subjects concerning how to regulate the financial markets than the United States," he says. "The U.S. is more prepared to discuss just how to recover, but I think it's also important to say: don´t miss the opportunity to discuss how to restructure."