Meet Cristina of Argentina
On Sunday, Oct. 28, Cristina Fernandez de Kirchner won a decisive victory in elections, becoming the first elected female president in Argentine history. In this report, Bill O’Grady introduces the new president and reports on the election results, the economic problems facing the country, her foreign policy stance and the market impact from this election.
Same as the old boss?
Cristina and Nestor Kirchner are, perhaps, the ultimate power couple. The latter is the current president of Argentina; his wife will be at the helm when she takes power Dec. 10. Both come from the region of Patagonia, and because of its southern location, they are called “penguins.” Although Cristina is the wife of a president, she is an accomplished political figure on her own. She is currently a senator and has held the second-highest state office in Patagonia.Her husband is something of a political agoraphobic; he seldom travels within Argentina and abhors foreign journeys. Cristina, on the other hand, is a world traveler. In fact, she did little electioneering before the poll and skipped several debates. Instead, she made several state visits to other Latin American nations, as well as trips to Europe. Although Nestor is considered a rather dour figure, Cristina is flashy and even known for her fashion sense. Given her lack of politicking and her shunning of debates, it is unclear what policies she will follow. However, we can reasonably expect her administration to be more outward-looking than her husband’s.
The election
Cristina won 44.9% of the vote; according to Argentina’s election rules, a presidential election requires a runoff unless a candidate wins (1) more than 45% of the vote or (2) 40% of the vote and leads one’s closest rival by more than 10%. Cristina won nearly 45% of the vote and outpolled her closest rival by nearly 23 points. Thus, she will not face a runoff election.
There were some interesting political developments in this election:
• Nestor Kirchner, the current president and husband of the president-elect, declined to run for office. The Argentine constitution does not allow a president to hold office for more than two consecutive four-year terms. However, it apparently does allow a president to persistently return to office as long as the terms are not consecutive. The current President Kirchner is popular with the voters and controls the largest faction of the Peronist Party, a formidable political machine. Thus, he could likely have won a second term. His decision to step down and allow his wife to win has raised speculation that the Kirchners intend to rotate the presidency, which would allow Nestor to succeed Cristina in 2011. Although such “job sharing” would be unprecedented in Argentine political history, it apparently is legal.
• It is interesting to note that a woman won the vote in the major cities of Buenos Aires and Rosario; that woman was Elisa Carrio, the candidate for the centrist opposition Civic Coalition party. Reports suggest that support for the president-elect was inversely correlated to education. The president-elect’s support came mainly from the working class and the poor. In one sense, this isn’t a major surprise, as the Peronist Party usually does well with the lower socioeconomic classes. However, Carrio’s campaign thrust was on anticorruption. Her strong showing among the upper classes suggests that Nestor Kirchner’s administration was hurt by recent scandals, and the new president will need to address these concerns if she is to gain support of this part of the electorate.
• Although Cristina Kirchner is the first woman to be elected president, she is not the first woman president in Argentina. Isabel Peron became president in 1974 following the death of her husband, Juan Peron.
The economic issues
Argentina has faced persistent problems with inflation during the past century. By some measures, the country’s economy was among the five largest at the onset of the 20th century. It is clearly nowhere near that rank today. Argentina represents the problems that develop with trying to operate policy designed to reduce income and wealth differences. The constant government interference into the workings of the market has led to distortions and borrowing that eventually became unsustainable.The peso Nacional was relatively stable (around 2.36 pesos per dollar) until 1948, when it began to weaken. This deterioration coincided with the election of Juan Peron. However, not all the depreciation can be blamed on him; a series of military governments that replaced him after 1955 did little better. At the end, it took nearly 350 pesos to buy a dollar. From 1970 to 1983, a new currency was introduced, the peso Ley, which officially exchanged one peso Ley for 100 peso Nacional — meaning the dollar exchange rate was around 3.50 pesos to one dollar. However, it also depreciated, eventually reaching 98,000 pesos per dollar. In 1983, just after the first Latin American debt crisis, the peso Argentino was introduced, which exchanged one peso Argentino with 10,000 peso Ley — indicating that 9.8 peso Argentinos was equal to one dollar. It rapidly lost purchasing power as well, reaching an exchange rate of 673 peso Argentinos per one dollar. In 1985, the Austral was introduced, equal to 1000 peso Argentinos. At inception, .88 Australs equaled one dollar (which means that just prior to the new currency, the peso Argentino weakened further). The mid- to late 1980s was a period of debt restructuring for Latin America. Rapid inflation returned, reaching 2,000% and pushing the exchange rate on Australs to 10,000:1. Toward the end, Argentines were demanding dollars or other hard currency for payment and were refusing to accept Australs. When nations face hyperinflation, citizens begin to take steps to protect their savings. The rich tend to hold either foreign currencies (usually U.S. dollars) or gold. They often invest outside of the country (i.e., capital flight). The less affluent will tend to hold savings in real assets (e.g., food, housing) and engage in barter. High levels of inflation tend to most adversely affect the poor. It is one of the great ironies of economics: Government policies designed to alleviate the struggles of the poor are usually inflationary, meaning that those who try to help often cause more harm.In light of a long history of inflation, in 1992 President Carlos Menem decided on a radical course to instill confidence. He created the peso Convertible at a rate of one peso to 10,000 Australs (for reference, note that one peso Convertible was worth 10 trillion peso Nacional, a reflection of how much damage government policies had done to purchasing power). In a sense, this was nothing new; as the above history shows, simply issuing new currency to end the rather ridiculous situation of using large-denominated notes for a trip to the grocer isn’t a long-term solution. What made the new program unique was the establishment of convertibility — the new currency could be exchanged 1:1 for U.S. dollars, meaning that monetary expansion was curtailed. In other words, pesos could be issued by the central bank only if there was a dollar in reserve backing it up.The convertibility program worked. Inflation declined rapidly, and confidence was restored. However, a number of problems developed. First, from 1995 onward, the dollar appreciated, meaning the peso appreciated as well. This factor lowered the price of imports and boosted the price of exports, hurting the trade balance. Because monetary expansion can occur only with dollars in reserve, this led to rising interest rates. To keep the economy growing, the Menem administration expanded government spending. This led to massive debts that were eagerly being funded by foreigners, attracted by the 15% rates being offered. Foreign investors were lured into buying Argentine debt because of high rates and the confidence that the currency would remain stable.Adding to pressure was the Mexican devaluation in 1994 and the Brazilian devaluation in 1999. Because both nations are major trade competitors with Argentina, these devaluations improved their competitiveness. By 1999, Argentina entered a deep recession. The inability of the central bank to expand the money supply led to the creation of “quasicurrencies” often issued by state governments. By 2002, the situation had become intolerable, and parity was abandoned. The peso floated and dropped to nearly 4:1.Nestor Kirchner took office May 25, 2003. Argentina was already in default on its massive foreign debt. Kirchner took the next step and refused an IMF restructuring plan. He froze the prices of energy and other staples and negotiated a 35 cent on the dollar plan for creditors. Although they grumbled, most accepted the plan. This cut its foreign debt payments significantly. Improving the situation further was a boom in commodity prices. Argentina’s grain exports have become more valuable, improving the economic situation. Growth has been running around 8% since the restructuring.
What Cristina inherits
Although the new president has the benefit of lower debt service and a commodity boom, there are significant problems brewing. Her husband expanded fiscal spending into the election, which has put pressure on inflation. There has been a scandal developing on inflation reporting. Officially, inflation is running around 8% to 9%. However, individual state data would suggest inflation is nearly double the official numbers, at 20%. Nestor’s administration recently fired 20 government statisticians who allege the government is manipulating the data (which should offer some insight to those who believe the U.S. government is manipulating the CPI — if it were true, we would likely be hearing of protests from government workers protected by the Civil Service Act). If inflation is becoming a problem, the new administration may be forced to implement austerity measures. Unfortunately, given the Peronist’s base of support — the lower classes — such actions would be very unpopular and difficult to maintain.Another problem is related to the debt default. Although foreign investors seem to have remarkably short memories, it has been virtually impossible for Argentina to borrow from abroad. The country has managed to sell some bonds to Venezuela, but this was likely done to improve relations, not because the Chavez administration expects to be repaid. If Argentina wants to return to global capital markets, it will face significant difficulties.Finally, anything that would undermine the current commodity boom would be devastating. Argentina’s economy is, at this point, extraordinarily dependent on continued Chinese economic expansion.
Foreign policy
Given that Cristina’s husband was completely focused on Argentina, we would expect that the new administration will be much more active in foreign affairs. How much success she has is another issue, because it isn’t clear what she wants to accomplish. However, one obvious goal would be to improve relations with creditors so as to be able to tap global capital markets again. We would also expect that she will work hard with regional nations that supply natural gas to Argentina in an attempt to lower prices.
Market ramifications
For investors, there is one key message — beware of stylish women offering bonds! As the above discussion on Argentine exchange rate history shows, this country has not shown that it can maintain stable prices and that it will use either default or depreciation to undermine the claims of creditors. Thus, at some point during the next two years, we would expect Argentina to attempt to tap the global capital markets. They will likely offer very attractive terms and, at least initially, will repay on schedule. Unfortunately, by the time retail investors are offered a chance at this “opportunity,” it will be too late. As recent debt market action has shown, there is ample opportunity to purchase dodgy paper; historically informed investors should avoid Argentina.
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