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Argentina: A Rock and a Hard Place

By Jane Hughes

The choice between former President Carlos Menem and leftwing governor Nestor Kirchner in Argentina, the two presidential candidates to qualify for the second round of voting, was always depressing. The outcome is worrisome, too: Menem’s abrupt withdrawal (in the face of certain defeat) handed Kirchner a presidency that is tainted from the very beginning. At any rate, now the course is set, so it is time for the markets to render their verdict.

The stock market actually dropped 8 percent the day after the first round of voting, which set the stage for a second round runoff between the widely discredited and unpopular Menem – whose financial mismanagement is widely viewed as paving the ground for Argentina’s financial collapse of 2001 – and Kirchner, an unashamedly unreconstructed Peronist whose economic plan actually drove business leaders into the Menem camp. The denouement, giving Kirchner the presidency without the legitimacy of an electoral win, can hardly be viewed as a victory for Argentine democracy. In fact, the peso fell by over 5 percent in the days following Menem’s withdrawal, reflecting widespread dismay with the result. Kirchner takes office on May 25 as Argentina’s sixth president in 18 months; his mandate consists of the 22 percent of the vote he received in the first round.

Kirchner’s record as a provincial governor and his candidacy were unimpressive, too. Nothing in Kirchner’s career as governor of an oil-rich province with less than 200,000 inhabitants has prepared him for the challenges that lie ahead. In stark contrast to his fellow leftist Luis Ignacio da Silva (Lula) in neighboring Brazil, Kirchner made little attempt to reach out to business and foreign leaders who were unnerved by his sometimes strident leftwing rhetoric during the campaign. Kirchner’s economic plans are murky, but include:

  • A pledge to demand that foreign creditors cut Argentina’s overall debt, lengthen its maturities, and slash interest rates;
  • Promises of greater social justice and wealth redistribution;
  • Plans to deepen the government’s import-substitution economic model; and
  • A commitment to give the state a bigger role in the economy, partly by implementing massive job creation programs fueled by government spending on infrastructure projects. He has talked of a program to build three million new homes, which will create five million jobs in an effort to bring down the 20 percent-plus unemployment rate.

On the positive side, Kirchner is taking over at a time when Argentina’s much-battered economy is actually showing some tentative signs of life. The country will run a healthy trade surplus in 2003 (partially thanks to a more competitive exchange rate), the budget is showing a primary fiscal surplus, growth is put at 4% for the year (after an 11% decline in 2002), and there has been no sign of the much-dreaded hyperinflation that accompanied past currency devaluations in Argentina. Both the central bank president and Economy Minister Roberto Lavagna – who is viewed as the man behind this burgeoning recovery – have pledged to remain in office under a Kirchner government.

However, much of this progress can easily be undone. Both the trade surplus and the lack of inflation reflect, in large part, the moribund state of the Argentine domestic economy. Any revival in domestic demand – especially one fueled by spiraling government spending, as Kirchner suggests – is likely to invite both higher imports and higher prices (not to mention a return to government deficits). Moreover, Kirchner’s approach is unlikely to foster a prompt reconciliation with Argentina’s foreign creditors, who are still reeling from the country’s $95 billion default in December 2001, the biggest sovereign default in history. Argentina cannot move forward until the issue of its $170 billion debt, the equivalent of nearly 140 percent of GDP, is resolved. With the best will in the world, devising a repayment mechanism will be unspeakably complicated – especially since more than $55 billion of the bonds are held by overseas investors, many of them retail investors.

Again, in stark contrast to Lula, Kirchner’s rhetoric suggests that he may not have the best will in the world. Under these circumstances, negotiations will be lengthy, intense, and difficult. In the end, of course, Kirchner will have no choice but to reach some accommodation with the foreign creditors – but the process looks to be painful.

On the domestic front, Kirchner’s reputation as an old-line, unreconstructed Peronist (a ‘party hack’ in American terms) may also presage trouble. The deeply divided Peronist party will find it difficult to sustain any kind of congressional momentum, especially if the nascent recovery proves to be short-lived. Kirchner’s uncertain mandate will buy him little support in the congress, nor does he have any support base among the country’s powerful provincial governors. In this environment, Kirchner’s prospects for reforming the deeply troubled domestic financial system – essential if companies are to regain access to credit and jump-start a real recovery – are also poor.

Despite all of Menem’s baggage, he probably would have been the lesser of the two evils at this point in Argentine history -- from the financial analyst’s point of view. But the voters have turned their backs on Menem’s shady past, and chosen to move forward with Kirchner. The best possible outcome would be a Lula-style conversion for Kirchner once he is in office. Optimists hope for a form of “smart populism” that would vindicate the voters’ choice and propel Argentina forward into the new century. As yet, though, there is little sign of this. The worst outcome – a legitimacy crisis that will remove Kirchner from office well before his term is up – seems like a better bet.

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Jane Hughes, Marc Faber, Jonathan Lemco, Russell Smith, Andrew Thorson and Robert Windorf

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