Political blame game prolongs Argentina’s economic agony
“Argentina seems to be in a circle where we keep returning to the same port, which is not the one we dreamed of.”
Finance Minister Hernán Lacunza may or may not succeed in rescuing the sickly Argentine economy but either way he deserves a prize for understatement.
Mr Lacunza was speaking after the government reimposed capital controls on Sunday in a desperate battle to prevent a market meltdown before October’s presidential election. Inflation is running at more than 50 per cent, interest rates at the central bank debt auction have hit 85 per cent and savers are queuing at banks to withdraw dollars.
This nightmare was mostly not of President Mauricio Macri’s making. It was the result of his losing badly in a nationwide primary election on August 11 to a populist opponent, the Peronist Alberto Fernández. The unexpected result of a contest widely regarded as a dry run for October’s ballot panicked markets. Investors fear a return to failed Peronist policies of nationalisation, lavish public subsidies and money printing.
Mindful that a non-Peronist president has never completed his presidential term in recent Argentine history, Mr Macri’s top priority now is survival.
This means preserving dwindling foreign exchange reserves, propping up the swooning Argentine peso and trying to renegotiate a $101bn mountain of debt, mostly accumulated during his tenure. All this while campaigning for voters to give him another four years in office as the man best qualified to run the economy.
Mr Macri’s problem is that, with 54 days until a presidential election he is almost certain to lose, Argentina is in limbo. Investors have lost confidence in the country’s ability to pay its debts. Savers fear the worst and have no incentive to keep their money in the bank. Exporters are hurt by a new requirement to repatriate their dollars and convert them to fast-depreciating pesos within five days.
To restore confidence, Argentina needs to restructure its debts under the auspices of the IMF, which has already lent the country $44bn from a $57bn programme. But neither the Fund nor the bondholders are interested in negotiating solely with a president who is unlikely to remain in office beyond December.
For anyone who cares about the country’s long-term future, the answer seems obvious. Mr Macri should sit down with Mr Fernández and agree a series of temporary measures to help Argentina through the rocky next few months.
This is where the dynamics of the election campaign get in the way. Arturo Porzecanski, a former Wall Street emerging markets economist now at the American University in Washington, believes Argentina should follow Brazil’s 2002 example of how to manage an election transition.
Market jitters over a probable leftist victory were eased when Luiz Inácio Lula da Silva, the candidate who ultimately triumphed, pledged months before the election to follow sound monetary and fiscal policies and respect the rule of law. He also committed to stick to an IMF austerity programme and offered to meet Fernando Henrique Cardoso, the outgoing president, to discuss the economy.
The crucial difference is that Mr Cardoso and Mr Lula da Silva were not fighting each other in the election: Mr Cardoso had completed the maximum two terms in office and had every incentive to leave gracefully.
Mr Fernández is following a different strategy. He has heaped blame on Mr Macri and the IMF for Argentina’s woes, pledged to boost consumption if elected without asking permission from the IMF and described Argentina as being in a “virtual default”
Siobhan Morden, head of Latin America fixed income at Amherst Pierpont Securities, said the outlook for Argentina depended on whether Mr Fernández adopted rational economic policy management. “The past few weeks of campaign rhetoric are not encouraging,” she said.
On Sunday night, Mr Fernández left for a week in Spain and Portugal. The implicit message was clear: Argentina’s mess was not his fault and Mr Macri should sort it out.