When Cristina Fernandez de Kirchner addressed Argentina’s Congress on March 1, she spoke without notes for 73 minutes. There were no word count estimates, but it was the word she didn’t use that raised the most eyebrows: inflation.
In just over three months as president, Cristina Fernandez already has a full-blown cabinet crisis on her hands and a growing chorus of businessmen and economists – even those who were most supportive of her husband’s (former president Nestor Kirchner’s) policies – clamouring for action on the country’s rapidly rising prices.
Meanwhile, a recent strike by the country’s farmers in protest against export tax hikes has led to shortages of meat and dairy products, paralyzed local grain and livestock trading and forced major exporters of soy products to renege on some contracts. As worrying for the administration, it has galvanized Argentina’s middle class, thousands of whom have taken to the streets in support of the farmers.
Other profound problems continue to dog Fernandez and her team. Having spent 2006 in a fruitless effort to strong-arm economic officials into lowering prices, the previous government took over the national statistics institute Indec (Instituto Nacional de Estadistica y Censos) in January last year and began to massage the numbers to yield more accommodating inflation rates. But that gambit – or “major self-inflicted wound” as Vladimir Werning, an economist at JPMorgan, puts it – has also failed.
Indec now claims a national inflation rate of 8.5%, while the broad consensus among economists is that it’s more like 20%. Not only has the credibility of the institute been severely damaged, a vital building block for economic decisions – for everyone from CEOs to housewives – has lost its relation to reality.
According to former central bank president Javier Gonzalez Fraga, Indec is the reason Fernandez failed to mention inflation in her first annual address to Congress. The statistics bureau has become a glaring problem for which the government has no apparent or agreed solution.
Discord and distraction
In recent weeks, rumours of discord between Martin Lousteau, the newly appointed economy minister, and Guillermo Moreno, the hard-headed commerce secretary inherited from Kirchner’s era, have reached fever pitch.
Moreno has so far done much of the dirty work: adopting a bullying strategy toward the private sector while executing a clumsy yet intimidating takeover of Indec. Both he and Lousteau – theoretically Moreno’s boss – promised a new formula for measuring inflation and other economic data, but they have so far failed to reach a compromise. This has fuelled speculation that Lousteau, a young and widely respected technician, would resign. Sources close to the controversy suggest the two nearly came to blows in one rancorous meeting.
Anxious not to have yet another minister succumb to Moreno’s browbeating, the president sallied out to lend support to Lousteau. But the former head of the Banco de la Provincia de Buenos Aires has yet to battle his last round with Moreno, a seasoned infighter and member of Kirchner’s close inner circle.
In many respects the ministerial punch-up is a distraction. What has most disconcerted analysts and economists is the agonizingly slow start the Fernandez government has made in moving towards solving the problems it inherited. This lack of progress is all the more surprising as her October electoral victory was all but assured, and it would not have stretched the public’s credulity to claim that today’s problems are simply the result of the prior government’s achievements – as a first step towards tackling them.
“I always maintained that there would be continuity between the two administrations – as in an adaptation of the 1973 Peronist slogan ‘Cristina to the presidency, Nestor in power’,” says Rosendo Fraga, a political analyst and head of the Centro para La Nueva Majoria. But, he adds: “I was mistaken; there isn’t even any change in style.”
If anything, Fraga sees Cristina as more disorganized than Nestor Kirchner. The presidential couple aren’t just continuity, they are identical. He predicts Fernandez, like her husband before her, will not hold cabinet meetings or press conferences or receive new ambassadors.
No momentum
Meanwhile, a lack of momentum in resolving Argentina’s outstanding $6 billion debt to the Paris Club of creditors has puzzled many observers, including economist and former finance secretary Miguel Kiguel.
Shortly before his abrupt replacement last December, then finance secretary Sergio Chodos told Emerging Markets that “the will is there” among the incoming administration to resolve the Paris Club debt. Subsequently, economy minister Lousteau has limited himself to saying that negotiations with the Paris Club are “important but not urgent”, and no other government officials have since broached the issue publicly.
Kiguel’s bewilderment was echoed publically by French ambassador Frederic Baleine du Laurens. The diplomat made it clear that the lack of an accord with the Paris Club will be very costly for Argentina; for example, he pointed out that a multibillion dollar project by French company Alstom to build a high-speed train line across Argentina will not qualify for the otherwise normal soft loan financing.
Moreover, pressure may eventually mount on the government to seek external financing as the cost of local market borrowing increases amid higher interest rates. Mario Blejer, a former Argentine central bank governor who was widely believed to be on the short list for Lousteau’s job, recently told a group of Argentine investors that only a normalization of relations with the Club would help restore foreign investment from its “close to zero” levels. “If I could, I would take $6 billion from reserves and pay it,” he said. “But that is a political decision.”
