Sub-prime Crisis: Argentina’s Consumption-Credit Variety

Global growth during the last five years provided a huge tailwind for agricultural producing countries boosting Argentina’s emergence of one of its biggest crises ever. The government response to this (temporary) windfall in its terms of trade and globalization not seen since the late 1800’s has been to stimulate consumption, instead of investment to capitalize the positive shock for its long-term growth. This can be observed, among many other things, by the huge consumption-credit boom of 2003-2008 (housing credit is relatively small in Argentina), especially to middle- and lower-income families. The domestically generated inflation has exacerbated the extensive use of this form of credit in a potentially unsustainable way.

Inflation, if temporary, can be expected to increase the use of this type of credit. Precisely this is the rational use of credit markets: to finance temporary shocks in order to smooth consumption. However, this is not the appropriate channel for permanent shocks as the current inflation rate, which is not expected to go away any time soon. When inflation starts to accelerate and being incorporated to inflation expectations and the government lacks a serious anti-inflationary program, and real wages start to decline, consumption is likely to lose pace. In this context, it should be expected that lower-income families in countries in which the share of food and basic stuff is non-trivial to being unable to meet all the required payments—the more so the higher the inflation rate—and for such repayments to be put on hold.

Paralleling the home-oriented sub-prime crisis in the U.S. where many credits where extended without the appropriate credit revision, many consumption-loans have been extended in Argentina. Although the amounts involved are lower, the collateral is worse: there is no home to be absorbed by the financial institution in case of default. And many credits were issued not only to buy cars or refrigerators, but also to buy clothes. Recent data from the central bank shows a substantial increase in delinquency rates in these types of credit, which doubled. Recent studies expect the delinquency rate to increase due to higher inflation.

A big share of these lending has been directly extended by stores selling these goods and financial institutions. These credits are then pooled and these financial instruments are then sold in financial markets—the so called financial fiduciary funds—which are supposed to hedge upon risk. As of now, middle and low income families are, on average, indebted on 80% of the monthly household income—for higher incomes this reaches five times the monthly income!).

Although the scale is much smaller, any resemblance to the U.S.? The rest is let for the smart reader to figure out.

6 Responses to "Sub-prime Crisis: Argentina’s Consumption-Credit Variety"

  1. ewulf   May 28, 2008 at 10:32 pm

    Financial sector policies ,are a matter of Central Banks area of concern .Is it possible to get in Argentina an economic slowdown,because of such a weak supervision ?. It will obvioulsy depend of the risk involved.It is not enough the level of debt, but also the ability to pay,which depend upon the income level and its stability over time.This is the key issue,to evaluate the impact on consumption.

  2. Roberto   May 29, 2008 at 8:00 am

    Clearly, this growing debt load could impact consumer spending which has fueled growth here over the last few years. But as a percentage of GDP, how large is it really, given there is so little credit available in this country? Movements in commodity (ie soy) prices probably have a much larger impact both in terms of government revenue and farmers income as well as impacting inflation.

  3. Nicolas Magud   May 29, 2008 at 11:25 am

    Thanks for your comments. It is correct that as percentage of GDP this type of credit is not huge (precisely because of the extremely low credit available), but as share of total credit it is important. It is not the direct effects in government revenue that I point to but the fact that populist macroeconomics have generated high inflation; this affects low-income people the most–as usual, and exactly in contradiction to what a populist government would like to distribute resources to.Of course the level effect will not be as important as in the U.S., but the income distribution implications are relevant. The more so if the economy is headed to worst times. And that is what I believe will happen. H1 does not look very good. 2009 much worse.Nicolas

  4. mangy cat   June 1, 2008 at 12:55 pm

    nicolason bank consumer loanslet us recall that the pushers of the consumer loan drug are the very same jokers who defaulted on the dollar-denominated deposits they had accepted under harvard’s blue-eyed wanker’s convertibility plani.e. shittybank, big bosta (bostón) under opus dei priest (sacerdote), lloyds (to only name those who operated as branches -which implies full responsibility from hq-not the fully-owned subsidiaries, where depositors were at least entitled to deposit refunds on consumer protection and truth-in-advertising legislation about the true (phony) extent of coverage by attractive flaming or tangram logosi.e. another puss die: santander -booty for the vatican and father grassi-, scot-free kill-mee loony ticks, eta-french, chinese torture, etc, etc, etc

  5. mangy cat   June 1, 2008 at 1:09 pm

    on financial trustsinterestingly, bcra monthly monetary report spends more column inches on financial trusts than the other 90% of the loan market. but maybe it is just laziness of rehashing what is written elsewhere instead of original researchwhat struck me in H2 07 was that retailers and private (non-bank) credit card issuers continued placing financial trusts irrespective of market conditions (badlar + 7 p.p.), which is suggestive of the lack of financial alternatives to keep the sales ball rollingwith the farming strike/lock out (technically a lock in) and the subsequent cracks in the chain of payments, bad loans will more than likely worsen radically at the regional household appliance retail chains (as s+p is starting -late as usual- to acknowledge)paybacks of pay-on-harvest loans by grain operators are in some cases reportedly being covered by the mutual guarantees firms (sgr)next stage: farm operators start throwing back their combine harvesters, tractors, drills and sprayers at the leasing companies who still (legally) own all this hardware, which is useless to process in a back-office to process credit card coupons

  6. mangy cat   June 1, 2008 at 6:17 pm

    res non verba (cattle don’t talk)interesting s+p graph on acceleration of over 90-day arrears, of tarshop (black as coal?) financial trust serieshttp://www.portfoliopersonal.com/doc/fideicomisos/PS_Tarshop%20XLIII_DEF.pdfpage 6