Posted on 11/01/2008 1:33:27 PM PDT by SeekAndFind
The steep fall in global commodity prices over the past several weeks has brought Argentina to the brink of fiscal collapse—alas, not an unfamiliar position for the South American country.
For far too long, the Argentine government behaved as if commodity prices would keep rising forever. It spent like a drunken sailor and made unsustainable commitments to the public sector. Such irresponsible fiscal policies were promoted aggressively by Argentine President Néstor Kirchner, who served from 2003 to 2007, and they have been continued by his wife, Cristina, who in 2007 was elected to succeed her husband as president.
Until recently, the Argentine government was awash in cash thanks to soaring commodity prices. This encouraged its fiscal profligacy. But in recent months, the price of soya—a key Argentine export—has declined significantly. To make matters worse, Argentina’s soya growers have been staging strikes to protest against high export taxes. Between the plummeting soya price and the economically damaging strikes, billion of dollars in projected tax revenues have been lost.
Meanwhile, Argentina has $23 billion in public debt that must be paid within the next two years. For a normal government, this would not be a problem, since it could roll over most of the debt. But in Argentina, the government’s shoddy treatment of international bondholders has come back to haunt it. Investors do not trust Mrs. Kirchner, and they have little motivation to buy government bonds. “Argentina hasn’t had access to international debt markets since its 2001 default,” Bloomberg News notes, “and demand for its local bonds has dried up on concern the government is underreporting inflation.”
Facing this confluence of fiscal challenges, President Kirchner has proposed a solution: the government will nationalize Argentina’s private pension system, which is reportedly worth around $30 billion. Kirchner insists that her plan is about “protecting our workers and retirees.” But this is a flimsy pretext; everyone can see that the nationalization scheme is really just a ploy to boost the government’s financial position.
“It looks like they want to use the workers’ money for non-pension spending,” University of Buenos Aires law professor Gregorio Badeni told The Economist magazine. “The reason private pensions were instituted in the first place was to stop the government from doing that.” As The Wall Street Journal reported earlier this week, Kirchner’s nationalization proposal “has jolted investor confidence and triggered a dollar outflow,” with both the Argentine peso and the Buenos Aires stock market plunging.
This is the second time this year that the Argentine government has made a naked money grab. In March, President Kirchner tried to increase to confiscatory levels the taxes paid by soya exporters. This sparked a bruising political battle with Argentina’s farming lobby, which Kirchner ultimately lost. In the aftermath of the tax fight, the government seemed to be changing its ways-until Kirchner announced her pension nationalization plan.
In political terms, Argentina’s private pension system makes for a less sympathetic victim than its soya growers. Over the years, the private pension funds have experienced periodic difficulties, most of which were caused by government meddling. In recent weeks, the global financial crisis has taken its toll on them. As The Economist observes, “the private pension funds are unpopular with the public.” They are certainly less equipped to defend themselves than the soya growers.
So will Kirchner get her way? That remains unclear, as there has been substantial resistance from the Argentine Congress. The private pension funds in danger of being nationalized are the main investors in Argentina’s beleaguered capital markets. In the short run, nationalization may temporarily solve the country’s fiscal crunch. But a state takeover of the pension funds would also hasten capital flight from Argentina and inflict serious long-term damage on the economy.
In order to move forward, Argentine politicians must come to terms with what really caused their economic meltdown in 2001, for that crisis still colors the political debate. Left-wing populists such as the Kirchners have blamed it on misguided “neoliberalism.” But that makes no sense. As journalist and Latin America expert Michael Reid writes in his book Forgotten Continent, “What killed Argentina’s economy in 2001 was not ‘neoliberalism’ or the free-market reforms, but a fiscal policy incompatible with the exchange-rate regime, and a lack of policy flexibility.” Indeed, “Contrary to many claims, Argentina’s policy mix was in direct contravention of the Washington Consensus.”
