Broke And Poor, Why Is Argentina’s President Focused On Saving Brazil’s Lula
Despite locking down early — the first to do so in all of Latin America — Argentina now had over 2 million people come down with new SARS 2 coronavirus, and most of the country is now living in poverty because of it.
Fernandez is going to travel to Brazil next month where he is reportedly going to join forces with protesters who are trying to convince the world — for the umpteenth time now — that Brazil’s ex-president Luiz Inacio Lula da Silva is the victim of political persecution. If Lula was Trump, the media would be laughing him into non-existence.
Lula is a non-story in Brazil. They have more important things to worry about.
Fernandez is going to Brazil for the Mercosul trade meeting in Foz do Iguacu, Parana. That’s when he will be partaking in gatherings (protests?) in favor of Lula, according to Clarin, a Buenos Aries daily.
Fernandez also has much bigger things to worry about than Lula. I’m sure he knows as much about the Lula cases as I do. So going to Brazil to discuss trade and investment only to spend time ticking off the President of Brazil, Jair Bolsonaro, shouldn’t be high on his travel list. Brazil is Argentina’s most important business partner in Latin America.
“The event will give open support to the left-wing strategic communications campaign to label Lula’s convictions on graft and corruption ‘political persecution.’ This view is not only dismissed by most Brazilians, but likely to worsen tensions with the right-wing government of Bolsonaro,” says Kevin Ivers, vice president of DCI Group, a political risk consultancy out of Washington.
Argentina is on the ropes on many fronts. People are tired of lockdowns that have done nothing to limit the pandemic’s rage in any meaningful way. Cases are high enough that most restrictions, imposed last April and May, are still in place.
The economy was already a mess, and deeply in hock to the International Monetary Fund. Covid came along and gave them a debt payment reprieve. There are zero signs that Argentina will ever be able to make good on its debt obligations, let alone get its economy back on track beyond the usual boom and bust cycles.
The currency is a joke. Only the Venezuelan Bolivar is worse. Dogecoin has more value than the Argentine peso.
Fernandez was elected in 2019 as the more moderate half of a Peronista ticket with ex-president Cristina Kirchner, a divisive autocrat whose government antagonized investors, the IMF, and everyone outside of her ideological base. She, and her supporters, think she is Evita Peron.
Like Lula in Brazil, once both in power at the same time in the early 2000s, Kirchner is facing multiple charges of corruption. She is immune from those charges as a sitting VEEP.
Like Lula, she too is saying it all boils down to “political persecution” by a bunch of oligarchs. If you got them tipsy, they might even blame the CIA.
As far as diplomacy goes, Fernandez is “making a mistake” in joining the Lula chorus in Brazil, says Ivers. “Whatever benefit he may get with Kirchner’s base in an election year, it will only intensify the pressure on him to embrace the same ‘political persecution’ campaign on her behalf in Argentina,” he thinks.
Why anyone but a distressed asset investor or a vulture capitalist invest in Argentina is a mystery at this point. The only company even worth considering is MercadoLibre MELI -0.2% , which is doing more business in Brazil and Mexico than in the country where it was founded.
Argentina is — along with Venezuela — South America’s other failed state. (Though, to be fair, by comparison, Argentina is Disney Land. Which, just to be clear, is arguably the worst of the Disney resorts globally.)
Picking a fight with Bolsonaro and sticking to tired political dramas should alienate investors; investors he desperately needs to take his people out of poverty. Argentina’s biggest financial savior is likely to be China again. They will buy up Argentina like Californians shopping at the Rose Bowl Flea Market in Pasadena (pre-Covid).
“There is greater general poverty. We are all a little poorer - we already were last year - and now with greater inequality,” Catholic University of Argentina researcher Agustin Salvia told Reuters back in October.
For sure it’s worse now.
Over 3.5 million jobs have been shed in Argentina due to the pandemic and the poverty rate was over 41% in 2020. There is no sign of a turnaround.
“To get back to the 35% (poverty rate) we had before the crisis, which was already a scandal, I do not see it possible this year or next year,” Salvia told Reuters.
“Already a scandal” — key phrase. This has to be an utter embarrassment for the people of Buenos Aires. This is disgusting now, what is happening to this once world class city and beautiful country.
President Fernandez (who some say resembles the character Cliff Clavin from the old sitcom Cheers) convinced the moderates and the apolitical of Argentina that he was not Kirchner, and that he was in charge.
The political persecution narrative, should he go ahead and push for this in March at the Mercosul meeting in Brazil, would suggest he is doing the bidding of his Vice President. There is no need to play any role in protecting Lula. If he and Lula are friends, he can say something during the meeting (“I hope for a fair trial for our companero Lula”. Cabou assunto.), and meet with Lula on his own. Attending party-sponsored, or a party-surrogate rally in defense of Lula is a bad look. Lula is not being politically persecuted.
Does Fernandez really want to stoke fires in Brazil?
In the grand scheme of things in Latin America, Bolsonaro is more important to the whole region than is Argentina. Brazil is more important to the U.S. than Argentina is. But Argentina is important to Brazil, and vice-versa.
Meanwhile, Brazil is strong. Argentina is incredibly weak. In other words, if I was advising the President of Argentina, I’d say — no rallies, no protests, no press statements surrounded by Lula fans and the Workers’ Party in red T-shirts with stars on them. Say what you need to in respect to Lula at Mercosul, and move on.
And Then There’s The IMF...
Argentina is in dire need of a confidence booster shot. The vaccine against SARS2 is not enough.
Bond lords are still waiting for a coherent economic program. They’ve been waiting at least two years now.
The normalization of IMF relations is critical not only for the continued postponing of Argentina’s debt, but also for alleviating overall balance of payments stress. Argentina has no money.
Recent economic data are discouraging. Inflation is running 4% monthly, all the while there is no economic growth. The central bank is slow to build foreign currency reserves, considered the beachhead investors look towards for gauging solvency.
Central bank reserves sit at just $39 billion, far less than the $64 billion estimate of the metrics necessary for Argentina to make good on its debts, postponed til 2024.
By comparison, Brazil has over $342 billion in foreign currency reserves.
Argentina has three years before its 2024 payment schedule kicks in to improve its finances. Under the constraint of economic policies that discourage dollar inflows and encourage dollar outflows by its businesses and upper classes buying properties in Uruguay, Brazil and the U.S., the odds are not in the favor of this government one bit.
Fernandez could placate Lula, anger Bolsonaro (who is considered “Trump of the Tropics” so the media will have something to write about from their hotel rooms), and print pesos to give to the poor.
The muddling through approach — left over from the previous government of Mauricio Macri — suggests the slow accumulation of forex reserves will continue, providing little to no backstop to another default.
Says Siobhan Morden, a bond analyst for Latin America at Amherst Pierpont Securities, “the near-term IMF delays may push bond prices to their lower end of their four to five month trading range.”
For those who think drama-queen Argentina is worth the risk:
The Argentina 10 Year Government Bond pays around 48.36% yield. The Central Bank lending rate is 38% as of December, so the evil bankers that the Kirchner voters despise can borrow from the central bank for 12 months and get paid 10%, if they’re willing to take the risk on the country’s CCC+ rated junk bonds.