Argentina: Too Much Downside

This should be Argentina’s moment of glory. Grain prices are soaring. The country is strategically positioned to be one of the greatest beneficiaries of the soybean bonanza. In addition to natural endowments, such as fertile soil and abundant water resources, 150 years of infrastructure investment gave it one of the best transportation grids in all of Latin America. Railroads crisscross the pampas and penetrate deep into the Andean sierra. The deep channels of the Parana, Paraguay and Uruguay Rivers provide it with a fluvial system that allows it to sharply reduce transportation costs. These are the reasons why the Argentine economy quickly recovered after the 2002 default. Not only did it recover, but it became the fastest growing economy in the region. Moreover, the political continuity promised by the election of President Cristina Kirchner suggested that the boom would persist into the future. Unfortunately, a confrontation between the new president and the agriculture sector degraded into class warfare between the urban poor and capitalists. The confrontation could have easily been resolved at the start, but the two sides reached such an impasse that capitulation will devastate the loser. Unfortunately, investors are now in a lose-lose situation, which explains why Argentine asset prices plunge lower almost every day.   The war of attrition between the two sides is bringing the Argentina to its knees. In addition to food shortages in some urban centers, inflation is spiraling out of control. Moreover, the confrontation is reopening old wounds that took decades to heal. Last of all, the central bank’s intervention in the foreign exchange market is depleting the country of its vital reserves. Unfortunately, the confrontation reached a point where compromise was no longer an option. With more than three years to go until the end of her term, President Cristina Kirchner realized that any concession would be seen as a form of capitulation and it would invite similar attacks from other groups with grievances. The Kirchners are also worried about the midterm elections scheduled for 2009. The Kirchners want to gain control of the congress in order to ensure another reelection at the end of this term. Therefore, they will give no quarter. Otherwise, it could be construed as a sign of weakness.   The farmers are in a similar predicament. The government’s sliding grain tariffs put the agriculture sector in a situation of diminishing returns. It was a virtual attempt to nationalize the agricultural sector. Therefore, this was why the farmers were so steadfast in their opposition. Given the amount of damage their protests caused, and the high level of popular support, they held all of the cards. The farmers are clearly in the driver’s seat, and there is no reason why they should concede—which explains the impasse. However, the stalemate is sapping the vitality of the Argentine economy, and investors are paying the price. Given the enormous level of international reserves, the Kirchners believe that they can hold out for a very long time. Yet, this means that they will capitulate when there is nothing left to recover.   Argentina has a disastrous track record with untimely political demises. Argentina defaulted on its foreign debt after the military regime collapsed following the debacle of the Malvinas War. The Argentine economy exploded into hyperinflation after the Alfonsin Administration was forced to abdicate 6 months ahead of schedule. Last of all, Argentina again defaulted on its external obligations after President De la Rua fled the country. Therefore, the external situation may be good and the economy sound, but the political conflict is forcing investors to correctly run for the door.

9 Responses to "Argentina: Too Much Downside"

  1. Guest   June 24, 2008 at 3:13 am

    Thanks for your post! Is there any chance that Argentina’s congress – although dominated by Peronists – will stand up to the Kirchners and resolve the crisis before it escalates further?

  2. Anonymous   June 24, 2008 at 7:59 am

    Argentina did not default on its debts at the end of the Falklands War and De La Rua did not flee the country, just the presidential palace in a helicopter.

  3. Jaime   June 25, 2008 at 4:12 am

    Interesting comments on Argentina. What do you think the effect on quotas for the price of commodity exports have to the Argentinian economy? Do foreign banks have any chance in the country or will Argentina keep paying for its politicians’ errors?Thanks

  4. Anonymous   June 25, 2008 at 6:54 pm

    Great piece. Thanks. Since inflation is one of the big stories here, its sad that the overly populist (political and economic) policies of the Kirchners (high taxes on rich individuals and capital used to dramatically increase government spending) will wind up hurting the poor and working class the most, which are the ones that the Kirchners claim to be fighting for. However, the Kirchners will probably get away with such hypocrisy and negligence through class warfare rhetoric and political/legal actions – blaming the rich/capitalists/foreigners for all of the country’s ills.

  5. Anonymous   June 26, 2008 at 7:55 am

    For more on real inflation figures of food prices, check out They monitor prices every day and get an annualized inflation rate of nearly 40%. The hikes due to the farm strikes are clearly visible in their series.