Today’s policy mix could have similar consequences for Argentina. Just look at how investors reacted to the pension nationalization proposal. As The Wall Street Journal editorialized last week, Argentina now “serves as a cautionary tale on how to ruin an economy.” If Kirchner hopes to achieve lasting prosperity and social stability, she should eschew Hugo Chávez-style economics and look instead to countries such as Brazil, Peru, and Uruguay, all of which are led by pragmatic center-left reformers. Argentina’s current trajectory will lead only to financial disaster.
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Jaime Daremblum is director of the Center for Latin American Studies at the Hudson Institute.
I had a call from a friend in Argentina yesterday, she said things are pretty bad there right not. She’s not terribly upset, as this isn’t that unusual. I was telling her about the cheating going on (ACORN, etc.) and she said “big deal, that’s normal down here, we expect it”.
The good news for Argentinians is that they may soon have company at the bottom of the heap of failed leftist states if the United States decides to elect a socialist to its highest office.
i spent 3 weeks in Argentina last year after Christmas and into January and I loved the country - especially San Carlos de Bariloche in the Patagonia region. The scenery is beyond spectacular and the people were quite nice. Very sorry to hear that they’re having these problems.
I wanted to go to Mendoza, their wine growing area, but heard that the drive there can be dangerous because of robbers.
It’s strange to see all those resources, the European seeming people, and then realize Argentina isn’t successful they way you’d think it should be.
Great, so now I can look forward to having Argentinian illegal poor and unwashed here in Florida to go with the rest of the poor and unwashed Latin American illegals.
Hope the Argentinians are at least educated.
--comimg soon to the USof A--
--http://www.investmentnews.com/apps/pbcs.dll/article?AID=2008810079894
“It’s strange to see all those resources, the European seeming people, and then realize Argentina isn’t successful they way you’d think it should be.”
You’re not the only one who’s thought that...
let it sink, i’ll save the ladies from there :D
Dear God don’t give the Obama or McCain any ideas...they might just vote on a bailout for Argentina.../sorta sarc.
In the early 1900’s there was an expression common in Europe, “As rich as an Argentinian.” Now a century later, it has come to this.
A country rests on a three legged stool: social, economic, political. Argentina has a population largely of European descent, a distinctive way of speaking Spanish, and lacks the “diversity” that leads to fracturing and balkanization.
It has natural resources and an educated population that should support prosperity.
It has also had a century of bad government, swinging between military dictatorship and Peronism, the latter a kind of Obama-like shucking and jiving with a tango beat.
I lived in Argentina for a year in ‘69/’70. It was a wonderful year, the country was grand and beautiful, the people were loving, the food was spectacular.....
except, I did feel the lack of true liberty that we have here. When I was there it was between the Peronistas two attempts at ruining the place. Peronistas were just trying to get back in power, and on their second run through they managed to wreck the place. I would probably cry now to go back and see what has become of that once wonderful place.
They will tell you there are a lot of people with Italian ancestors there, they speak Spanish and want to be French.
They also have immigrants like Indians from Peru who are looked down upon and expected to be impoverished because that is where you start out as an immigrant - according to them. Their immigrants live wayyy worse than ours from what I saw.
But still, I felt comfortable there. Many beautiful women and handsome men - friendly to Americans. Fabulous food and I learned to love Malbec wine. And they really tango in the streets. I’d love to go back!
Argentina has tremendous potential - if they could only get decent leadership. Of course I could say that for the US as well.
......Argentina’s soya growers have been staging strikes to protest against high export taxes.....
The United States is blessed with a constitutional prohibition of export tariffs. A nation of traders early on, the founding fathers knew of the pain caused by taxes on exports.
My business depends on it today.
I am originally from Argentina and have a lot of relatives down there. Many of them lost their pensions years ago because of hyper inflation and government meddling. Every time they get their head above water some leftist politician demagogues the lower classes and creates massive social programs that bankrupt the country. It’s been going on since Peron took a country with massive gold reserves and huge exports and turned it into a third world country. They never learn.
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