After the Argentina case study I
was very curious to know its situation in the last decade or so.
I went through various
interesting articles which could throw light on the current economical and
political situation within in the country. I am writing this blog compiling the
best possible information from all the sources I have gone through (Sources which
I have mentioned at the end) & my understanding from them.
Till 2008 Argentina was clinging
onto its emerging market status. MSCI Barra, (MSCI
Inc., trading as MSCI Barra, is a provider of investment decision support tools
to investment institutions) whose stock
indexes are tracked by investors with $3 trillion in funds, downgraded
Argentina to a “frontier” economy from an “emerging market” in
February 2009, citing its restrictions on foreign capital. (Frontier markets are countries with investable stock
markets that are less established than those in the emerging markets. They
are also known as "pre-emerging markets”). That put South America’s
second-biggest economy, after Brazil, in a category with Sri Lanka and
Kazakhstan.
On March 20, the Merval stood at 672.31, down
more than 50 percent from a year earlier. By comparison, Brazil’s Bovespa and
Mexico’s Bolsa declined about 40 percent during the same period. After more
than five years of annual economic growth faster than 8 percent under Kirchner,
it shrank to 1.1 percent this year, putting it on track for the first recession
since 2002.
Access to fresh international loans was
blocked by lawsuits from holders of $20 billion of bonds the country defaulted
on in late 2001; an additional $140 billion of outstanding debt trades at
default levels.
Some of the reasons can be attributed to the
following events of the past:-
Protest Against
Dictatorships
Protests against the government and banks left
more than two dozen people dead in December 2001. Within a few weeks, Argentina
had five different presidents, and the following year the poverty rate rose to
50 percent while the economy shrank 10.9 percent.
Kirchner won the presidency in May 2003 with
22 percent of the vote after his opponent, former President Carlos Menem,
declined to compete in a runoff.
Controversial
Policies
Kirchner’s policies were controversial.
Ignoring advice from independent economists and the International Monetary
Fund, he fought inflation by prodding supermarkets to cut prices. He told
domestic business leaders to “share” more of their wealth.
Underestimation
Kirchner’s former economy
minister, Roberto Lavagna, and research institutes including the Buenos
Aires-based Latin American Economic Investigations Foundation, or FIEL, said that
the government numbers underestimated inflation by at least half.
Snubbing Leaders
Kirchner was also famous for snubbing visiting
dignitaries including former Vietnamese President Tran Duc Luong and former
Hewlett-Packard Co. Chief Executive Officer Carly Fiorina when they visited
Argentina.
Souring Relations
with the U.S
Argentina’s relations with the U.S. soured
after prosecutors in Miami said they’d arrested four people for being illegal
agents of Venezuela’s Chavez. Their alleged mission was to cover up the
$800,000 donation to Fernandez’s presidential campaign.
30 Cents on the
Dollar
He offered foreign investors who held
Argentina’s defaulted bonds 30 cents on the dollar -- the worst terms since at
least World War II -- and refused to negotiate.
Fernandez, who became a senator from Buenos
Aires after the couple moved to the capital, shepherded his legislative efforts
through the Senate. She also backed laws overturning amnesty for military
officers accused of human rights abuses during Argentina’s 1976-1983 “Dirty
War” and helped extend emergency economic powers for the president that allowed
Kirchner to redirect government spending without consulting Congress.
One way in which Kirchner used his authority
was to designate his successor. On July 2, 2007, Kirchner announced that his
wife Fernandez would be the Peronist party’s candidate to succeed him in
October elections. The popularity of her husband’s policies carried the day,
and she won 45 percent of the vote -- double the amount received by her closest
rival, former lawmaker Elisa Carrio.
‘Prospects Weren’t Good’
President Fernandez repeatedly clashed with
the country’s powerful soybean farmers, whose crops are the country’s biggest
source of export revenue.
With inflation quickening and the government
still blocked from international credit markets, in March 2008 Fernandez turned
her eyes toward agriculture to raise funds. Argentina is the world’s
third-biggest soybean exporter and prices for the crop were booming. A bushel
of soy that cost $11.25 on the day Fernandez took office surpassed $15 per
bushel barely two months later -- a windfall for the government, given a tax
rate of 35 percent on exports.
