Why Argentina is going down (again)

On Monday Argentina's government announced that they will seize control of YPF in a latest move of increased government intervention and state control. Over the weekend Cristina Kirchner furiously walked out of the Americas Summit in Cartagena after she was not granted uncompromised support against the UK over the persistent feud concerning the Falkland Islands.

These are only the most recent developments that leave statesmen and investors alike worried about the political and financial future of Argentina. It also sounds awfully similar to previous economic disasters that largely wiped out the country's middle class, which took years to recover after the most recent crisis of 2001.

Kirchner's conduct was not entirely unforeseeable. She nationalised private pensions during the financial crisis in 2008 and passed legislation that effectively allows her to use foreign currency reserves as her piggy bank. Yet, it seems like the aggregative effect as well as the increased lack of capital-friendly economic policy is what will ultimately bring the country over the cliff. The Economist has stopped using Argentina's official inflation figures and instead employs an alternative, private measure in its publications. It is widely known that inflation rages at around 20-30% with wages barely keeping up - in a country that was devastated by hyperinflation in the 1980s.

Growth driven by vast commodity resources and the agricultural sector has kept the population at ease. But Argentineans are increasingly aware of what is happening and have chosen to vote with their feet. Capital flights have been estimated at around US$ 10.2bn in 2011 alone. Further capital controls have made it increasingly difficult to shift money out but citizens are circumventing regulation, with money stored and transactions carried out abroad. There already exists an informal market for dollars with exchange rates at around 10% below the published rate.

Having said that, I am sitting in a parrilla, enjoying a bife de chorizo while writing this article. Argentine steak culture will survive once more as it has in previous crises. Unfortunately, this seems to be the attitude of the poorly organised political opposition as well, which is no match against Cristina Kirchner's surging popularity after her husband's death 18 months ago.

Economists claim the existence of two economic wonders: Japan's economic success given its lack of land, natural disasters and nonfavourable climatic conditions and Argentinas lack thereof given its fertile pampas and perfect temperatures. With Japan struggling and inflation, capital flights and a powerless opposition, it is only a matter of time until Argentina's economy is drenched in tears again.

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4 Responses to Why Argentina is going down (again)

  1. El Gringo says:

    Well said. It is truly amazing that this woman continues to dominate Argentina politics. The only issue I may take is the statement that the beef industry will continue to survive. You might be interested in this blog post... http://argentinagringos.blogspot.com.ar/2011/04/a...

  2. Ron Courtney says:

    "It is truly amazing that this woman continues to dominate Argentina politics."

    No, it's not, El Gringo. This is the country that voted Peron back in. They're the same people that strove against the military dictatorship in order to reassert democracy for themselves, yet now support Ms. Kirchner's desire to seize the Falklands against the wishes of its own citizens. Collectively, they're as malodorous as she is, and they deserve everything they're going to get under her misrule.

    • Roland says:

      Yes Argentinos are good people but incredibly clueless in so many aspects. I spoke to a colleague in Buenos Aires who works in finance and I asked him "Who should be the next president of Argentina?" He told me he did not know because every politico is pandoras box, you simply do not know what to expect from a newly elected Argentine leader. This is why for many they would prefer to re-elect the existing
      leadership because at least you can better speculate their attitudes, behaviors and decision / policy making then someone new.

      • El Gringo says:

        When I speak to Argentines they collectively agree that whoever governs their country is of little importance because it will be a "Mal Bicho" (a bad bug) regardless which party. They are keenly aware that nearly all politicians, if given enough time, will become corrupt. So, while it may seem like the Argentines don't care I believe they have realize that they will get screwed no matter who they vote for. Further, it's not like they really have any choices anyway. Political parties here argue about which of them is the MOST Peronist!

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