Lavagna’s legacy in Argentina

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The economy minister’s ousting signals the end of an era.

Roberto Lavagna’s dismissal as Argentina’s economy minister came as no surprise. Rumours have been circling for some time that he was on the verge of leaving. He had an uneasy relationship with the president, Néstor Kirchner, and it was always a question of when, not if, he would depart.

Friction between the two had intensified in recent weeks, especially after Lavagna made remarks that were taken as a direct criticism of one of the president’s closest confidants.

This was the trigger for Kirchner, emboldened by his party’s success in October’s legislative election, to put in place an economic team more akin to his way of thinking. Kirchner is a populist relatively close to the style of Venezuela’s president Hugo Chávez; Lavagna takes a fiscally responsible leftist line.

How will history judge Lavagna? He could be uncompromising, dogmatic and inflexible. But without his resolve, Argentina might have gone down a financial path from which it could never have recovered. He fought hard for Argentina’s interests and never got the credit he deserved.

Perhaps Lavagna’s greatest success was his political longevity. When he was appointed economy minister in April 2002, he was Argentina’s fifth in two years. What the nation needed most was political and economic stability and, together with Kirchner, Lavagna has largely ensured that.

At first glance his task was daunting. The economy had shrunk by 11% in 2001, the banking system had collapsed and the government had defaulted on more than $80 billion of foreign debt repayments. In addition, the currency had sunk like a stone and the country’s social fabric was torn apart. Lavagna entered office with riots and looting outside his window. Today, the economy is growing at a solid clip, investors are once again buying the nation’s assets and the banks are once more solvent.

Lavagna was a lucky minister too. The peso’s devaluation meant that Argentina’s economy had a competitive currency on which to base its rehabilitation. Even so, Argentina has recovered far more quickly than anyone could have imagined possible in 2002 – the country’s growth rate of 6% to 7% is proof of that.

Still, important issues remain unresolved, especially energy reform. Lavagna was only moderately successful in this area. The government’s continued inability to provide a stable regulatory environment and price mechanisms has left private-sector participation in the sector in limbo. Reform in this area is vital if Argentina’s growth is not to come to a screeching halt.

Of course the most controversial issue associated with his tenure is the sovereign’s debt restructuring. A lot has been written about the matter; suffice it to say that the deal settled in June was the biggest debt restructuring in history – an achievement in itself. It was also the most complicated and all parties concerned were entering into the unknown.

Could Lavagna have done more to satisfy foreign investors and the IMF? Possibly. He could, for example, have kept the restructuring open for a couple of weeks longer to get an even bigger participation rate than the eventual 76%. However, it’s difficult to know how much control he had over the process and to what extent Kirchner was engineering it. What was always clear from the outset was that the deal that was put to investors would be final – a one-off opportunity that they could take or leave. Many investors might have been unhappy that they were only getting back about 32 cents on the original dollar invested but the vast majority did tender their bonds, grudgingly or not. At the same time, in Argentina, many locals felt that at last here was a politician who stood up for their interests, who didn’t just back down when the IMF ticked him off.

When Euromoney last spoke to Lavagna in the summer, we asked him if Argentina had turned the corner. His reply was instructive. “It depends on how we continue to manage the situation.” Argentina still faces an uncertain future. Inflation is creeping up, investment levels remain weak and the government’s relations with the IMF are reaching breaking point. Without Lavagna, though, things might have been a whole lot worse.