Argentina: Cristina fumbles a critical crisis
Argentina has done well out of the commodity boom but bankers and the man in the Buenos Aires coffee shop are frustrated by the government’s failure to sustain a thriving economy. Chloe Hayward reports.
THE EDITORIAL IN Aerolineas Argentinas’ in-flight magazine reads: "Toda crisis es una oportunidad." Aerolineas is a company in the middle of a crisis. Sadly, the opportunities are not that apparent.
The day Euromoney attempted to travel with the airline only a handful of flights took off, and all of these were several hours delayed. Two days earlier, on July 25, the Argentine carrier, which has debts of more than $890 million, had been renationalized. Far from describing the change in ownership as an opportunity for the Argentine government, one banker declares the venture to be a void into which the government was throwing money. "Renationalizing Aerolineas Argentinas was a major mistake," he says. "I don’t know what the government was thinking."
In contrast to Aerolineas’ hopeful magazine editor, many Argentine bankers believe the Chinese proverb is back to front where their country is concerned. "Instead of saying out of every crisis comes opportunity, it should be out of every opportunity, Argentina creates a crisis," says a senior banker in Buenos Aires.
As the country lurches on from the recent farmers’ strike, held to protest against taxes on agricultural exports, bankers and citizens alike are frustrated by the lack of positive action by the president. They fear that the longer the government fails to mount a fight against a deteriorating macroeconomic environment, the closer the country will move towards another meltdown, characterized by growing inflation, slowing growth and a lack of funding for corporates and the government.
A senior banker says: "Argentina is a continuous crisis. If it wasn’t for the opportunities this country has had thrust at it over the past couple of years then we could have had another 2001-type default long ago."
The opportunities
Argentina is able to assemble a long list of facts and figures that highlight its potential. Central bank reserves exceed $52 billion. It has a $12 billion trade surplus and a primary surplus of 3.8% of GDP. At the end of 2007 peaceful elections brought in its first female president with 46% of the vote; tax revenue reached a new high of Ps24.5 billion ($8.1 billion) in July 2008, a year-on-year increase of 40.3%; with vast natural resources and commodity-producing capacity, Argentina grew its export earnings by 42% in the first three months of 2008, which reflected an average 30% price increase in such commodities as wheat and soybeans. The list of positives goes on. All these factors have meant that GDP has grown at rates of more than 8% for four consecutive years.
Despite Argentina’s potential, the impact of poor government policy is now coming to a head. The sovereign is effectively shut out of the international capital markets. Legal disputes involving claims of $20 billion linger with bondholders who did not accept the debt restructuring deal offered in 2005. Locally, the government can raise a limited amount of debt, or it can turn to Venezuela for funds. Some analysts fear another debt default is looming.
Head just above water
The most recent farmers’ action brought Argentina to a halt. On March 11, the government increased soybean tariffs from 35% to 44%, giving itself the option to increase them to 95% if prices rose above $600 a tonne. Overall this policy would have placed a 73% tax burden on farmers, according to the Argentina Agrarian Federation. In retaliation, farmers blockaded roads, stopping food supplies reaching the cities and ports. Eventually the government agreed to vote on the bill in congress.
On July 17, the vice-president and head of the senate, Julio Cobos, settled the tied vote by going against the government. The president had been mistakenly confident after winning the lower-house vote.
Despite the defeat, president Cristina Fernández de Kirchner remains defiant. In her first press conference since coming to power eight months ago, and the first press conference an Argentine president has given since 2003, she declared that she would not change any of her decisions and has no regrets – her only mistake was to underestimate the power of the opposition.
A coffee shop owner called Andreas on Tucuman Street in Buenos Aires ranted to Euromoney: "I am no banker but even I know Argentina should be thriving."
Many Argentinians are as frustrated as he is. June’s Poliarquia consultancy opinion poll showed Cristina’s popularity to be less than 20%; another poll reported that a staggering 72% thought the president had hindered Argentina’s growth.
"The president should have seen this congress defeat as an opportunity and used it to her advantage," says Luis Caputo, former president of Deutsche Bank in Argentina, who is setting up an emerging-market focused hedge fund. "At the moment Argentina is holding its head above water, but now Cristina needs to act."
Marcelo Blanco, country manager of Argentina and co-head of Latin America at Deutsche Bank, says: "I would love to meet with our madam president for 30 minutes and express my frustration. She needs to understand that she has a unique opportunity to change the course of Argentina’s destiny. With simple things she could make our CDS spreads tighten at least 300bp and make foreign investors look at Argentine paper again."
He adds: "Initially I would recommend her tackle a couple of easy-to-fix issues, like send her husband on a six-month fully paid vacation. She needs to show the people she is in control and not him; the executive power cannot operate under dual leadership." At the August press conference, Cristina dismissed the notion that her husband and predecessor, Néstor Kirchner, was running the show. "Comments of that nature come from a biased reading of reality," she asserted.
But her cabinet is filled with Néstor’s allies. The new cabinet chief, Sergio Massa, who took office on July 24, is known as young and intelligent – he is also known to be a strong supporter of Nestor.