Argentina’s recession is self-inflicted
Those who govern Argentina have often said in the past few years that they are motivated by principle in setting their economic policies and their international dealings, writes Dr. Joseph S. Tulchin.
That has been President Cristina Kirchner’s defence in her government’s response to those holders of Argentine bonds who have refused to exchange their bonds for restructured debt. These ‘holdouts’ have now succeeded in suing the Argentine government in New York to have the principal and the interest owed to them on their bonds paid.
The Argentine government’s emphatic refusal to deal with the holdouts has cost it about US$15 billion a year in excessive interest charges on its international borrowing. It is unclear what benefit Argentina’s government has actually achieved from its stance.
But Argentina’s experience has helped to change international finance. Recent bonds issued by Mexico, Vietnam, and Kazakhstan now contain clauses which make holding out virtually impossible.
Argentina’s stand against the holdouts may be considered the last chapter in a decade-long saga of miserable economic policies, perhaps motivated by principle. First President Nestor Kirchner in 2003 and now his widow, Cristina Kirchner, have supervised Argentina’s economic policies which have frittered away US$160 billion - what some considered the largest trade surplus in the world during the last decade.
So, where did all of that money go? The largest part, US$95 billion, left the country in the form of capital flight. Another US$40 billion covered excess interest payments on Argentina’s public debt, and the remaining US$16 billion was used to bolster its foreign reserves.
Argentina’s experience provides two lessons. One, of value to all commodity exporters, is that commodity prices are cyclical. The other is of value to leaders of populist regimes who try to use export windfalls to build their political base. It is that sooner or later either the currency is debased and inflation destroys any benefits they have attempted to provide to their power base or, the price of the exports falls, leaving the government without resources.
Argentina’s government used the money partly to provide subsidies to the working class and improve the quality of life for a new middle class. The rate of poverty was cut in half and the new middle class was allocated significant resources.
At the same time, however, through other macroeconomic policies such as price fixing or manipulation of the rule of law and policy inconsistencies, the Argentine government undermined its credibility and poisoned the climate for investment. This drove nearly US$95 billion out of the country.
Cristina Kirchner’s response to this flight of capital has been a series of feeble attempts to block capital flight and exchange rate manipulation. This has only made matters worse.
Argentina is now in full recession. Its next president - to be elected in 2015 - will have their hands full in getting Argentina’s economy going again.