As Argentina Faces Another Default, Kitchenware a Last Resort

by Jack Zeller November 26 2012, 11:30

Earlier this month, hundreds of thousands of disgruntled Argentines flooded the streets of Buenos Aires to protest the embattled presidency of Cristina Fernandez de Kirchner (CFK). [i]. The anti-government demonstrations, dubbed “the Protest of 8N,” were held across the country on November 8th and are estimated to be the country’s largest in a decade.[ii]. With CFK's approval ratings falling from 64 percent in October 2011 to only 34 percent today, this month's protests reflect the urgency – and popularity – that now characterizes the opposition movement. [iii]. But with the country’s ears still ringing from 8N's boisterous cacerolazo (a demonstration technique used in Argentina that involves the banging of pots and pans), we may pause to consider the question – why is Argentina missing out on Latin American growth?

A century ago, Argentina’s future looked as bright as any in Latin America. [iv]. An endless expanse of tillable land, a vibrant and continuously replenished immigrant workforce and rich deposits of oil, precious metal and other natural resources throughout the countryside all indicated that the continent’s second-largest nation might soon become its most powerful. Throughout the 20th century, though, Argentina found itself mired in persistent political turmoil, recurring military coups and cycles of statist regime changes – all told, Argentina experienced six coups from 1930 to 1976. [v]. After a failed neo-liberal experiment in the 1990s led to a massive economic crash in 2001, Argentina rededicated itself to a new brand of Peronist populism developed by Néstor Kirchner and championed today by his widow, President Cristina Fernandez de Kirchner. [vi].

It is indeed true that Argentina’s dramatic and unsteady political history simply failed to establish the sort of security necessary for long-term economic growth; however, in Latin America, political tumult is by no means unique to Argentina. In fact, countries with much more recent and even ongoing social and political conflicts are currently experiencing growth while Argentina is losing steam. Brazil is booming and Argentina’s western neighbor, Chile, has been heralded as the continent’s most stable economy despite a similarly troubled political past. [vii]. Colombia and Mexico are also enjoying a periods of rapid economic growth and upticks in foreign direct investment (FDI) despite widespread, ongoing violence in both countries. [viii]. The question then becomes – if regional counterparts with similar political histories and hurdles are enjoying growth, why is Argentina moving in the opposite direction?

To the demonstrators participating in 8N, the blame rests squarely on the shoulders of the current administration and its leftist economic policies. [ix]. In order to finance massive subsidies and growing public expenditures, the Kirchner administration has undertaken a series of dramatically protectionist measures to control and finance the Argentine economy within the last decade. In 2008, CFK’s administration nationalized nearly $30 billion in private pension funds. [x]. In 2009, the government expropriated the country’s largest airline, Aerolineas Argentinas, from Spanish company Marsans. [xi]. Most recently, the Argentine government again expropriated a foreign-owned company, seizing a majority stake in Argentina’s largest oil company, YPF, from Spanish-owned Repsol. [xii]

Not surprisingly, FDI in Argentina fell from 3.5 to 2.4 billion dollars in the first half of 2011, even as Latin America and the Caribbean saw an overall FDI increase of 54 percent. [xiii]. To highlight how dramatically averse the world market has become to investing in Argentina – in the same time it took Argentina to lose out on 30 percent of its FDI, Brazil and Colombia saw FDI increases of 157 percent and 91 percent, respectively. [xiv]. Furthermore, if the routine expropriation of private industry is not enough to send foreign investors running for the Andes, government regulations within Argentina further limit the country’s ability to access the world market. Notable policies implemented by CFK include highly restrictive import regulations and the wholesale prohibition of purchasing foreign currency by Argentine citizens. [xv]. To make matters worse, Argentina has been loudly criticized for falsifying economic data and masking its skyrocketing inflation – so much so that the country now faces the first-ever International Monetary Fund censure for falsifying economic data. [xvi, xvii]

Today, it appears that these measures have caught up with the Argentine economy and that its citizens have noticed. A sluggish economic performance in 2012 – marked by a decline in growth from 8.9% in 2011 to just 2.4% in 2012 – indicates that CFK’s policies are not paying off. Still, CFK is remains characteristically defiant. Though denied by CFK herself, rumors persist that the president is working with the legislature to modify the Argentine constitution and extend her presidency by another term, much like Venezuelan leader Hugo Chavez did earlier this year. [xviii]. CFK’s insistence on hostile protectionism as a means to retain political power and sustain her administration’s widely criticized spending habits is damaging Argentina’s ability to capitalize on all of its natural economic advantages. The international community is losing patience and the Argentine people are steadily growing tired of the disastrous effects such policies have had on its once-promising economy. To the critics and large swaths of the Argentine population alike, the outlook for Argentina is gloomy. [xix, xx]. 

