The fall of the house of Kirchner
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The fall of the house of Kirchner

How to botch a dynastic succession

They looked like they could walk on water

...When Nestor Kirchner stood down as president of Argentina at the end of his four-year term in 2007, his approval ratings were such that he shoe-horned his wife Cristina Fernandez into the slot as his successor. In terms of founding a political dynasty, the husband-wife presidential succession was a world first.

From 2003 until mid-2006, with the wind from international commodities prices in their sails and a domestic jump start from the 2002 devaluation, economic growth averaged over 8% – second only to China’s.

Inflation was tame; tax collection hit record rates; the fiscal and trade surpluses were high, and international reserves grew with unprecedented speed. Unemployment and poverty declined, and consumer purchasing spiralled upwards. But two years on the situation is different.

The chief concern is whether the government can survive to the end of its mandate in 2011 – especially after the bi-elections scheduled for next October. “The view within the party is that without serious, deep political and economic changes – much more than just a service repair – a graceful exit for Cristina Fernandez is going to be difficult to achieve,” says one analyst.

So what went so wrong so fast?

The answer is in part to do with the Kirchner – husband and wife – style of governing and with the arrival of the first economic storms in 2006.

It started with inflation – no stranger to Argentina, where the public is hypersensitive to price moves. As the phenomenal recovery following the 2001–02 devaluation headed into its third year, economists warned the country was growing too fast. Under-utilized capacity was running on empty. Prices, they projected, would have to rise if measures weren’t taken.

In fact, two measures were taken. Unfortunately, both were mistaken.

Pressure to assure Cristina of her win ahead of the presidential election in 2007 led Nestor to shower subsidies on everything from public transportation to energy and food prices. He stood fast on keeping utility rates frozen and subsidized. Today these subsidies represent some 3.5% of GDP.

Still unable to dent inflation expectations and real price increases in January 2007, the government decided to meddle with the national statistics agency, Indec, and to recast the way the numbers were calculated.

As a result, outsider observers say that today there is little certainty about inflation, employment, GDP growth or any other national economic statistic. What is known is that the official inflation figure – 10% – is about one-third of private forecasts.

Around then, the Kirchners faced for the first time a run of bad luck and bad judgement. Rather than turn to technical experts from other political backgrounds, they isolated themselves even further. They relied increasingly on impetuous, poorly thought-through and disastrously communicated gestures, masked as policy decisions.

The result was that the threat of rising federal indebtedness led to an all-out assault to tax the riches that were coming from the agricultural sector. But to little effect. Agricultural associations that had previously vied with each other for members and influence buried their hostility towards each other, formed a united front and stood solid during a three-month nationwide strike.

Second, the vice-president, Julio Cobos, little known outside his native Mendoza province – and ignored by the Kirchners – became a national hero and a household name. His tie-breaker vote in the Senate that defeated the government’s attempt to increase agricultural export taxes catapulted him to national attention. Today, he has the highest public approval ratings – 52% – of any political figure in the country. He is considered one of the most likely presidential candidates in 2011.

Forming the backdrop for Cobos’ dramatic action, was the revival of the Congress and the Senate as more potent, political bodies in the country. The transformation has, so far, held fast as debate continues over the merits of other measures such as the renationalization of Aerolineas Argentinas.

Debt no more

The parliamentary system may soon have other chances to display its clout. President Cristina Fernandez de Kirchner’s announcement to pay the Paris Club debt with international reserves falls into its domain. Cristina’s theatrical decision in the first week of September was, according to many reports, intended to demonstrate Argentina’s “willingness to pay” its $6.7 billion debt (a figure now disputed) to the organization and to begin to open the doors to international capital markets.

It was, however, an embarrassment, say some analysts. They said it was unprofessionally prepared and highly questionable legally and politically; the offer fell on deaf ears in financial markets.

After a lengthy (and regularly scheduled) meeting on September 17, the Paris Club’s 20 members issued a statement saying it welcomed “full” payment and that, at the same time, Argentina needed to “normalize” its relationship with “all” its creditors. (Effectively it was saying that those that had held out for fuller repayment needed to be accommodated as well.)

Then on September 22, Cristina Kirchner announced her government was analyzing a proposal brought to it by three international banks to reopen the 2005 debt swap to those bondholders who refused to join it at that time. The plan would be to swap guaranteed bonds for others of longer duration and without adjustments for inflation.

Barely a week later, Argentine defaulted bonds were trading at a three-month high after the government confirmed it will give creditors a chance to restructure the $20 billion of securities.

What is clear is that, with the cover of the new swap being initiated outside the government – by Barclays, Citi and Deutsche – there is an expectation that it will have less resistance in Congress, where it is due to be discussed in late October.

Following the 2005 restructuring, Congress passed a law forbidding any Argentine government from reopening the swap without congressional approval. Under the new circumstances, another law will be required, meaning that the prior one has not been broken – but it makes governmental overview and approval necessary. According to officials, this procedure is not necessary for the guaranteed loans, the vast majority of which are held by local institutions.

This 180-degree reversal toward resolving the issue of those that held out against the earlier debt agreements is not without its benefits. As far as has been discussed, the swap of defaulted debt will become a source of cashflows for the government in the range of $2.5 billion to $3 billion. Moreover, the bondholder will be responsible for the three banks’ commissions.

Modest reception

Even so, the reception in Buenos Aires, while positive, has not been exuberant. The modest rises in the Merval stock index, the stability of the dollar and interest rates and the slight decline in country risk are, no doubt, due to multiple factors, not least of which is the continued international financial uncertainty.

But the Kirchners’ stretch of bad luck has also played a part.

On the same day as the president announced the reconsideration of measures to end the stand-off with the holders of Argentine debt that had not accepted the initial terms, a trial in Miami involving possible illegal transfers of money – perhaps up to $5 billion – from Venezuela to Cristina’s election campaign entered a more incendiary phase. This may have a more negative impact on her public approval ratings than any bounce coming from further debt restructuring.

For Daniel Marx, a former government economic official and veteran of several restructurings, the proposal in general is positive, but many questions remain unanswered. “We have to see how many bondholders will join and what is to be done with those who don’t, for example.” For Marx, the criteria for success of the operation will be an acceptance rate of 70–75% – significantly higher than that promised by the three banks.

Few economists or analysts have ventured negative comments. However one formerly high ranking government official said the consequences will be a replay of the 2005 restructuring. “Bread for today and hunger for tomorrow,” he quipped, saying that this will ease debt payment obligations in the next two years only to make the following years much more difficult.

By far the Kirchners’ most amazing trick has been to convert Eduardo Duhalde into an elder statesman. Reviled and rejected in the early rounds of the 2002 crisis, when he resigned as president under pressure resulting from the deaths of two demonstrators, and widely regarded as a corrupt old-style Peronist, Duhalde has made a comeback.

Eduardo Amadeo, Duhalde’s long-time collaborator and a former ambassador to the US, says Duhalde is on a mission to save Peronism from imploding into local non-party groups, to shore up political institutions and rebuild the political system. “He would like to help Cristina to avoid another crisis; the question is would she – or Nestor – accept that help?”

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