Download 129464_ARGENTINA Jan

Title
Argentina: Debt, Politics and Credibility
Summary
Argentine President Cristina Fernandez de Kirchner is determined to fire Argentine
Central Bank Chief Martin Redrado in order to use Argentina’s foreign reserves to ensure
debt payments through 2010. The political fight that has ensued will bring to the fore in
Argentina a national debate about the feasibility of financing populist policies through debt
accumulation.
Teaser
A series of dramatic twists signals a fight over Argentina's use of debt to finance the
government's populist spending policies.
An Argentine federal judge issued an edict on Jan. 8 temporarily blocking the use of the
Argentine central bank's federal reserves to create a fund to guarantee national debt payments
during 2010, according to a report by Argentine newspaper La Nacion. This ruling comes in the
wake of a series of rather dramatic twists in the tumultuous world of Argentine domestic politics,
and signals a fight over Argentina’s most pressing economic concern: the use of debt to finance
the country’s cherished standard of living.
The judge's ruling calls into question the legality of Argentine President Cristina Fernandez de
Kirchner's use of the "Decree of Necessity and Urgency" to dismiss Martin Redrado, the head of
Argentine's central bank, and the intended use of central bank funds to make debt payments.
Fernandez initially fired Redrado on Jan. 6 after a disagreement over a plan to use central bank
reserves to create a fund to finance debt payments in 2010. Redrado rejected the pink slip,
however, claiming that the president didn't have the power to fire the head of the central bank.
The move forced Fernandez to turn to the presidential decree to achieve her goals -- prompting
howls of protest from opposition legislators. The Fernandez administration has filed an appeal to
the court’s ruling and the situation will continue to develop over the coming weeks.
Fernandez’s effort to ensure that 2010 debt payments are met is a part of a larger push to repay
old debts and improve Argentina’s international credibility, with the ultimate goal gaining
greater access to international debt markets. If Argentina increase its access to debt, there is an
acute danger that Argentina will simply dive deeper and deeper into hock to support politically
popular spending. Although the issue is becoming more of a common concern throughout
Argentina as politicians and commentators recognize the challenges ahead, the country faces a
strong political mandate to maintain spending levels
[http://www.stratfor.com/analysis/argentina_economy_minister_resigns_0].
Argentina’s current troubles link back to the country’s default in 2001-2002. A host of angry
international bondholders refused to accept the settlement offered by Argentina in the wake of
the default, and have sued the country in foreign courts for the repayment of some $30 billion.
Argentina also owes between $6 and $7 billion to international institutions -- one of which is the
Paris Club. In an effort to reconcile the country with all of these claimants, Fernandez has
attempted to start with the latter, with hopes to pay off the debt using central bank reserves,
which themselves total about $48 billion. Failing at that task in the wake of the financial crisis,
Fernandez is now seeking to use central bank reserves to handle routine debt payments while at
the same time seeking alternative methods for settling outstanding debts -- including a potential
new offer to settle debt with outstanding bondholders.
The stakes are high for Fernandez. Argentina's access to external financing depends on the
cordial settlement of all of these debts, and Fernandez’s political future relies on maintaining
high levels of spending to keep her populist promises.
But times are tough. As a result of the financial crisis, Argentina has been effectively sealed off
from international capital markets, making it difficult for the government to secure needed cash.
The government has tried a number of options to raise funds, including shuffling cash between
federal and state levels of government, and the outright nationalization of the country's private
pension system
[http://www.stratfor.com/analysis/20081031_argentina_trouble_nationalizing_pension_funds].
However, these measures can only last so long, and the government will need to gain access to
international debt markets once more. This need explains a number of recent policy measures -including a potential new offer to outstanding bondholders, the decision to pay off international
institutional lenders, and a promise to reform Argentina's National Statistics and Censuses
Institute (INDEC).
These measures are designed to lower the country's riskiness in the eyes of skittish international
investors, but in the end, the goal will simply result in the country getting more deeply into debt.
According to official statistics compiled for the third quarter of 2009, Argentina owes a total of
$141 billion worth of debt in good standing (i.e. excluding the $30 billion outstanding debt owed
to bondholders) -- or 49.1 percent of GDP -- to national and international lenders. Though this
level is not unsustainable in the short term, it is worth noting that debt as a percentage of GDP
was only 45.7 percent in 2000, one year prior to the country's debt crisis. There are reassuring
differences in the debt portfolios -- including a lower percentage of foreign currency
denominated debt (54.4 percent of total debt in 2009 as compared to 94.3 percent in 2000),
which is more vulnerable to currency fluctuations. However, this is still a level of debt
accumulation that could cause troubles for Argentina if it continues to grow while the economy
suffers the results of the government's populist spending policies
[http://www.stratfor.com/analysis/20081017_argentina_brazil_threat_bad_luck_spreading].
Fernandez’s continued reign will be increasingly difficult as she struggles to impose her writ on
an incoming congress dominated by opposition politicians
[http://www.stratfor.com/analysis/20090629_argentina_electoral_loss_economic_impasse].
Nevertheless, the popularity of every Argentine politician depends on maintaining the economic
policies that drive political support
[http://www.stratfor.com/analysis/20090708_argentina_two_more_resignations], meaning that
no matter how dirty the political fight gets, in the end, Argentina is likely to do whatever it can to
regain access to international capital markets. But as the government strips Argentina of every
asset of value to maintain these policies, it will find itself closer and closer to the next economic
crisis.