US crisis hits Argentina

As the world awaits news of whether the US government will step in to rescue the global financial system, South American nations – including Argentina – are already feeling the effects of the crisis.

President Cristina Kirchner initially ventured to assert that Argentina would remain largely untouched by the crisis. While claiming this economic sturdiness as some kind of achievement of hers, it’s really just due to the fact that credit plays such a small role in Argentina’s economy, where people buy houses in cash and relatively few have access to credit cards.

But the country is already learning that their president was quite mistaken. Soy – one of Argentina’s most important exports – has already fallen to US$384 per tonne, a drop of 35% over the last two months. Given the government’s high (and controversial) export duties on grains, including soy, which is taxed at 35% of export sales, this will have a serious impact on revenues next year – some say the government will gather up to 10 billion pesos less in 2009.

Meanwhile, inflation is still putting pressure on consumers – and despite the fact that official statistics downplay the inflation rate, it’s also making it hard for the government to rein in public spending. Already the government has had to cut energy subsidies and raise tariffs on services, but some say in the new year public infrastructure projects will also be affected.

Neighbouring economies will also affect Argentina’s economic health. There are fears that if Brazil’s growth slows, Argentina’s exports to its major trading partner will drop, while Argentine business is nervous about Brazilian imports flooding the local market.

And of course credit – hard enough to get in Argentina – will become even tighter, with mortgages only offering variable rates. Argentine consumers will, like others elsewhere, put major purchases on hold and cut overall spending while they wait and see what happens.

All of this throws in doubt the capacity of Argentina to make good on bold plans to pay its debt to the Paris Club and to strike a deal with those still holding Argentine bonds that were subject to the country’s 2002 default.

The Kirchners have benefited extraordinarily well from a rapidly growing Argentine economy, overhwlemingly driven by high commodity prices. With the US economy going into recession, the US will buy fewer products from China, slowing that country’s growth and causing a drop in demand for Argentina’s soy and other food products. The Kirchners have every reason to be nervous.

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Cristina K gloats at US financial woes, sticks the boot in at UN

“They told us South Americans that the market would solve everything, that the State wasn’t necessary, that interventionism was mere nostalgia. Nonetheless, we’re now seeing the most formidable act of state intervention in living memory, in precisely the place where they’d been telling us that the State was unnecessary.”

CFK addressing the UN General Assembly today. Photo by AP

CFK addressing the UN General Assembly today. Photo by AP

Thus spoke Argentina’s president, Cristina Fernandez de Kirchner, in her address to the UN General Assembly today in New York. The remarks follow some serious crowing on her part last week.

“We are witnessing as the First World, which had been painted to us at some point as a Mecca we should strive to reach, is crumbling like a bubble,” Fernández de Kirchner told her fellow Argentines, mixing her metaphors something shocking. “We with our own model, based on building with our own means, are here weathering the storm, firmly, recovered, and ready to face the present and the future.” She neglected to mention that the near impossibility of getting credit in Argentina would tend to insulate it from a major credit crunch.

In an apparent effort to avoid misunderstanding, she told the UN today that the US’s woes “don’t make us happy or at all content.”

But she couldn’t resist further sarcasm. In what appeared an attempt at some sort of wit, she said that just as previous crises that rippled out from the emerging economies have been nick-named with labels like the “tequila effect” (referring to the 1994 Mexican peso crisis) , or the “caipirinha effect” (referring to Brazil’s 1999 financial woes), nor the “rice effect” (presumably a reference to the Asian financial crisis of 1997), this time we’ve got what might be called the “jazz effect,” produced at the centre of the world’s largest economy, and expanding throughout the world.

The US wasn’t the only country to receive a rhetorical boxing around the ears from Cristina K. Earlier in her address, she called on Iran to cooperate with Interpol in apprehending the suspects (of Iranian nationality) in the the terrorist attacks on the Israeli Embassy in Buenos Aires (bombed in 1992, 29 dead and over 200 injured) and the city’s Jewish community centre (attacked in 1994, 85 dead and hundreds injured). Argentina is home to Latin America’s largest Jewish population, with most of its 200,000 Jews living in the capital.

Fernandez de Kirchner finished her discourse by sticking the boot into the Brits, who still have control of the Falkland Islands (known in Argentina as the Malvinas). She said it was an embarrassment that colonial outposts like this still exist. Argentina’s claim over the Malvinas (which it invaded in 1982 in a failed effort to wrest control from the British) is not merely a question of national pride. The UK is seeking to expand its sovreignty over large areas of sea bed surrounding the Malvinas and other South Atlantic islands. With Brazil discovering major oil deposits off its Atlantic coast, it’s hoped there’s more to be had in the region.

Before the general assembly, Kirchner held up her own government as a model of economic wisdom, with the state playing a highly interventionist role that, in her view, has helped produce Argentina’s strong growth following its 2001 financial crisis, placing the country in a position to pay back its debts – perhaps in full.

Yesterday, Fernandez de Kirchner announced that thanks to an appealing offer from major banks, Argentina would pay back the debt on defaulted government bonds, a move she hopes will encourage foreign investment. The Buenos Aires stock exchange responded well to the announcement, gaining 1.67% for the day. With the announcement on September 2 that Argentina would pay off its 6.7-billion-dollar debt to the Paris Club of international creditors, the government hopes to open Argentina up to foreign credit. But many critics say it’s not enough, and that the government will have to stop fiddling with its inflation figures (which it places at around 9% for the year, with independent assessments saying it’s more like 25%) and put the brakes on public spending if they truly want to stabilise the economy.

Click here for the Economist’s assessment of the situation.

Argentina cancels its debt with Paris Club

This week’s big news in Argentina was the government’s decision to pay back its debt to the Paris Club, whose 19 members include Japan, Germany, the Netherlands, Italy, Spain and the United States.

President Cristina Kirchner made the announcement on Tuesday, September 2, to much applause from loyal party members and Argentine empresarios. The debt amounts to $6,706 billion US dollars and will be paid ahead of deadlines in an effort to boost the country’s weakening credit rating and encourage much-needed foreign investment. Many rating agencies have lately sounded worried about Argentina’s ability to make its debt repayments next year, with government spending high.

The debt will be repaid out of central bank reserves, which drew criticism from some government opponents who say the reserves shouldn’t be touched. Others say the real reason the payment is being made is to avoid an IMF visit to Buenos Aires to evaluate the country’s finances – a precondition of any renegotiation of the Paris Club debt. There’s very little affection for the IMF in Argentina, with many people blaming it at least in part for Argentina’s 2001 economic crisis, so paying back this debt and denying the IMF its fact-finding mission plays well with Argentines whose pride is still wounded by the country’s dismal fall.

The unexpected move was largely welcomed as a positive first step towards normalising relations between Argentina and its lenders. But until Argentina pays back all those bold holders who lost out in the 2001 default, its access to international capital markets remains blocked, forcing it to rely on friends like Hugo Chavez, who recently bought expensive Argentine bonds at 15%.

Click here for the Wall St Journal’s story, along with one of those weird WSJ sketched portraits that look nothing like the actual person.

[Cristina Kirchner]