Kirchner’s diminishing returns

First elected as Argentinian President in 2007, Cristina Fernández de Kirchner began her term riding a wave of popularity. The election wasn’t even close, with Kirchner winning 45.3 percent of the vote, over double that of her nearest rival. Her husband, the late president Néstor Kirchner, had appeared to successfully steer the country through the fallout from its 2001 default, and the economy grew at an impressive 7.7 percent average between 2003 and 2011. Things were looking good.

But behind the Perónist populism and official statistics, trouble was brewing. Under Néstor Kirchner, public spending had soared and the economy was overheated. A large primary fiscal deficit had developed and with Argentina unable to raise credit in external markets without paying steep interest rates, the central bank took to printing pesos instead. Inflation took off, with unofficial estimates placing it as high as 25 percent; although the government officially reported a lower figure of about nine percent. Much of the government’s spending was just plain wasteful; it had instituted a freeze on energy tariffs which artificially lowered prices – Argentines pay 70 percent less than their neighbours – and put stress on the treasury. Kirchner had also nationalised a series of businesses including the postal service, railways, a water company and a shipyard, resulting in dismal financial results.

Kirchner’s policies have been spooking investors and the government’s lavish spending is now becoming unstable

Despite his popularity, Kirchner had effectively laid an economic minefield, and if the new President were to get the country back on track, something different would be required. As it happened, it was to be his widowed wife who would take up his mantle; to pick up the economic slack, Cristina Kirchner would have to deal with a series of problems, including rising government spending, high inflation, wasteful energy subsidies and the country’s sovereign debt; a change of pace was urgently needed. Instead, Argentina got a president keen to follow the same dangerous policies as her husband, while attempting to silence opponents and scapegoat the country’s problems at the same time.

A tough act to follow
Part of the reason Argentina had grown so impressively under Kirchner’s husband was due to lucrative agricultural exports. When he assumed office, he upped the export tax on soya to 35 percent, boosting the economy in the aftermath of the country’s default. Barely three months after her own presidency began, Kirchner followed suit, attempting to raise the tax further to 40 percent in an effort to boost the state coffers. The move sparked a backlash from angry farmers, however, with many descending on Buenos Aires to clank pots and pans, a traditionally Argentinean way of protesting. At the time, Kirchner’s ruling Front for Victory (FPV) party and their Perónist allies had an absolute majority in both houses of congress, so the measure should have gone through easily. Instead, the tax increase tore the party apart and the president was forced into an embarrassing climb down; there would be no additional revenue from soya exports and, to make matters worse, a drought had already been severely reducing production.

The fiasco ended up costing Kirchner her majority in the Chamber of Deputies during the 2009 midterm elections, and critics were already beginning to write off her political career. At one point her approval rating fell to a dismal 20 percent. She was not to be deterred, however, and in another attempt to raise revenue, nationalised Argentina’s private pension system and used the country’s foreign currency reserves to repay debt. The first move was widely applauded, but the head of the central bank objected to using the reserves. As a result he was effectively pressured into resigning.

With the global economy beginning to recover and the drought affecting agriculture having ended, Argentine exports rose again. With newly added income at her disposal, Kirchner went on a spending spree. She extended the child support system for poor families at a cost of $2.6bn, distributed laptops to school children and offered cheap mortgages for first-time buyers. The measures, although costly, sent her popularity soaring and in 2011, she was re-elected in a landslide. “Count on me to continue deepening a project for this country that helps improve the lives of the 40 million Argentines,” she told supporters.

With no obvious successor, speculation is rife that [Kirchner] will attempt to pass an amendment allowing her to run for another term

And deepen the project she would, going after Argentina’s largest oil company YPF next. According to the government, the company had failed to significantly reinvest profits into the country. In response, Argentina announced the seizure of Spanish firm Repsol’s 51 percent stake in YPF. The move won Kirchner applause in Buenos Aires but Madrid reacted angrily, with Spain’s Minister of Industry, José Manuel Soria saying: “If there are gestures of hostility, there will be consequences.” But Spain’s objections have so far come to nothing, and Argentina has refused to reverse its policy or provide Repsol with the compensation it believes it is due.

