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.


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]