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Monday, September 16, 2013

The Current Economic Woes Of Argentina


September 16, 2013 1:11 pm

Risk of default adds to woes for Argentina’s Fernández

In the heart of downtown Buenos Aires, it is hard to walk more than 20 paces without being accosted by hawkers buying and selling dollars. Interested customers will be led into an inconspicuous office in a nearby building.
“They’re called ‘caves’, because they’re supposed to be secret. Of course everyone knows they’re there,” said a hawker who called himself Raúl. “Illegal? Of course they are! But don’t worry, the police are paid off, nothing will happen to you.”

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The thriving currency black market on postcard Florida Street in the commercial centre of Argentina’s capital is a result of strict foreign exchange controlsintroduced in 2011 to stem capital flight. In the “caves”, dollars can be sold for close to double the official rate of 5.7 pesos.
Argentina’s artificially overvalued currency is one of an array of economic problems facing Cristina Fernández de Kirchner, president. Others include stubbornly high inflation, state subsidies that are sapping resources, and an abysmal business climate that has seen investment all but dry up.
“We have an economy that has become dysfunctional,” said Miguel Kiguel, an economist and former government official, who identifies the overvalued currency as one of the roots of the problem, undermining the economy’s competitiveness.
During Ms Fernández’s second term as president, surpluses in the current and capital accounts have shrivelled into twin deficits. This is especially bad for a country that has outlaw status on the international capital markets and cannot seek financing abroad.
That problem will only deepen if Argentina slips into a technical default, which some observers believe is all but inevitable after a US appeals court last month ruled in favour of the holdouts demanding that Ms Fernández’s government pay the $1.3bn it owes them in full, in the latest chapter in a long-running saga that began when Argentina defaulted on almost $100bn in debt in 2001.
The likelihood that Argentina will default for a second time in little more than a decade only increased when Ms Fernández subsequently proposed a new debt exchange, which congress will approve this week, since if the plans are implemented in full observers say they would put Argentina in contempt of court.
The government is doing its utmost to stave off the moment of reckoning, when the US Supreme Court issues a definitive ruling on the case – something it may not do until next year – but some question how much another default will really change what is already a bad situation.
“It will just be one more stripe on the tiger,” added Mr Kiguel, who observes that Argentina is already paying default-level interest rates on its debt.
Serious economic problems are among the main reasons why the ruling Peronist movement fared so poorly in primary elections last month, making it almost impossible for the president to secure the two-thirds majority she would need in midterm legislative elections on October 27 to amend the constitution and enable her to run for a third consecutive term in office in 2015 presidential elections.
With less than two years of Ms Fernández’s presidency remaining, the battle for succession is well under way, sending local politics into flux.
Carlos Germano, a political analyst, said: “We are about to see a fierce dispute for the change of leadership of the Peronist party, as well as a realignment of forces in the opposition.
“The great unknown is how the president will react to all of this.”
Ms Fernández is losing the support of the trade unions and low-wage workers – bedrocks of the Peronist movement. Some fear that her waning power could have grave repercussions.
“Why has Argentina had these macroeconomic problems for such a long time without a crisis? Because we have had a strong government,” according to Luis Secco, an economist. “When political power weakens and there are macroeconomic problems, the possibility of a crisis increases greatly,” he said, pointing to the premature collapse of the Alfonsín and de la Rúa governments in 1989 and 2001 respectively.
Sergio Berensztein, a pollster, said: “The president’s power has weakened extraordinarily, thanks to a series of terrible decisions. She has done everything wrong.”
He added that Ms Fernández’s victory in 2011 presidential elections, with an unprecedented 54 per cent of the vote, led her to believe that she had carte blanche. “She went for everything, but she ended up with nothing.”
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