Kirchner’s controversial policies have been spooking investors and the government’s lavish spending – particularly on political allies – is now becoming unsustainable. With the government quickly running out of money, her rule is being increasingly scrutinised by many Argentinians. Even labour unions, a traditional ally of the Perónists, are claiming that inflation has been destroying their wages. Meanwhile, Argentina’s middle class is angry about crime and the exchange controls imposed to prevent capital flight. National strikes rocked Argentina’s transport system and grain shipments in November 2012. A month later, tensions came to a boil when two days of rioting and looting swept the country.

Inflation nation
Kirchner’s government has remained defiant, however, with the president often taking to the airwaves for national broadcasts to promote her policies. Under law, channels are required to interrupt regularly scheduled programming for these presidential announcements, and in 2012 alone Kirchner delivered over 50 of them. Vice President Amado Boudou has also been on the charm offensive, telling reporters that “our different way of doing things has permitted growth and the creation of jobs. Argentines can be proud we did things our way.”

One area of contestation between Kirchner and her opponents is inflation. The Argentine government claims that the rate is not nearly at the level of 26 percent claimed by unofficial estimates. The country has an interest in maintaining low figures, too, because Argentinian debt payments are indexed to inflation. When figures had first begun to rise into double digits in 2007, the trade ministry responded by replacing Gracila Bevacqua, the director of consumer pricing at the government statistics agency. Bevacqua went on to face various charges, including embezzlement and accepting bribes. Although none of these were ever proven, she was forced to pay fines for publishing her own unofficial inflation rate, well above the government’s official figure.

The inflation issue has not sat particularly well with the IMF, either, and the organisation has threatened to eject Argentina if it fails to get its finances in order. Expulsion from the IMF could also result in Argentina losing its spot in the G20. In September 2011, IMF director Christine Lagarde demanded the country start producing reliable statistics or risk being shown the “red card”. Fernandez reacted angrily to the IMF’s threat, telling the UN General Assembly that “Argentina is not a soccer team; it’s a sovereign country and accepts no threats or pressures. In the game of comparing football with economics and politics, let me say that the President of FIFA has been far more successful and satisfactory than that of the IMF Executive Board.”

Don’t cry for media, Argentina
Kirchner has been equally eager to combat her strongest critics at home. With the opposition weak and divided, her biggest domestic threat is arguably the Clarín Group, Argentina’s largest media conglomerate and a fierce critic of the government. She has frequently accused them of spreading lies about her administration and officials say that the company is violating new anti-trust laws because its 240 cable systems are more than the 24 maximum licenses permitted. The government has already forced the closing of Fibertel, the group’s internet provider, and Kirchner’s supporters have launched a high- profile campaign to discredit the organisation. It is now determined to strip Clarín of many of its cable licenses in an effort to silence criticism.

Martín Sabbatella, the official in charge of implementing media law, views it differently. He argues that the government’s efforts aren’t meant to be personal. “This is not about enemies,” he said. “The government is not coming to expropriate, to nationalise or confiscate any media group. We are coming to apply the law.”

Clarín disagrees. “The official goal is to silence the few independent voices left in the audio-visual sector in Argentina. More than 80 percent of radio and television channels depend directly or indirectly on the government,” a source at the group told the Financial Times. For now, the government’s efforts have been unsuccessful. While a judge had rejected Clarín’s assertion that the monopoly law is unconstitutional, he also ordered a reprieve in its application while the company appeals. Whether Clarín can continue to defy the government remains to be seen. In a further effort to scapegoat her government’s performance and the country’s economic woes, Kirchner has brought renewed attention to Argentina’s dispute with the UK over the Falkland Islands. Known as Islas Malvinas to Argentinians, the two countries fought a costly 1982 war over the windswept territory, with Argentina eventually finding itself on the losing end. In June 2012, Kirchner attempted to hand UK Prime Minister David Cameron an envelope with documents detailing her country’s claim to the islands. Cameron refused to take it and the spat was caught on cameras, boosting Kirchner’s domestic image, as most Argentinians back their country’s claim to the territory. Many have even taken to the streets to protest what they view as the continued colonial occupation of their territory.

