Argentina, Oh, Argentina: Playing With Fire

While the world watches Greece, Argentina is burning.  Because both countries have debt problems and endemic private and public corruption, some commentators have tried to draw parallels between the two.  In fact they are two very different situations.  In 2002, Argentina defaulted on $95 billion of debt internationally.  Greece is not in jeopardy of default and will not default.  While both countries are still emerging from dictatorship, the level of private (including tax evasion), public, and political corruption is far more invasive in Argentina with its peronista culture.  While Greece has a competitiveness problem within the Eurozone as the result of fixed trade exchange rates, the euro is not a pegged currency.  The Argentine peso maintained a fixed peg with the US dollar for 11 years until 2002 which increased its dependence on US dollars and foreign debt leading to the 2002 default.  Beginning in 2002 with the rescinding of the currency peg, inflation broke out and has continued to the present as a virtual way of life and may approach 20% this year.

In 2001, de la Rua resigned the presidency and Duhalde, an economically center left Peronist, became interim president with unemployment at 25% and capital fleeing the country.  Despite intense social protests, the country used the currency devaluation to re-industrialize, increase internal demand and exports leading to fiscal and trade surpluses.  In 2003, Kirchner, a social democratic Peronist, was elected president and Argentina paid off its IMF loans, restructured its defaulted debt at a 66% discount, renegotiated utility contracts, began nationalizing privatized businesses, applied price controls, and engaged in a sweeping public works investment program.  Kirchner's approach to inflation was to remove those in charge of studying and issuing inflation statistics with his own people; consequently, "official" inflation statistics are less than one-half of reality.  In 2007, Kirchner "stepped" aside to let his wife run and be elected president and she has continued his policies, which aggravate and continue the inflation.  In 2009, the Kirchner's political party lost control of the Argentine Senate, which is leading to a potential political confrontation.  The emergence of major bribery and corruption scandals from Nestor Kirchner's administration are continuing and will not die away.

In 2008, Fernandez de Kirchner had a law passed allowing the government to seize all private pension funds allowing the government to invest the pension funds in government bonds, which were used to make international debt payments.  If Argentina is going to be able to borrow internationally, it must continue to repay its re-structured default debt.  Despite the Argentine central bank being a political extension of the government, Fernandez de Kirchner fired its president Redrado, when he refused to transfer central bank foreign currency reserves to the Treasury, and replaced him with a political ally, Mercedes Marco del Pont, who will guide the central bank consistent with the economic policies of the government and who transferred $4.2 billion to the Treasury without the necessary legislative approval.  These foreign currency reserves will be used to pay international debt.

The transportation monopolies, which accept only coins, are so corrupt that the country as a whole has a shortage of coins as these companies hoard the coins and charge exorbitant fees for paper currency exchanges.  Regular businesses and individuals would rather give excess change in paper currency than part with a coin.  Beef prices, as the result of production and export taxes (which effect supply) as well as inflation, are up 25% in this beef eating country.  Argentina's budget deficit to GDP will double this and the country faces an inflation-wage price spiral as Fernandez de Kirchner aggressively seeks to appropriate money from whatever sources to pay international debt and continue an aggressive public works program in defiance of Argentina's Congress.

Is Argentina so systematically corrupt that its citizenry cannot demand a free society and have grown to expect the choices to be one type of corruption or another?  At what point does this out of control inflation, which has been accompanied by growth, become socially intolerable?  Is the massive public works program keeping enough people employed and fueling enough future growth?  Will increased political confrontation require public diversions?  Oil has been discovered in the Falkland Islands (Malvinas) and Argentina and the United Kingdom are butting heads.  Both countries have economic difficulties, with Greece debt problems focusing a lot of analytical attention on the United Kingdom, and both could politically benefit internally from an international confrontation involving sovereignty and oil.  Posturing rather than actual military confrontation is the most likely scenario, particularly since Argentina has cut military spending by 50%.  Argentina has gone to the UN and the United States is not supporting the United Kingdom.  The United States Supreme Court also allowed Argentina private pension money in the United States to be turned over to Argentina.  While trying to mitigate Venezuela's, and its allies Iran and Russia, influence as well as China, the United States may be playing into their hands if the UK redeploys troops from Afghanistan to the Falklands in a demonstration of strength that could bolster Gordon Brown.  The current situation could strengthen the Rio Group at the expense of the Organization of American States as well as the commercial-strategic position of China, Russia, and Iran in Central and South America.

Argentina's central bank has consistently failed to promote price stability and monetary policy and has been unable or unwilling to divorce itself from fiscal policy.  It is a perfect example of the failure of a corrupt central banking system tied to a corrupt political system.  Unfortunately, Argentina's inflation problem has geopolitical consequences.

Print Page

Turkey is Harvesting the Risks of Its Foreign Denominated Debt

Noah Smith has hit the nail on the head when he writes that Turkey's currency crisis is the direct result, as many emerging nations have experienced, of issuing debt denominated in foreign currencies rather than its own currency.

It is just bad economics for any nation to issue debt in a foreign currency.  I wrote about this in relation to Argentina in 2010 and Argentina still, today, has the problems associated with foreign

Countries to Watch

In talking about Dubai on the last radio show, I briefly mentioned a few other countries.  I also questioned whether the strong US dollar last week was, rather than a possible bottoming as other analyst have speculated, was the result of seeking a safe haven from sovereign default.  This week with the welcome but inadequate $10 billion from Abu Dhabi to Dubai, the market "sighed relief " and the US dollar reverted to being weaker.  Was I right?

Moody's Misery Index listed countries with public debt in relation to sovereign default risk in descending order or risk: Spain, Latvia, Lithuania, Ireland, Greece, United Kingdom, Iceland, United States, Jamaica, France, Estonia, Portugal, Hungary, Germany, Italy, and the Czech Republic.  Take note of number 6 and number 8 on the list.

The 6th largest Austrian Bank, Hypo Group Alpe Adria, was was nationalized by the Austrian government as insolvent with 40 billion Euros in assets at the insistence of the ECB's chairman Trichet.  The  bank is a subsidiary of the German bank, Bavaria BayernLB, which had reported losses of over 1 billion Euros for the second quarter in a row from HGAA.  Austrian banks have been the subject of how much exposure they have to lending in weak Eastern European countries and some analysts consider German banks fragile as the result of reckless lending seeking high returns.  Credit Writedowns has an excellent article on the nationalization of HGPP and its relation to what is going on in Austria, Germany, Eastern Europe, and Dubai.  Sweden and Poland also have large exposure to Eastern Europe.

CMA DataVision has issued a Q4 report on the Global of countries by percentage of risk for sovereign default based on CDS prices.  It is a multi-page report but here is page 13 with a listing of countries by percentage probability of default.  The top ten are Venezuela, Ukraine, Argentina, Latvia, Iceland, Dubai, Lithuania, Romania, Lebanon, and Greece.  It should be noted that Greece has started to take serious action to curtail spending and has about a year to get its debt and budget under control.  It will be interesting to see if the public demonstrations by young people in Greece will moderate or increase.  Spain has serious economic contraction and, while the economy appears to be picking up in Italy, there have been reports of right wing reactions, particularly against immigrants.




Print Page