Monday, September 24, 2012

Pre Crisis Contracts in Argentina After 2001‏

Hi Ferfal,
I've enjoyed reading your blog over the last year and I've purchased your book, but have not read it yet.  I enjoy your insight and stories from your experience in Argentina and look forward to reading your book.
My questions are about financial contracts.  I've seen on your blog and have read that a lot of post-crash purchases of large items, like a house or car, are primarily in US dollars cash.  Before the crash in 2001 did people use mortgage loans or cars loans?  If a loan was written in 1999 in Argentine dollars were the loan payments still accepted in the debased currency because of the contract?  Did the banks or lenders just write off the loans or did they try to force payment in US dollars or Euros?  Did the government force loans to be forgiven?
I would like your perspective on what happens to a contract.  I think the US will be seeing similar problems in the near future and I'd like an idea of what it may look like to carry any debt.  The US situation may not play out like Argentina, but I wouldn't put it passed US officials to look at other countries handling of these issues.
Any insight would be appreciated.  Please feel free to share the letter and your reply if you have one, but please do not publish my e-mail address.
Thank you for sharing you knowledge and experience!
God bless you and your family in Ireland!

Hi Andrew, sorry for the delay in replying.
You bring up an excellent point. After an economical collapse or significant economic crisis like the world is seeing now the importance of correct contracting becomes even more significant. On one side frauds become more common and you really have to cover your back from any possible legal loophole, on the other the rules by which you do business chance constantly in times of turmoil so you have to keep up to date on everything.
Take for example contracts for renting.  When inflation is spinning out of control you have to keep this in mind. When doing a two year contract we would adjust for inflation, the second year price being 20 or 25% higher than the first one.  Some people did contracts that included an increase if inflation reached say, 10% in 12 months (just an example) but these lost their meaning as soon as the government started cooking the books. Officially the inflation may be 4% a year, but on the street the real inflation is 25% per year. When such a situation presents itself your contracts can hardly go along the lines of official figures because they don’t mean much at all anymore so you have to be careful.
Regarding your questions, loans weren’t that common, not like in USA, but some people that owed money in USD did benefit from the new rules, in many cases paying back just a fraction of what they owed. In others, especially for deals between individuals, either an in between point was agreed or they went to the justice to settle the matter. In general yes, you benefited if you had to pay a loan in USd. When it came to banks you had to repay at an official 1.4 rate, then a little higher, but always less than the street price. Paying back at a 1.4 peso to dollar rate is actually a great deal when the street price is 3 pesos per Usd.  Why did banks allow this? Because on the other hand they were being allowed by the government to steal everyone’s Usd savings, taking away basically 75% of people’s savings, with a similarly low conversion rate during the “pesification” period (turning people’s Usd savings to pesos).  Getting in debt to take advantage of such circumstances is still a high risk deal. If the timing isn’t just right you’re just losing money so I would recommend people staying out of debt as much as possible. I avoid debt that piles up in a snowball effect. Buying a cell phone, smart TV, etc, all in monthly payments is an awful idea under most circumstances. In a free falling economy like Argentina with a 25% inflation it is a pretty safe bet, that’s why people don’t think much of it and jump right in. The TV is going to cost 50% more by the end of the year anyway, but for normal countries getting into debt isn’t recommended.

 Having said this, an especially for people thinking of buying real estate, if you find the right property at a low enough price it might be worth getting into debt. In many places property has reached an all time low.

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