Argentine President Ends First 100 days In a Showdown with the IMF
At the end of August 2003, Argentine president Nestor Kirchner completed his first 100 days as head of the government. Although he was practically unknown in his country before the election, Kirchner has become extremely popular despite the fact that his government has offered no clear resolution for tackling key economic problems. These problems include adjustments in the price of public services, compensation to banks for the asymmetric “peso-fication,” and restructuring of the country’s debt. His lack of progress in these areas has made negotiations for the renewal of an accord with the International Monetary Fund very difficult.
When he was sworn in as president of Argentina on May 25, 2003, Kirchner became the first democratically elected president in the country since the political, economic and social crisis of December 2001, the worst crisis in the country’s history. Kirchner’s surprising election came despite the fact that he had the support of only 22% of the electorate due to suspension of the second round of elections. To analysts, it forebode a weak government precisely when Argentina needed to overcome instability caused by the 15-month provisional government of Eduardo Duhalde (from January 2002 to May 2003).
In order to compensate for his low level of legitimacy, the new president “carried out measures of great popular impact,” says Carlos Malamud, principal Latin American researcher at the Real Instituto Elcano de Madrid. The president’s most important measures were removing the military leadership; changing the leadership of the Federal Policy; investigating PAMI (the health insurance plan for Argentine retirees, which Malamud says was a den of corruption) and renewing two lawsuits against the Argentine military dictatorship of 1976-83 for violating human rights.
This approach has produced very good results and, in the course of the three months that he has been the head of the executive branch, it has made Kirchner into the most popular political leader in Argentine history. About 80% of the population now approves of his leadership. What is the key to his success? “Public opinion is very positive because Kirchner looks like a fighter; he is more aggressive than presidents Fernando de la Rua (1999-Dec. 2001) and Eduardo Duhalde,” says Juan Luis Bour, executive director and chief economist at the Foundation for Latin American Economic Research (FIEL) in Argentina.
Moreover, the President’s critical attitude toward the IMF and foreign multinationals – whom he blames in large measure for the economic crisis of recent years – has helped to feed his popularity in Argentina. Kirchner even said once that [these institutions] “should know that they don’t have a partner in the Casa Rosada, the Argentine presidential mansion,” notes Ramón Casilda Bejar, professor at the Universidad de Alcalá in Madrid and consultant to the Inter-American Development Bank. “This sort of nationalist feeling, this attitude of not being subjected, makes a very good impression on the electorate,” he adds.
In October and November, Argentina will hold provincial and congressional elections.
Despite this growth in his popularity, “advances in the economic, political and social realm have been very few for the president, who lacks clear direction in these areas,” says Malamud. Juan Luis Bour agrees. “Kirchner has accumulated a high level of public trust but there are no clear definitions about fundamental issues, so the economics ministry is giving small incentives, such as lowering interest rates and so forth, to try to sustain the level of [economic] activity. There is no clearly defined long-term direction.”
Nevertheless, the Argentine economy will grow this year by about five percent, according to the World Bank. And, according to the Dresdner Bank, it could even reach 6.5%, propelled by exports and growth in consumption. In Bour’s view, that growth rate is not enough. “The economy is coming out of the crisis very slowly. Next year, there will be growth of about 3.5%. Growing at that rate might sound very good, but you have to remember that Argentina’s economy had fallen by about 19%.”
Gerald McDermott, management professor at Wharton, provides this warning about the economic future. “Argentina is going to have problems with its commodity exports. The fundamental topic should be to know how things are really going when it comes to the development of sectors that provide added value.”
The President’s style of government, which has been labeled “Style K,” “is a bit authoritarian,” