Argentina: Slipping Away

Argentine bond prices plunged more than 6% on Friday, as the market gave up hope that President Cristina Kirchner would amend her ways. Argentina suffered its worst week since the default of 2002. The Argentine EMBI+ jumped to 727, the widest spread in the region. Although there were initial hopes that the president would strike a more conciliatory tune after she lost the conflict with the agro sector, her actions showed the contrary. Former President Nestor Kirchner’s henchmen, Planning Minister Julio de Vido and Interior Commerce Secretary Guillermo Moreno, were never replaced. An attempt by the newly appointed Chief of Staff, Sergio Massa, to restore confidence in the INDEC and Administration were quickly sidelined. Given the intransigence of the Kirchners, it is only a matter of time until they are ousted. Unfortunately, abrupt changes of power in Argentina tend to be chaotic. This is the reason why the markets are bracing for a default, even though the country’s macroeconomic indicators are sound.

In addition to the Kirchners’ recalcitrance, investors were buffeted by a slew of negative news. The first was the government’s desperate issuance of more than $1 billion to the Venezuelan government at the usurious rate of 15%. The Chavez Administration immediately resold the bonds to local Venezuelan banks and investors who dumped the paper on the international market as a way to circumvent the capital controls. The deluge of Argentina bonds was one of the factors that triggered the selloff. Given the desperate act, it was not surprising that Moody’s immediately announced that it would soon cut Argentina’s outlook due to concerns about the government’s willingness to service its financial obligations. At the same time, the meltdown in the commodity markets led many investors to turn their backs on commodity producers, such as Argentina. Soybean prices plunged more than 13% last week, erasing 5% on Friday—the day of the Argentine debacle. This left very few reasons for anyone to place a bid on Argentine paper, which explained why asset prices dropped so precipitously on Friday.

President Cristina Kirchner was on a well-received tour the day of meltdown in San Juan and Mendoza, two provinces which were not affected by the agro turmoil, but there was still a sense that the clock was running out. It is no longer an issue of popularity. It is an issue of political and economic clout. The repeal of the tariff initiative was a powerful blow to the government’s purse. With soybean prices on the decline, the outlook is even worse. Although tax revenues soared 40.3% y/y in July, approximately 81% of the primary surplus was generated by soybean tariffs. Now the surplus is shrinking. The Kirchners increased spending during the crisis in order to buy friends and influence, but a reduction in government revenues will soon leave them stranded. The government froze provincial transfers last week, as well as some public spending programs. It is only a matter of time until the labor unions turns their backs on the presidential duo. The loss of economic clout translates to less political power. The Peronists are split in two, with more than half of the party under the command of former President Duhalde. This is the reason why people are doubting that the Kirchners will make it to the end of the year.

It is no longer a question of “if,” it is now a question of “when” the Kirchners will be ousted. They lost all sense of reality, inventing conspiracy theories instead of bridging their differences with the opposition. The Kirchners’ dream of remaining in office for another 12 years is a distant memory. The main debate in Buenos Aires is whether they have three or four months left in office and how chaotic will be the transition of power. Argentina has a nasty history of political collapses. The untimely demise of the military junta and the ousting of Presidents Alfonsin and de la Rua were associated with sovereign defaults and/or hyperinflation. Hopefully, this time the situation will be different. Argentina has fiscal and current account surpluses. The economy is growing and the government’s financing needs are relatively low. Argentina’s macro indicators are sound, for now. Unfortunately, the deterioration of the external environment and the rapid erosion of the domestic situation could put it in dire straits by the end of the year.

7 Responses to "Argentina: Slipping Away"

  1. contango   August 12, 2008 at 2:27 pm

    Brilliant piece as always big W. Couldn’t be happier by the bloody ending that will most likely be the Kirchners’ fall from power. This will be a powerful lesson to all the Chavez’ followers and to all the left-wing economically-challenged utopians who for centuries have managed to keep Latin America a backward and inhospitable place. Let this be a lesson to the Argentinian left! Done it again…

  2. Anonymous   August 12, 2008 at 5:37 pm

    Much as I dislike the Kirchners, there are dubious assertions and mistakes in this note:”it is only a matter of time until they are ousted”: no opinion poll registers this demand, since most of us find that opposition politicians are even less attractive (or viable) than the Ks.”The government froze provincial transfers last week, as well as some public spending programs.”: ?? Probably means to say that over the past few months discretionary transfers to provinces are stable or even slightly declining, in nominal terms (and inflation is over 20%).”The Peronists are split in two, with more than half of the party under the command of former President Duhalde.” Not even Duhalde would dare say this. The Peronists are not split in half; many of them are wavering in their “loyalty” to the Ks and starting to look elsewhere. I cannot think of any one of them that is under Duhalde’s “command”. In fact, many of the up-and-coming Peronists would not want to find themselves associated with him. He is a good coordinator of many discontented politicians, however.”It is no longer a question of “if,” it is now a question of “when” the Kirchners will be ousted.” “The main debate in Buenos Aires is whether they have three or four months left in office and how chaotic will be the transition of power.” Wow, sounds exciting, but, being Argentine and living in Buenos Aires, it does not fit my experience at all. Betting on the Ks being ousted soon would be an extremely risky bet.

  3. Anonymous   August 12, 2008 at 10:22 pm

    You made some good points about how the kirchners have destabilized the Argentine economy by their inability to compromise with their enemies, but I agree with the last commentor, that this post is too much of an exaggeration. The majority of people in Buenos Aires do not think Kirchner’s resignation is immininent. Nor is there a second faction of legislators being commanded by Duhalde. It is true that many legislators from the kirchner camp have split from the alliance, but is by no means headed by Duhalde. More accuracy, less rumours please.

  4. mangy cat   August 14, 2008 at 8:08 am

    “untimely demise of the military junta” and contango’s “couldn’t be happier by the bloody ending” fertilizing the conspiracy theory of the downfalllike the anons above, my hope is that this time argies may grin and bear them to the end of her term, and force consensus politics at the mid-term election next yearrather than pinning hopes on messianic mingo mumbo jumbo, or whateverduhalde may have been the biggest political gainer from the farm fracas, but still has a long way to go before he can call it a comeback”concerns about the government’s willingness to service its financial obligations” is a throwback to 2002 buckpassing by investment bankersat that time argentine finances were terminally ill -with a helping hand by harvard’s blue eyed mingopate- and was “unable” rather than “unwilling”very few will agree to rodriguez saa’s bedside manner and the way he announced the demise to the bereaved, but that doesn’t mean his diagnosis was incorrect, at least on this point

  5. Anonymous   August 20, 2008 at 1:30 pm

    Excellent article.