Holding out for a plan
With the Paris Club negotiations on the back burner, there is little hope of a strategy to deal with the $20 billion in hold-outs from the 2005 restructuring of Argentina’s defaulted international bonds. Hopes surfaced momentarily with the appointment of Guillermo Nielsen as ambassador to Germany. Nielsen, a secretary of finance under Kirchner, became the public face of the 2005 debt restructuring and is on record as favouring opening negotiations with bond holders that didn’t enter the debt swap. But so far, there has been no word from the top.
Even if the government used its majority in Congress to repeal the law that prohibits reopening the exchange – a move it has opposed for the last three years – some economists foresee a tougher and more costly process this time around. As bond prices, especially those linked to GDP, have risen, one official calculated, it would be nearly impossible to repeat the nearly 70% hair cut – or discount on the value of the bonds. “Today it would be more in the order of 50% or less, depending on the options offered,” said the official on condition of anonymity.
Daniel Marx, a former economics official, reckons a reopening of the debt swap is an unlikely prospect any time soon. First, says Marx, there are few bondholders who have repented their decision to reject the 2005 offer or would be willing to cut a deal, while vulture funds now hold a lot of bonds and will fight long and hard for 100% of their value. Moreover, he adds, “There is no strategy, not even at the level of discussions within the government.”
Another obstacle to reopening debt negotiations is that the original deal – hailed as a victory of historic proportions for Argentina – is now losing some of its lustre. GDP and inflation-linked payout clauses have risen substantially as GDP rates have risen over 8% for the past four years (even by official figures).
Economist Ruben Lo Vuolo of the Centro Interdisciplinario para el Estudio de las Politicas Publicas argued in a recent critique that the inflation and economic growth mechanisms have not changed Argentina’s traditional public debt profile. Instead, the result has been higher fiscal costs for its debt amortization and interest payments.
Kiguel takes a different view and does not think that debt is the major issue. “As GDP goes up, the debt burden goes down,” he says. The real problem, he argues, is that the economy is working at over capacity, generating ever more and larger imbalances.
This view is shared by Werning, who praises Argentina’s economic policy stances taken through 2005 – in defiance of IMF-sponsored conventional wisdom: “So far the constraints are not binding, but they are building,” he says.
But Werning goes a step further, pointing out that although the primary fiscal surplus will rise to 4% of GDP this year (a 1.8% increase), the structural balance – which adjusts for the business cycle and the commodity price cycle – will barely reach 0.3% of GDP. The problem, he says, is that while a higher cash surplus today “should comfort credit investors, Argentina’s fiscal policy is dangerously pro-cyclical at heart; therefore the economy remains unnecessarily exposed to future adjustments and wild swings.”
Politics of power
So why has Cristina Fernandez’s electoral triumph been followed by economic policy inertia? The consensus among domestic analysts – supporters and detractors alike – is that the presidential couple and their inner circle have a very distinct way of analyzing the interplay of politics and economics. “For them, the old saw holds – if it ain’t broke, don’t fix it,” Marx quips.
More specifically, an overriding belief in the primacy of political power tends to bias the government’s view that all is well. After all, the economy is continuing to grow rapidly by historical standards, fiscal and trade surpluses are high, international reserves are larger than they’ve been in decades while unemployment rates are in single digits, falling from 20% six short years ago.
This complacency is supported by public approval ratings. The most recent poll taken by Poliarquia Consultores showed that 54% of the public has a positive image of Fernandez.
Roberto Frenkel, an economist at the Centro de Estudios de Desarrollo Social who has been bullish on the economic policy mix of recent years, says that Argentina will experience “a very gradual decadence” if measures aren’t taken to rein in price expectations. “Autopilot is not an economic policy,” he says.
Like the 1970s generation they claim to represent, the Kirchners believe that time is on their side – at least economically. Politically, they project a higher sense of urgency. Nestor Kirchner lost no time in launching his campaign to “restructure” the Peronist Party. Since he left the Casa Rosada and took over an office in Puerto Madero, Buenos Aires’ most expensive neighbourhood, Nestor has been in overdrive, meeting with governors, trade unionists, municipal leaders and political operators.
It’s working. Although the Peronists had been without an official party head for years, in less than three months Kirchner has both forced the various factions into the same room and made himself the party caudillo on his own terms.
Yet this may not be the renewal Kirchner would like to portray. “This is returning the movement to the most traditional Peronism, with both the left and the right inside,” says Rosenda Fraga.
He adds that the pair had little room to manoeuvre, given their ambitions to stay in power forever. Cristina, he points out, won the October presidential election with 45% of the vote even though public spending was lavished throughout the country, the economy was growing at a rapid clip and there was no challenging opposition. “They realized that the only votes they had were the traditional Peronists,” he says.
Gonzalez Fraga thinks they will survive: “How can they not hold on when, at a minimum, they’ll end the year with 6% growth?” he says.
Asked about what the current situation implies for the longer-term horizon, Fraga responds: “I can’t answer that. I don’t know where we’ll be at the end of next year.”