Fernandez’s popularity plummeted to 20 percent
during a face- off with farmers in 2008. It stood at 29 percent in February,
according to Poliarquia Consultores, a polling organization in Buenos Aires.
Cash Beneath
Mattresses
The slump was the latest in a series of economic
crises Argentina had faced since the Great Depression. Today, middle-class and
wealthy families keep thousands of U.S. dollars in cash stuffed under
mattresses or in home safes for just such emergencies.
Fernandez, who gives hour-long speeches
without notes, relies in part on a shrinking list of defectors from opposition
parties to form a majority. Even her fellow Peronists had been deserting her,
leaving her with a slim one-vote margin in the upper house of Congress.
‘Oligarchs’
Fernandez attacked the farmers, calling them
“oligarchs” who drove expensive sport utility vehicles and supported the
country’s military dictatorships in the 1970s.
On the rural highways of Argentina, farmers
manned roadblocks, letting passenger cars go by while trucks were left idling.
They held roadside prayer services and cooked midnight barbecues to get through
the winter nights.
Shift in Momentum
Facing a stalemate, Fernandez sent her tax
proposal to Congress, counting on her ruling coalition’s support to step up
pressure on the farmers.
Senate debate began on July 16, 2008, and
continued past midnight. Vice President Cobos, a member of the Radical party
who served as a president of the Senate, oversaw the deliberations.
In the early morning hours, sensing that
momentum was shifting against the government, Cobos sat in his offices trying
to convince Fernandez’s cabinet chief that a final vote should be delayed, he
says. The idea was rejected.
Call for Voting
In the ornate Senate chamber, Fernandez’s
coalition was crumbling. Cobos rejoined the debate and, after all the senators
had spoken, called for the voting to begin.
Ten seconds later, an electronic scoreboard
read 36-36. Cobos called for a second vote.
Again, it was a tie.
“I don’t believe in backing a law that won’t
help resolve this situation,” Cobos told the hushed chamber. “I can’t go along
with this. ... My vote isn’t for, it’s against.”
At a public park in Buenos Aires, where they had
gathered to watch the proceedings on a giant outdoor screen, farm leaders and
their supporters burst into celebration, dancing and praising Cobos.
Two weeks after the vote, Fernandez told him
that their relationship would be purely “institutional.” It was the last time
they spoke.
‘Instability’
Amid the controversy, Fernandez had been
making herself scarce in the capital. Rather than coming to the presidential
palace, she prefered to do her day-to-day work at home with Kirchner, who
handpicked her to be his successor.
She also made frequent visits to a vacation
home in her husband’s native Patagonia. The newsweekly Noticias branded
Fernandez the “Part-Time President” for her travel and work schedule in a
February 2008 cover story.
Grab for Pensions
With the tax increase on soybeans scuttled,
Fernandez needed other sources of cash. The government’s borrowing needs totalled
about $20 billion in 2009, up from $7 billion in 2008.
So Fernandez turned to the country’s private
pension system, managed by companies such as Bilbao, Spain-based Banco Bilbao
Vizcaya Argentaria SA and London-based HSBC Holdings Plc. About 3.6 million
Argentines kept their retirement savings in the private system and 450,000
received monthly payments. In addition to $24 billion in assets, the pension
funds also took $4.5 billion in contributions that year.
Trumpets and
Drums
“While the world’s biggest economies are
undertaking policies to protect banks, we’re doing this for our retirees and
our workers!” Fernandez said. The crowd blew trumpets and banged on drums.
Citigroup Inc. strategist Geoffrey Dennis
called the decision the death knell for Argentina’s equity markets. That day,
Argentine bond yields soared above 24 percent from 8.3 percent on the day
Fernandez took office.
Pedrajo, the foreign investor, says. “This
isn’t a model for growth. It’s not a model for sustained health. And it’s a
very bad model for attracting new private capital.”
There again, Fernandez changed her tune. She
was now willing to consider a deal with holders of about $20 billion in
defaulted debt. Barclays Plc, Deutsche Bank AG and Citigroup submitted a plan
to Fernandez that aims to resolve the outstanding claims.
With Fernandez in charge, the only thing worth
betting on was that the outcome will not be what anyone expects.
Sources :-
Bloomberg & frontiermarkets.wordpress.com
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written by Tejas Nahar (tejas.pgdm14c@greatlakes.edu.in)
