So often in Argentinas tumultuous past, economic
troubles stirred up political crises. Now under president
Cristina Fernández de Kirchner whose husband and
predecessor Néstor Kirchner still looms over the
presidency its the other way round: their frequent
political crises have led to economic woes.
A case in point is the ongoing drama over the
presidents order in December to use central bank reserves
to pay outstanding debt a saga that led to the
resignation of bank governor Martín Redrado at the end
This government has the rare ability of transforming
an opportunity into a crisis, Miguel Kiguel, an Argentine
economist and former finance secretary, tells Emerging
Markets. The conflict with the central bank was
But its not just the Kirchners who are at fault, say
analysts. The political leadership on both sides has achieved
the impossible and gone yet deeper into the gutter. The
consensus view from economists, analysts, and political leaders
interviewed by Emerging Markets is that Argentina is
likely to face turmoil this year, but itll be political
rather than economic.
There are two reasons for this. First, they do not expect
Fernández de Kirchner and her husband to change their
decision-making methods and style or be able to adapt to no
longer having a majority in a compliant Congress.
The Argentine first couple has a perverse talent for taking
issues that many Argentines support, sometimes by wide margins,
and making them unpalatable and unrecognizable. And if one does
not agree with their methods, one is immediately accused of
plotting a coup much the same way former US president
George W Bush argued that you are either with us or the
The Kirchners have also undermined the countrys few
solid existing institutions, most notably its statistics
agency. Argentinas economics ministry exists in name only
and has little influence over economic policy. For such a
performance, the Kirchners suffered a humiliating defeat last
June in Congressional elections.
The second reason for the expected political turmoil is that
in the nine months since its victory, the opposition has failed
to fill the leadership void. It has few credible leaders, a
coherent vision or economic plan.
The likely result this year is not just increased stalemate
but also polarization. This also makes it highly unlikely that
Argentina will fully normalize relations with the international
financial community in the next two years or at least
until after the 2011 presidential election.
What is promising about Argentina is its economic growth
prospects. The government estimates GDP growth of 2.5%,
triggered by an improvement in the countrys industrial
sector. Argentina will also maintain its devalued peso to
promote exports. A Ps3.95/$ exchange rate is forecast in the
2010 budget. External public debt remained stable in 2009 at
49% of GDP, down from 139% in 2003, but unchanged from 2008.
The private sectors external debt has plummeted.
Private economists are also optimistic. Kiguel predicts 4%
growth in 2010. Dante Sica, head of consultancy Abeceb, expects
Bernardo Kosacoff, director of the Buenos Aires office of
Cepal, credits both Kirchner and the Argentines. He says that
after 30 years of volatility something has definitely
matured in society here. Everyone from heterodox to orthodox
economists, from the left to the right, all agree that having
consistent macroeconomic policy is necessary for economic
He adds: Today there is no crisis in the financial
sector. It is extremely liquid.
Agriculture, mainly soy and grains, is expected to have an
excellent year, says Juan Miguel Massot, a Buenos Aires
economist. However, he says that the wheat, dairy and meat
sectors will continue to face problems as they become less
Gustavo Grobocopatel expects the country to produce
8590 million tonnes of grain this year. That figure could
reach 150 million tonnes with less harmful policies, he
The main economic challenges will be a vanishing fiscal
surplus and inflation. Still, the chances of default on the $8
billion in public debt payments due this year are close to
zero, say economists of all political shades.
This could change if the Kirchners are massaging statistics
more than has been claimed a distinct possibility
according to Alfonso Prat-Gay, Nestor Kirchners first
central bank president and today an opposition legislator and
chair of the lower houses Finance Committee.
Prat-Gay says that even before the December controversy, the
central bank was lending money to the Treasury, roughly $20
billion since 2005, he contends.
It is quite clear that a country that grew at 8% from
2005 to 2008 and officially showed significant fiscal surpluses
on the books, required emergency lending from the central
bank, he says.
On December 14 (the day of the first decree), the
government revealed that there is a big fiscal hold that it has
been covering up or masquerading for a number of years
now, Prat-Gay adds.
The government is now showing publicly that it is keen to
expand its financing options. Still, few expect much progress
on settling the debt with the hold-outs from 2005,
$20 billion, or the Paris Club, $6.5 billion.
In addition, the Paris Clubs insistence on involving
the IMF to audit Argentina, and in particular Indec, its
controversial statistics agency, will likely get nowhere with
the Kirchners. Nothing is going to happen with the Paris
Club debt. Its a non-starter requiring the IMF
audit, says Kiguel. The debt is indexed to inflation, so
it is unlikely the Paris Club would bend its requirement of IMF
As for the hold-outs, the government continues to claim a
desire to reach an agreement and has taken some initial steps
forward. Edwin Gutierrez, who manages $5.5 billion of emerging
market debt for Aberdeen Asset Management, including Argentine
bonds, thinks a new debt-swap offer could be made by the end of
March. (La Nación recently reported that this will
likely be pushed back to April.)
