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Argentina’s economic troubles and the US factor

November 18, 2014

Originally published in Aspenia Online of the Aspen Institute Italia

On October 23rd, Argentina issued $1 billion worth of a new two-year government bond, denominated in US dollars but paid in pesos. It is the third time this year that Buenos Aires has tried to raise cash on the domestic market, in order to finance deficit spending without resorting to printing more money outright. This comes at a time when the national economy is in recession, inflation is ballooning and the country’s foreign-currency reserves are being rapidly eroded. And it wasn’t much of a choice for the government of President Cristina Kirchner, as Argentina has been barred from international credit markets since it defaulted on its $100 billion debt in 2001. That rather cataclysmic financial event has been in the news again this year, and, since much of the story has unfolded in the US, the resulting standoff has plunged the relationship between the two countries to an all-time low. In reality, tensions between Buenos Aires and Washington have been building for at least a decade and have been driven by politics as much as anything else. So much so that, as winds of political change sweep across Argentina, it is possible that the pendulum might swing again in the other direction soon.

“The basic US attitude toward all of the populist, leftist experiments not only in Argentina, but also in Venezuela, Ecuador, Bolivia and Nicaragua, has been to wait and see, so long as they don’t threaten US national security interests,” says Professor Arturo Porzecanski, Director of the International Economic Relations Program at the School of International Service of American University in Washington, D.C. “Wait for the Argentines to kick out the Kirchners, wait for the Venezuelans to kick out President Nicolás Maduro, that’s what everybody is doing, counting the days until they are gone”.

According to this view, the ups and downs that have marked American-Argentine relations in the last 20 or so years have largely been fueled by the mood in Argentina, with Washington happy to engage when it found itself on the same wavelength as governments in Buenos Aires, and just as happy to disengage when the opposite became true. “Argentina and the US were the closest ever during the 1990s, under President Carlos Menem,” says Porzecanski. At the time, Menem embraced the so-called “Washington Consensus” and made a strong push to deregulate, liberalize and privatize the national economy. According to Porzecanski, Argentina quickly became the poster child for this type of en vogue macroeconomic policies, which solidified its friendship with the US. In 1990, Argentina’s Foreign Minister Guido di Tella described the bilateral relationship as a “carnal relationship”.

However, things began to sour at the turn of the new millennium, when Argentina’s economy entered into a deep economic and political crisis and ended up defaulting on its debt, exiting the peg with the dollar by devaluating the pesos and churning through several short-term governments in the space of only a few months between 2001 and 2002. As the Argentines’ enthusiasm for the “Washington Consensus” vanished and people, stricken with economic anxiety, looked elsewhere for answers – to the Peronist, populist governments first of President Eduardo Duhalde and then of the duo Néstor and Cristina Kirchner – neglect on the part of the US only increased. In fact, Washington became even more hands-off, not only toward Argentina but toward the whole of South America, with the terrorist attacks of September 11, 2001, when its foreign policy priorities suddenly shifted toward Afghanistan and the Middle East. “Essentially, over the past decade, the government of Argentina has rendered itself of very little relevance in the world geopolitical arena,” says Joseph Tulchin, a known Latin Americanist and Senior Scholar at the Wilson Center in Washington, D.C. “Given the geopolitical concerns of the US, Argentina does not weigh much in the balance.”

Enter the debt litigation issue, which, though not a primary cause of today’s glacial relationship between Buenos Aires and Washington, has certainly reignited tensions between them. In June, the US Supreme Court let a 2012 decision by a lower court stand that required that Argentina pay in full those bondholders, so-called “holdouts”, who, over the past several years, had rejected different offers to be only partially compensated for what they were owed (about 93% of bondholders had accepted haircuts between 2005 and 2010). For technical reasons, Buenos Aires’ refusal so far to comply with the decision has triggered another sovereign debt default on its part (by law, Argentina cannot pay the bondholders who have taken the deal until it pays the holdouts first) and, most importantly, continues to prevent the country from raising funds on international credit markets. “The consequence of the dispute with the holdouts is that the government of Argentina, including the cities, the provinces, and the state-owned enterprises, have been forced to borrow money at more or less twice the normal rate,” says Tulchin. “The cost to Argentina for its posture with regard to the holdouts has been approximately $20billion per year since 2012.”

Obviously, the fact that the legal decision was handed down by a US court and that the group of investors demanding to be repaid in full is led by prominent US hedge fund Elliott Management’s NML Capital, of billionaire Paul Singer, provoked a harsh populist response in Argentina, which sees this as yet again another instance of American imperialism and undue interference in its domestic affairs and has come to call the holdouts “vulture funds”. In this respect, however, two caveats are in order. “The US government has been supportive of Argentina in its effort to solve the debt/holdout problem and joined the government of Argentina in asking the US Supreme Court to find for the Argentines, though that did not happen,” says Tulchin. “Additionally, the Argentine debt issue is being adjudicated in the US courts because the Argentine government selected that venue when it signed the debt agreements in 2001, 2005 and 2010.”

Meanwhile, in the US and across much of the international financial community, this latest episode is seen as the tipping point of Argentina’s long-running tendency not to hold up its side of bilateral and multilateral agreements. “What we are seeing in the courts today is the legacy of wounds inflicted starting in 2002,” says Porzecanski. “Many multinational companies have gone through lengthy judicial and arbitration processes against Argentina and won but Buenos Aires does not pay, saying judges are not qualified or competent, that they don’t have jurisdiction, that witnesses are not good, and that’s unheard of.”

In fact Porzecanski is surprised not so much that US-Argentina relations are tense today, but that they aren’t tenser. He says that only in the last few years, under increased pressure by corporate and financial lobbyists in Washington and in the face of a worsening economic situation in Argentina, has the US begun to push back against the government in Buenos Aires. In September 2011, for example, the US voted against loans to Argentina at the World Bank and the Inter-American Development Bank saying Argentina first needed to normalize its relationship with creditors. In 2012, the US along with the European Union and Japan took Argentina to a dispute panel at the World Trade Organization over what they deemed to be unfair import restrictions by Argentina. In August of this year, the panel found in favor of the US, the EU and Japan.

Considering the growing number of spats between Washington and Buenos Aires it is unlikely that the bilateral relationship will improve under the current political make-up. But the truth is that this is bound to change soon, as Kirchner’s government has only about twelve months left until next year’s general elections, in which she is constitutionally prohibited from running after completing two full terms in office. “Given Mrs. Kirchner’s harsh anti-US rhetoric over the past few years, it is logical to expect relations to improve under the next government, no matter who the next president will be,” says Tulchin.

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