MichaelSchmichael

Argentina: Sinking

The analysis about this latest bout of Argentina/Kirchner wierdness is almost uniformly half-baked and the commentators seem pre-disposed to jump to the conclusion that the country will default. But this is not new -- every adverse event in Argentina since 2001 has been interpreted as a signal that it will default again. The differences between 2001 and now are stark: Argentina has a floating currency; the most recent expansion was fueled by exports, not debt; it has much less external, dollar-denominated debt; it had over USD $40B in reserves; and it had significant budget and current account surpluses. I do not buy the argument that the proposed privatization (it still needs to pass the legislature, which is not entirely friendly to Kirchner) was needed to fund next year's budget or as a way to extinguish a big chunk of sovereign debt (AFJP accounts reportedly hold USD $15B of it). It seems to be more reflective of nationalism, a distrust of international banks and finance and a desire to unwind the "neo-liberal" mechanisms put in place by Menem. But, whatever the reason, it shows the Kirchners' fundamental misunderstanding of or indifference to conventional economic and market wisdom. And, sadly, the erratic behavior of the government itself, even though I don't think it signaled a default, might actually cause a default: There is now a run on the Peso, in response to which the Central Bank appears likely to burn through its currency reserves, which will back it into a corner and leave it few alternatives but to default. But I don't think all is lost, at least not yet.