But Alberto Ramos, senior economist for Goldman Sachs, says
that a healthier political climate is needed to give investors
confidence in going through with any offers, even more so now
that the Argentine government is divided. He does not expect
progress on either the hold-outs or the Paris Club talks.
The political environment has deteriorated over the past
years to such an extent that the head of Argentinas
Supreme Court, Ricardo Lorenzetti, has suggested studying the
option of moving towards a parliamentary system.
Kosacoff adds that leading into the global financial crisis,
the private sector had the impression that what happened
overseas would have a significant impact on Argentina. But now
there is great agreement that 90% of Argentinas economic
problems are endogenous.
The latest tensions surfaced late last year. In November,
Congress approved President Fernández de Kirchners
2010 budget. She still held her majority at that time
the new Congress had not yet begun.
Less then a month later, the government decided it needed
more money. Fernández de Kirchner signed a presidential
decree creating a new fund that was to draw from central bank
reserves. Martín Redrado, the central banks head
at the time, refused to go along although some say hed
been compliant before. He was then sacked. A court ordered his
reinstatement the following day. He then resigned.
With a new central bank head in place, Fernández de
Kirchner in March revoked the old decree and issued two new
ones to transfer reserves to the Treasury and pay off external
debt, including one payment to the IDB.
But the opposition, now with more control in Congress, has
been up in arms over the Argentine leaders actions. It
has threatened to overturn the decrees and fire the new central
bank president. Some opposition leaders are also pursuing
Analysts say many opposition leaders are offering much in
the way of spectacle but little in the way of substance. Their
credibility and their demands are also suspect.
The opposition is demanding an independent central bank
even though Argentina has seldom had one, and this has
not been an issue for them in the past. It is attempting to
position itself as a defender of institutions and integrity,
yet many of its leaders are not widely believed to embody these
Francisco de Narváez violated election finance laws
last year. Buenos Aires mayor Mauricio Macri had one of the
worst attendance records when he was a legislator he
said that attending Congress bored him. Julio Cobos is the
nations vice-president but often behaves as an opposition
figure. (President Fernández de Kirchner has reportedly
even been forced to cancel overseas trips, most recently to
China, out of fear of what hed do while she was
And then there is the widely criticized former president
Carlos Menem, now a senator, and Adolfo Rodríguez
Saá, the person who declared default in 2001 during his
brief stint as president. In his more regular job, he and his
brother have run the San Luis province as their personal
fiefdom one or the other has been governor for the last
All this means that Argentines find it difficult to see the
opposition as the guardians of strong institutions and checks
Julio Burdman, a Buenos Aires political analyst, says that,
the opposition has every right to oppose the decrees, but
it has to explain why. Simply not complying with the rules is a
stupid argument, given the type of leaders it has.
He says: There is a significant part of the opposition
that is willing to sacrifice a few points of economic growth in
Argentina just to defeat the Kirchners. They do not realize
that they are playing with the future of the country, and
that cacerolazos [popular noisy protests] could return,
but this time against them too.
Just a few months ago, paying off the debt was a fairly
non-controversial issue with little opposition. Now, neither
the government nor the opposition looks good. This incapacity
to form a consensus on the issue and the new uncertainty are a
turn-off to investors.
It could also lead to domestic fallout. Economists Jose
Fanelli and Ramiro Albrieu say that the governments
shunning of consensus-based decision-making has forced it to
depend on political alliances characterized by their
heterogeneity and fragility.
They say that they are fragile because they depend on
specific initiatives, and so allies for one measure today are
not likely to be allies for another measure.
This intensive use of public resources makes it
minimally credible that the government will be able to get its
fiscal deficit under control, they contend.
In addition, they say, This makes it difficult to
develop expectations as to what kind of jobs initiatives the
government will develop over the medium term.
For example, they add that public works investments
will now significantly depend on which political jurisdictions
they are made in. But the government is not solely
responsible for the current climate.
Perhaps most noteworthy in the central bank debate,
virtually nobody is discussing what ought to be a legitimate
and important topic during this type of conflict: what should a
country to do with its reserves.
Miguel Angel Arrigoni, a managing partner for corporate
finance at Deloitte and Touche, says that, it is a shame
the lack of substance in the discussions over the last few days
between the president of the central bank and the executive
To use part of the reserves to give credibility and
comply with paying debt is absolutely normal and technically
correct. No country in the world would default without using
Dante Sica at the economic advisory firm Abeceb believes
that the conflict is out of control, calling the notion of an
independent central bank in Argentina a myth.
He says: What does independence mean? That Redrado
woke up every morning and set monetary policy as he sees fit
without consulting the government? No, he never had monetary
policy that deviated from the ideas of the Kirchners. The
Kirchners cannot say that they do not control the central bank
and that Redrado did what he wanted to.