Kirchner persisted, calling for the UK to relinquish the islands in a ceremony to mark the 30th anniversary of the war, and latter publishing an open letter in the UK’s Guardian and Independent newspapers to outline her claims. According to the letter, Argentina was forcibly stripped of the islands “in a blatant exercise of 19th-century colonialism” and its settlers were “expelled by the Royal Navy.” The UK’s Foreign Office rejected the claims, declaring that the Falklands had been uninhabited when it had taken control. Cameron further called on Argentina to respect the wishes of the current inhabitants, most of whom want to maintain the status quo. He also said the UK was willing to defend this by force if necessary.

The islanders themselves intend to stress this point by holding a referendum on the issue. Kirchner, however, has rejected the results of the planned referendum in advance, claiming that since the current inhabitants are colonists, they have no right to self-determination. “Why don’t they go and do a referendum in Afghanistan or Iraq, to see what is thought of what they are doing?” she quipped at the United Nations. Argentinian embassies around the world were also instructed to advise their hosts of the illegitimacy of the vote and try to dissuade potential observers from supervising the vote.

The circling vultures
Argentina’s biggest international problem lies not in the South Atlantic, however, but in the American courts, where recent rulings have put the country at risk of another default. It had restructured most of its debt in two renegotiations held in 2005 and 2010, with over 90 percent of creditors accepting haircuts. These are said to be between 70 and 75 percent of their original value. If there is one element of the Kirchners’ economic policy that deserves praise, then this is probably it.

But holdouts demanding full payment remain and they threaten to derail the whole restructuring process. Known as ‘vulture funds’ because they invest in debt from an entity on the verge of immanent default – like birds of prey circling a dying animal – they have sought to force the Argentinian government to pay up. Some of them have even come up with novel ways of going after payment, such as managing to get a court in Ghana to detain an Argentinian naval training vessel as collateral.

The ship was eventually released after the UN’s International Tribunal for the Law of the Sea ruled that military vessels were immune from civil claims. Nevertheless, the episode brought the Argentinian government much embarrassment in the process.

In November 2012, US District Court Judge Thomas Griesa ruled in favour of one of the vulture funds, NML Capital, lifting a stay on payment and ordering Argentina to pay $1.3bn to it and others that had refused the restructuring. The ruling included an “equal footing” clause, meaning that the country could not pay holders of the restructured debt without also paying the vultures at the same time. Kirchner reacted angrily, declaring that her government would not pay a dime to the holdouts and branding the judgment “a kind of legal colonialism.”

Argentina’s refusal to pay quickly sparked fears of a fresh default, with Fitch slashing the country’s sovereign credit rating three levels from B to CC. Thankfully for the country, however, a US court quickly froze the judgement upon separate appeals from Argentina and holders of the restructured bonds. While Argentina has offered to reopen restructuring negotiations, the holdouts are unlikely to accept, and this legal soap opera is due to continue. It brings with it the continued risk of default, heralding much unneeded uncertainty to an economy already on the brink.

Kirchner’s term ends in 2015 and the Argentinian constitution prohibits her from ruling for a third time in a row. But with no obvious successor, speculation is rife that she will attempt to pass an amendment allowing her to run for another term. Such a bill would require a two-thirds congressional majority, however; something Kirchner will be hoping to get following elections for the lower house in October.

With her popularity at less than 40 percent, though, and with most Argentinians opposed to a third term, this seems unlikely. Despite not having announced any official plans yet, protests have already been organised against her running again, not to mention continuing inflation, foreign currency exchange restrictions and economic decline.

Still, Kirchner has fought back in the past and the government has already passed laws thought to improve its elections prospects. One of these is the lowering of the voting age to 16 as she enjoys high levels of support from the youth. Throw in Argentina’s fractured opposition, and it would be unwise to count out the country’s embattled president just yet.