  6. Anonymous   June 27, 2008 at 4:24 pm

    Argentina has: A much better fiscal situation to service it´s debt, the State is receiving a large amount of money out of taxes on agricultural exports, that´s more or less the same than oil rich countries do, it´s growing at a faster clip, and it´s gross investment ratio to GDP is much higher, all of this information is respect to Uruguay (who is not taxing agricultural exports, thus letting that enormous flux of money go away). However Uruguayan debt yields more or less half that of Argentina´s. That´s absurd. I´m buying Argentina´s debt. Political and ideological matters have, as history demonstrates, little to do with debt servicing. Countries default when they can no longer pay. Comentators use to write and speak just to service some interest. That´s the same as the MSM saying some time ago that there was nothing to worry about US or world economy. In this case, commodities producers and landowners in Argentina are making lots of money, taxes not withstanding. They are just fighting to avoid sharing some of that windfall profits.Molano´s comments are that kind of "official" financial stuff.Sureño

  7. rros   June 27, 2008 at 9:29 pm

    > … the State is receiving a large amount of money out of taxes on agricultural exports…"Wait till soft ags prices correct, news of overstated demand in India and China comes out and the US congress via the CFTC curbes derivatives contracts speculation, soon coming. If you think high prices of corn, wheat and soy are here to stay I politely suggest some history reading. In the end, farmers will be left with a high cost/low yield operation and many of them will go broke. At this point, where will the argentine government get its monies? International debt? Doors closed. Domestic debt? Maxxed out!P.S. Excellent briefing on Argentina’s situation by Walter Molano.

  8. Anonymous   June 30, 2008 at 9:30 pm

    @rros:That´s exactly the point. This "bonanza" in ag prices is set to correct sooner or later.By holding a high exchange rate and use windfall export taxes to fund it, as well as to benefit industrial development, Argentina is trying to establish conditions for stable growth and develpment. Once you have a solid industrial structure you don´t need foreign credit or investment. In fact, for example, foreign investment in China is about 7% of total, they are developing mostly without it. That´s is the history of all countries who arrived at a developed condition.Adam Smith recommended the by then newborn United States to carry on non protectionist policies……of course, the US didn´t follow his advice.That´s what´s happening today. Those who follow advice from financial establishment, be it IMF, WB, and so on, are screwed.Just do the opposite and maybe you have a chance to succeed.Mr. Molano is of course some kind of "Chicago boy", that´s the miserable state in which most of Latin America is today, we followed advice from these guys.Sureño

  9. Anonymous   July 1, 2008 at 5:57 pm

    Sureno: Your assumptions are unrealistic, which makes your conclusions and criticisms flawed. Class warfare, price controls, inflation, and government ineptitude/corruption/overly politicizing economic policy (e.g. misreporting inflation and pushing out of government skilled bureaucrats) by the Kirchners will not lead to "stable growth and development" in Argentina. Under such conditions, you will not have a "solid industrial structure" in which "you don’t need foreign credit or investment". Economic conditions today in Argentina are not similar at all to the so far successful Chinese development experiences of today or those of the Asian tigers or the U.S./Western Europe in the distant past. Argentina is currently pursuing a flawed economic development model. You are drawing the wrong lessons from these past cases. You are also drawing the wrong lessons from current Latin American development experiences seen in such as Brazil, Chile, and Uruguay (and possibly Peru). Today, the economic models of development in Latin America are not between only the neoliberal model (IMF, WB, IADB) and the economic populism seen in Argentina, Bolivia, Ecuador, and Venezuela. The moderate economic development path seen in the left-leaning countries of Brazil, Chile, and Uruguay is another viable model, one that I argue will lead to stable, long-term economic growth in Argentina (the future economic conditions you note) more so than if it continues on the present economic development trajectory it is pursuing. Actually, Argentina might end up getting in the relatively near future exactly the neo-liberal treatment and "Chicago Boys" that it (and you) currently despise. Freshen up a little on the history of economic populism in Latin America; start out by reading Nicolas Magud’s recent and highly germane post (6/25/2008). Economic populism in Latin America eventually leads to economic crisis and collapse, allowing for new political leadership as the public kicks out the incompetent populists (new leaders usually on the political right economically since the populists are on the political left economically). The new leadership and the public turn to more to neo-liberalism and oftentimes significant assistance from the IMF/WB.