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Argentina: Exit Kirchners?

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It is no longer a question of "if," it is now a question of "when" the Kirchners will be ousted.

BY WALTER T. MOLANO

Argentine bond prices plunged more than 6 percent on Friday, as the market gave up hope that President Cristina Kirchner would amend her ways. Argentina suffered its worst week since the default of 2002. The Argentine EMBI+ jumped to 727, the widest spread in the region.

Although there were initial hopes that the president would strike a more conciliatory tune after she lost the conflict with the agro sector, her actions showed the contrary. Former President Nestor Kirchner’s henchmen, Planning Minister Julio de Vido and Interior Commerce Secretary Guillermo Moreno, were never replaced.

An attempt by the newly appointed Chief of Staff, Sergio Massa, to restore confidence in the INDEC and Administration were quickly sidelined. Given the intransigence of the Kirchners, it is only a matter of time until they are ousted. Unfortunately, abrupt changes of power in Argentina tend to be chaotic. This is the reason why the markets are bracing for a default, even though the country’s macroeconomic indicators are sound. 

ARGENTINE-VENEZUELA BONDS

In addition to the Kirchners’ recalcitrance, investors were buffeted by a slew of negative news. The first was the government’s desperate issuance of more than $1 billion to the Venezuelan government at the usurious rate of 15 percent. The Chavez Administration immediately resold the bonds to local Venezuelan banks and investors who dumped the paper on the international market as a way to circumvent the capital controls.

The deluge of Argentina bonds was one of the factors that triggered the selloff. Given the desperate act, it was not surprising that Moody’s immediately announced that it would soon cut Argentina’s outlook due to concerns about the government’s willingness to service its financial obligations.

At the same time, the meltdown in the commodity markets led many investors to turn their backs on commodity producers, such as Argentina. Soybean prices plunged more than 13 percent last week, erasing 5 percent on Friday—the day of the Argentine debacle. This left very few reasons for anyone to place a bid on Argentine paper, which explained why asset prices dropped so precipitously on Friday.

POLITICAL CLOUT

President Cristina Kirchner was on a well-received tour the day of meltdown in San Juan and Mendoza, two provinces which were not affected by the agro turmoil, but there was still a sense that the clock was running out.

It is no longer an issue of popularity. It is an issue of political and economic clout. The repeal of the tariff initiative was a powerful blow to the government’s purse. With soybean prices on the decline, the outlook is even worse. Although tax revenues soared 40.3 percent y/y in July, approximately 81 percent of the primary surplus was generated by soybean tariffs. Now the surplus is shrinking.

The Kirchners increased spending during the crisis in order to buy friends and influence, but a reduction in government revenues will soon leave them stranded. The government froze provincial transfers last week, as well as some public spending programs. It is only a matter of time until the labor unions turns their backs on the presidential duo. The loss of economic clout translates to less political power. The Peronists are split in two, with more than half of the party under the command of former President Duhalde. This is the reason why people are doubting that the Kirchners will make it to the end of the year.

WHEN, NOT IF

It is no longer a question of “if,” it is now a question of “when” the Kirchners will be ousted. They lost all sense of reality, inventing conspiracy theories instead of bridging their differences with the opposition.

The Kirchners’ dream of remaining in office for another 12 years is a distant memory. The main debate in Buenos Aires is whether they have three or four months left in office and how chaotic will be the transition of power. Argentina has a nasty history of political collapses. The untimely demise of the military junta and the ousting of Presidents Alfonsin and de la Rua were associated with sovereign defaults and/or hyperinflation.

Hopefully, this time the situation will be different. Argentina has fiscal and current account surpluses. The economy is growing and the government’s financing needs are relatively low. Argentina’s macro indicators are sound, for now. Unfortunately, the deterioration of the external environment and the rapid erosion of the domestic situation could put it in dire straits by the end of the year.

Walter Molano is head of research at BCP Securities.  

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