Salvador Alberto Fernández traveled to the Environment Summit in Glasgow with a delegation of 100 people. But instead of making a name for himself in environmental issues, the Argentine head of government acted like a petitioner on his own behalf.
He tried to persuade the heads of state that his country had got into the debt crisis through no fault of its own and that it deserved special treatment from the International Monetary Fund (IMF). Environment and climate change – Fernández was only interested in that if it could reduce debts.
“Argentina wanders the world, begging for exceptions and demanding the impossible,” scoffs the political scientist Sergio Berensztein in Buenos Aires. But the bizarre appearance of the Argentine President in Europe shows one thing above all: Once again Argentina is on the brink of the abyss, once again the government is lacking ideas on how Argentina can get out of the permanent crisis.
Now Fernández, who has been in office for two years, is also weakened politically: his Peronist government lost its majority in the Senate in the midterm elections and only a narrow majority in the House of Representatives. The government has failed with its strategy of “still being able to turn things around through populist measures,” says Alberto Ramos of Goldman Sachs.
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It is now completely open how the president will proceed after this setback: In a speech after the polls had closed, he urged the Argentines somewhat helplessly to unite and declared that he now wanted to present an economic plan and soon to reach an agreement with the International Monetary Fund .
No solution in sight to the miserable economic situation
It remains a mystery what such a plan might look like and what strategy Fernández is adopting to solve the economic crisis. “The government never had an economic plan,” says Eduardo Levy Yeyati, an economist at Torcuato de Tella University. So far, Fernández has always pretended that the pandemic prevented him from governing as planned. But nobody takes that from him anymore.
Fernández justified last year’s hard lockdown that lasted for months by stating that he would “rather have ten percent more poor than 100,000 dead”. But now Argentina has both: 116,000 deaths from Corona and a poverty rate that has increased from 35 to over 42 percent of the population since the beginning of the pandemic.
And the prospects are bleak. The economy is growing by 5.8 percent this year. But that is a short-term recovery effect after the drop of almost ten percent in 2020. The IMF expects growth of only 2.5 percent for next year – that is a bad figure for an emerging market.
The biggest problem, however: At 47.5 percent, inflation is almost at a worldwide record level. The government is running the money press to finance the budget deficit of four percent of gross domestic product.
Confidence in the local currency is waning. The dollar is worth more than twice the official exchange rate of the peso on the black market. Despite the high prices for agricultural products such as soy, beef and wheat, which Argentina exports, the foreign exchange coffers are empty: the country currently has less than five billion dollars available to pay for vital imports. But by March alone Argentina has to transfer almost six billion to foreign creditors.
The Argentine President is leading the country into an economic crisis.
(Photo: imago images / Agencia EFE)
A state delusional in control
The 62-year-old president is reacting to this, as is the tradition among the Peronists who have ruled Argentina intermittently for more than half a century: more state, more control, more protectionism.
For 1,432 products, prices are frozen until January – from toothpaste to wheat flour, the government decreed. The appendix to the decree is 881 pages long. The minister responsible negotiates the details with companies and lobbies on a daily basis. The prices for public goods such as water or electricity have not been increased since the end of 2019.
The government is also intervening in the labor market under pressure from the unions – and forbidding layoffs. That was of little use: The economic institute Ecolatina estimates that in the last year alone around 20,000 companies closed and 100,000 people lost their permanent jobs. 100 citizens emigrate every day. The exile community in Spain is said to have grown by 20,000 Argentines since the beginning of Fernández’s government.
A country impoverished. The 46 million Argentines have been experiencing this process for decades. Just under a hundred years ago, the country was one of the richest in the world. Now it threatens to become a developing country. Because the decline has accelerated in recent years.
The Pampaland has practically not grown since 2008: GDP has only increased by an average of 0.2 percent per year since then. 80 percent of Argentines suffered a loss of purchasing power due to inflation. Currently, wages – converted to dollars – are at their lowest level in 15 years.
At the same time, the rich are trying to save their money abroad: In the Pandora Papers, which showed 30,000 accounts in tax havens, Argentinians were numerically most frequently represented as account holders after the Russians and the British. After years of isolation from the international financial markets due to insolvency, Argentina had become creditworthy again between 2015 and 2019 under President Macri, the liberal predecessor of Fernández in the presidency.
The state and private companies raised $ 100 billion in loans during his tenure. Much of it doesn’t seem to have stayed in the country. Macri himself says today that the IMF funds – after all 44 billion dollars – left the country mainly for fear of a return of the Peronists.
Debt negotiations with the IMF
The government is divided over whether it should seriously negotiate with the IMF over the debt – or not. The negotiations have been bobbing for over a year. Before the mid-term elections, the mood in the government turned – against the IMF. The Minister of Economic Affairs, Martin Guzman, who was conciliatory with Washington, repeated like a mantra that Argentina had to grow before it could pay. “We’re not going to kneel down in Washington,” he said, so as not to spoil the left wing with the Peronists.
Vice-President Cristina Kirchner is in charge there. She is the most powerful politician in Argentina – and is demanding debt relief from the IMF. In any case, she doesn’t feel responsible for the debts Macri took on. “First the Argentines, out with the IMF!” Demands her son Máximo Kirchner, MP and one of the possible successors in Fernández’s office.
Together with Cristina Kirchner, he sets the tone in the left “Kichnerista wing” of the Peronists. But Kirchner is now weakened because she has lost the presidency in the Senate. It is quite possible that she is now calling her radical supporters onto the streets. The two-time president had presented her former head of cabinet Alberto Fernández as a candidate for the 2019 elections because her own rejection rate among the population was too high.
But she still holds the reins in her hand. However, she seems just as perplexed as Fernández himself. In her governments from 2007 to 2015 she pre-empted how she would react to empty coffers, a shrinking economy and high inflation. With even more control, expropriations, political pressure on the economy and state support for the poor in return for their votes.
It is to be feared that the government could rely on this concept again even after the defeat in the mid-term elections. The consequence would then be to break off negotiations with the IMF. Hardly any expert in Argentina is currently ruling out such a scenario. The economist Arturo Porzecanski says clearly: “More populism would lead to a complete isolation of Argentina.”
Such a scenario may not be in the government’s interest. Fernando Sedano of the US bank Morgan Stanley thinks it likely that the government will try to negotiate with the IMF after the elections. “The government knows that the sooner it begins negotiations, the lower the cost of an adjustment.” The 2023 presidential election date is approaching.
The most likely scenario, according to economist Eduardo Levy Yeyati, is that the weakened government will try to “trick its way through”: with a little goodwill towards the IMF. With constantly new controls, ad hoc taxes and transfers. But then there is a risk that inflation will approach the 100 percent mark.
This is why Diego Pereira from JP Morgan also considers this strategy to be highly risky – because then the likelihood increases that Argentina will lose control of its monetary system, as it did in the mid-1970s, early 1980s and 1990s. The risk of hyperinflation is very high when a country experiences an annual inflation rate of over 40 percent for two years in a row, says Pereira. That is exactly what has just happened in Argentina.
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