Sica calls the Kirchner-Redrado showdown la guerra de
vanidades (the war of the vanities).
Sica also thinks it is appropriate for the government to tap
into the reserves. He says: does it make sense to go out
to the market in search of $5 billion at 12% interest when
there are $50 billion in reserves getting only 3%
But he thinks the more important question should not be
whether the central bank is independent, but why the Kirchners
did not tap into the reserves earlier, as Brazil did in the
middle of the global financial crisis to finance its public and
private sector. That would have made more sense if
Argentina had done that then, he says.
Now the Kirchners motives are widely suspected.
Goldmans Ramos says, why did not the government
include this in the budget passed in November? Nobody is asking
that question. He believes it wants the reserves to pay
the bills and not for debt relief.
Many economists fear that the new central bank president
Mercedes Marcó del Pont will be too subservient to the
Kirchners and allow them greater access to the reserves, which
could increase an already high inflation.
In a recent interview with Emerging Markets, a
central bank official who works with Marco del Pont said that
she will have a more active role than prior leaders
did. The source said that her approach will follow the
politics of economic development with social
The best way to preserve the value of money is to
promote economic development, creating jobs and increasing the
capacity of the productive sector. The new director does not
have a monetary vision towards inflation.
While this concerns economists, it did not have to be this
way. Once again, inflation is largely a self-inflicted problem
of the Kirchners creation.
Since January 2007, the government has cooked the books at
the national statistics agency, Indec. Since then, both local
and foreign press have often used figures from private
economists in reporting true inflation figures.
The Kirchners love this. It allows them to rail against
private economists together with international
banks and credit agencies, all of whose credibility has tanked
following the global financial crisis.
Yet what the Kirchners have yet to explain is why even
government figures on inflation do not back up their claims.
Several provinces official inflation figures show wide
discrepancies from the national statistics according to
CIPPEC, a non-partisan Buenos Aires think-tank, whose data come
from official government sources.
There is also an open judicial case against the government
on this matter. Former anti-corruption prosecutor Manuel
Garrido has revealed documents he claims show that in 2007 the
national arm of Indec doctored the figures from its provincial
arm in Mendoza.
Garrido and his team went to Mendoza to review products and
their price tags. He says that his investigation detected
mathematically impossible prices of products in the
national consumer price index, meaning that the Kirchners
Indec claimed median prices that were lower than the cheapest
product available that his team found while in Mendoza.
Who was the governor of Mendoza at the time who gave Garrido
access to its records? It was none other than Julio Cobos,
already named as Fernández de Kirchners running
mate for the October 2007 presidential election.
Garrido suspects that Cobos was merely attempting to be
transparent as Fernández de Kirchners running
mate. But looking back, the irony is not lost that even before
being elected, Cobos actions would come to haunt the
JOCKEYING TOWARDS 2011
So is Cobos the man to end the Kirchners regime in
2011? Today he has highly favourable ratings and is viewed as a
leading opposition candidate but has little political party
structure. He also cannot seem to decide if hes the
countrys vice-president or part of the opposition. For
example, he supported the governments decision to sack
Carlos Reutemann is also mentioned as a possible candidate
but has a reputation for being wishy-washy. Mauricio Macri, the
Buenos Aires mayor, was once the person the Kirchners feared
most, but many Argentines now question whether he can even
handle running a city.
The Kirchners may be very weak, but should never be
underestimated. Since 2003, when Néstor Kirchner was
elected, the Argentine media has portrayed numerous potential
leaders as thorns in the side for the Kirchners. All have
Juan Carlos Blumberg galvanized the middle class in 2004
when his son was kidnapped and brutally murdered. He led some
of the largest rallies in recent times protesting crime. But
his day has come and gone; today he is rarely mentioned.
During the 2008 farm strike, Alfredo de Angeli became an
iconic figure, galvanizing protesters and the nation. But he
was mocked after he staged a bank sit-in during normal business
hours with a group of farmers demanding a loan. Later he came
close to assaulting the president when her plane landed in his
home province, indicating to some voters that he was little
different from some of the Kirchners thugs.
So the Kirchners continue to outlive their obituaries. For
many Argentines, the first family with all its flaws, is still
better than any alternative or any past administration since
democracy was restored.
The issues that concern international investors, as well as
part of the upper class in the country, do not register with
the majority of Argentines. To them, that is a first-world
imposed perspective on a country that has long had weak
institutions. That is never going to change they say. They are
resigned to that.
Moreover, issues such as Indec, weaker institutions and debt
repayment are irrelevant to many of the governments
supporters, who are poor and more concerned about bread and
butter issues. All these things are theoretical,
says Roberto Lavagna, Néstor Kirchners former
At the same time, Lavagna believes that poverty may be what
ultimately poses the largest challenge for the Kirchners. He
sees poverty and social inclusion as one of the government and
countrys biggest challenges this year. The
Kirchners have done nothing for the informal economy, he