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Sovereign Debt

Less than two months ago, key members of Argentine president Cristina Fernández de Kirchner’s cabinet boasted that the global financial crisis would not affect Argentina. At the Waldorf Astoria in New York on September 25, the president herself reacted bitterly to an American executive who asked about her plans to cope with the looming downturn: “It is you [the US and Europe] who need a Plan B.”

They spoke too soon. October turned out to be the worst month for Argentina’s economy in half a decade: The Buenos Aires stock exchange lost a staggering 37 percent, the peso about a tenth of its value (despite heavy intervention by the central bank), and sovereign bonds over 60 percent of their value. To top it all, the last day of the month saw S&P lower Argentina’s debt rating from “B” to “B-”--comfortably in junk territory and close to virtual default. November has not been much better.

The year-old Kirchner administration, which has continued the policies of her husband’s previous term, is finally headed for a reality check. And after six years of interventionist and short-sighted economic policies, the Kirchners are squarely to blame for the country’s economic slide.

Since ascending to power in 2003, barely over a year after Argentina announced the largest sovereign debt default in history, the Kirchners relied on rising commodity prices to put the economy in full throttle. At the crux of their economic policy lay the decision to keep Argentina internationally competitive by using the central bank to artificially deflate the peso, rather than focusing on raising productivity. To a certain degree, it worked: Whereas the economy shrank significantly in 2002, it has expanded at what local commentators have baptized as “China rates”--close to 10 percent year on year--ever since.

The government sought to benefit from this growth--particularly in the agro-exporting sector--by implementing a temporary export tax of 20 percent in 2002, a policy that could have been justified at the time in light of soaring unemployment and half of the country living under the poverty line. But the Kirchners have kept the tax in place for the past five years, using the fiscal surplus to fund their own political machine. They monopolized power within the Peronist party and adapted it to fit their leftist creed, reminiscent of 1970s rhetoric. Moreover, they bolstered their own support throughout the vast country by selectively funding loyal provincial governors. They also re-nationalized many of the companies--the airline Aerolineas Argentinas, the water company Aguas Argentinas, and the postal company Correo Argentino, to name a few--that had been privatized in the 1990s under the country’s neo-liberal president Carlos Menem, a devotee of the Washington Consensus.

Their heterodox economic policies extended to foreign policy: The Kirchners became vociferous critics of the IMF’s “failed” neo-liberalism, and, by remaining close to Venezuela’s Hugo Chavez, distanced the country from the United States and international financial markets. In 2005, the first Kirchner administration was unable to renegotiate a significant portion of its defaulted credit, causing foreign creditors to initiate legal actions against the country, which remain in progress to this day. Later that year, the president pompously announced full payment of IMF debts in order to rid himself of their policy recommendations, “bury[ing] an ignominious past of eternal, infinite indebtedness." At the time, the country seemed to pay little price for the government’s defiance of classical economics.

Yet the explosive growth resulted in renewed inflationary pressure by early 2006, a particularly pervasive disease in the economic history of Latin America. As the Kirchners’ spending schemes grew exorbitantly during Fernández de Kirchner’s election year and commodities continued their global rise, so did domestic prices, fueled by a revived struggle between labor and industrial interests. But rather than solving the problem by controlling spending or wage increases, the populist administration appointed loyalists to the national statistics bureau, the Instituto Nacional de Estadísticas y Censos (INDEC), who would report numbers that support their policies; though unofficial estimates for 2008 inflation rarely run below 25 percent, the official figures point to an illusory nine percent--a rather convenient figure for a government facing transfer payments indexed to inflation.

For all these heavy-handed policies, it seems that international markets will have the last laugh. With commodity prices now in decline, the government has tried desperately to access much needed liquidity by increasing revenues or accessing foreign markets. But all measures have failed. In March this year, the government introduced a bill to raise farm export taxes to almost 50 percent; opposition was so staunch that it was defeated in a Peronist Congress by the vote of none other than the vice president, Julio Cobos. Furthermore, Fernández de Kirchner’s September announcement that Argentina would use central bank reserves to pay off outstanding debts with the Club of Paris, an informal body representing the world’s 19 most developed nations, failed to ease anxieties in international financial markets: bond yields continued to skyrocket, and foreign analysts began to talk about another default, this time under Kirchner’s watch. Even her promise to explore settling balances with foreign debt “holdouts” later that month gained almost no traction.

Most recently, the Kirchners’ unprecedented decision to nationalize all private pension funds (known as AFIPs in Argentina since their privatization under Menem in 1993), led the bourse to drop over 10 percent in one day when it was first announced. The Kirchners pressured Congress to pass it without much debate yesterday. Although the president tried to spin it as a protection against the ravages of capitalism amidst declining global markets, most investors and analysts received it for what it is: a desperate attempt to access much needed liquidity. The AFIPs were far from ideal, and arguably corrupt, but the nationalization plan was badly timed and implemented by an administration with an atrocious track record.

The lesson is as simple as it is sad: The Kirchners may have defied the economics textbooks for the first half decade of their reign, but they will not be able to do so forever. Argentina is not the land of exception; just like its neighbors, it has to play within the rules of globalization and modern financial markets. The country can lean left or right, embrace state-sponsored welfare or decry it, but it needs to do so with leaders that respect existing contracts and free trade, follow sustainable economic polices, and believe in accountable democratic institutions. Having atomized the opposition, the Kirchners may yet hold on to power for some more years. But there is no Plan B: It is due to their arrogance and denial that Argentina stands alone and exposed to its worst global economic downturn in generations.

Pierpaolo Barbieri studies history at Harvard University.

By Pierpaolo Barbieri