ARGENTINA: A conflict of interest

President Cristina Fernández de Kirchner may have succeeded in turning a shot at stability into a recipe for disaster

  • By Vinod Sreeharsha
  • 23 Mar 2010
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So often in Argentina’s 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 – it’s the other way round: their frequent political crises have led to economic woes.

A case in point is the ongoing drama over the president’s 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 of January.

“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 totally unnecessary.”

But it’s 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 it’ll 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 terrorists”.

The Kirchners have also undermined the country’s few solid existing institutions, most notably its statistics agency. Argentina’s 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 country’s 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 sector’s external debt has plummeted.

Private economists are also optimistic. Kiguel predicts 4% growth in 2010. Dante Sica, head of consultancy Abeceb, expects 4–5% growth.

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 development.”

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 profitable.

Gustavo Grobocopatel expects the country to produce 85–90 million tonnes of grain this year. That figure could reach 150 million tonnes with less harmful policies, he adds.

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 Kirchner’s first central bank president and today an opposition legislator and chair of the lower house’s 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 Club’s 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. It’s 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 review.

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 Argentina’s 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 Argentina’s economic problems are endogenous.”

The latest tensions surfaced late last year. In November, Congress approved President Fernández de Kirchner’s 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 bank’s head at the time, refused to go along although some say he’d 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 leader’s actions. It has threatened to overturn the decrees and fire the new central bank president. Some opposition leaders are also pursuing judicial action.

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 qualities.

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 nation’s 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 he’d do while she was away.)

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 27 years.

All this means that Argentines find it difficult to see the opposition as the guardians of strong institutions and checks and balances.

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 government’s 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 branch.

“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 its reserves.”

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% interest?”

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. Goldman’s 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 inclusion.

“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 Kirchner’s running mate for the October 2007 presidential election.

Garrido suspects that Cobos was merely attempting to be transparent as Fernández de Kirchner’s running mate. But looking back, the irony is not lost that even before being elected, Cobos’ actions would come to haunt the Kirchners.


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 he’s the country’s vice-president or part of the opposition. For example, he supported the government’s decision to sack Redrado.

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 disappeared.

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 government’s supporters, who are poor and more concerned about bread and butter issues. “All these things are theoretical,” says Roberto Lavagna, Néstor Kirchner’s former economy minister.

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 country’s biggest challenges this year. “The Kirchners have done nothing for the informal economy,” he says.

  • By Vinod Sreeharsha
  • 23 Mar 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Jul 2017
1 Citi 253,106.92 930 8.89%
2 JPMorgan 230,914.50 1036 8.11%
3 Bank of America Merrill Lynch 221,389.46 762 7.78%
4 Goldman Sachs 171,499.26 554 6.03%
5 Barclays 169,046.60 646 5.94%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 25,935.16 104 7.16%
2 Deutsche Bank 25,125.19 81 6.94%
3 Bank of America Merrill Lynch 22,023.57 59 6.08%
4 BNP Paribas 19,315.94 110 5.34%
5 Credit Agricole CIB 18,706.93 106 5.17%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%