In court, Argentina has done little to combat its worsening reputation and had recently found itself between a rock and a very hard place. Just last week, Argentina bristled at a U.S. District Court ruling that demanded the country pay $1.3 billion to Argentine national debt holders still holding out from a 2001 sovereign debt restructuring. [xxi]. Argentina vowed to appeal the decision and, in the combative fashion that has come to characterize CFK’s administration, criticized the ruling as a form of “judicial colonialism” perpetrated by foreign financial “vultures.” [xxii]. Dramatics aside, Argentina now officially finds itself standing in the shadow of yet another international debt default – should it abide by the U.S. decision, payment could force them to default on the accepted restructured debt from 2001; should it flaunt the international courts, its status as a market pariah will worsen dramatically. [xxiii].

All of this, taken together, further calls into question the stability and legitimacy of Argentina’s government and suggests that Argentina is quickly becoming a market-non-grata for highly sought-after foreign investors. [xxiv]. Unfortunately, as CFK and her advisors scramble to effectively respond to latest development in its ongoing debt battle, it is difficult to imagine just how they will think of a solution as the cacophonous clamoring of pots and pans grows ever-louder just outside their office windows.


Sources

i.               http://www.cnn.com/2012/11/08/world/americas/argentina-protests/index.html

ii.              http://blog.heritage.org/2012/11/09/argentina-massive-protests-against-statism-and-corruption/ 

iii.            http://www.businessinsider.com/kirchners-popularity-is-in-freefall-2012-11

iv.             http://economix.blogs.nytimes.com/2009/10/06/what-happened-to-argentina/

v.              http://www.nationalreview.com/articles/299154/what-s-wrong-argentina-matthew-shaffer?pg=2

vi.             http://www.mercurynews.com/breaking-news/ci_22058971/argentine-leader-puts-kirchner-perons-pedestal

vii.           http://news.bbc.co.uk/2/hi/americas/country_profiles/1222764.stm 

viii.          http://seekingalpha.com/article/617601-colombia-poised-to-reach-its-economic-potential  http://www.forbes.com/sites/nathanvardi/2012/10/15/the-mexican-mircale/

ix.            http://www.guardian.co.uk/world/2012/nov/09/argentiana-protests-rally-fernandez-kirchner 

x.              http://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina.html

xi.            http://www.ft.com/intl/cms/s/0/eb6a7dae-b6a1-11dd-89dd-0000779fd18c.html#axzz2DGZTQ1HC 

xii.           http://investorplace.com/2012/04/cry-for-me-argentina-ypf-repsol/

xiii.         http://en.mercopress.com/2011/10/27/fdi-in-argentina-falls-30-in-brazil-and-colombia-soars-157-and-91

xiv.          http://www.upi.com/Top_News/Special/2011/10/27/Argentina-losing-out-on-Latin-American-FDI-flows/UPI-41341319744373/#axzz2DGiZbWfM

xv.           http://www.bloomberg.com/news/2012-09-21/argentine-growth-slumps-as-fernandez-tightens-controls.html

xvi.          http://www.bloomberg.com/news/2012-09-18/imf-to-put-argentina-on-path-toward-censure-over-economic-data.html 

xvii.        http://www.economist.com/node/21548229

xviii.       http://www.guardian.co.uk/world/2012/nov/06/fernandez-de-kirchner-reforms-protest

xix.         http://www.reuters.com/article/2012/09/21/argentina-economy-gdp-idUSL1E8KLFZA20120921 

xx.           http://en.mercopress.com/2012/02/21/argentine-economy-expands-8.8-in-2011-capital-outflow-reaches-21.5bn-dollars

xxi.         http://www.ft.com/intl/cms/s/0/4b35908a-3726-11e2-b58c-00144feabdc0.html#axzz2DGZTQ1HC

xxii.        http://www.google.com/hostednews/ap/article/ALeqM5gcjQZ2vER1G5sPaq16A2jJmVXY7g?docId=21ee4d17cb7c46dcb50ec9c3380ec81e

xxiii.      http://www.reuters.com/article/2012/11/23/us-argentina-debt-idUSBRE8AM0PY20121123

xxiv.       http://en.mercopress.com/2012/07/24/argentina-the-world-s-most-protectionist-country-says-world-bank-trade-report

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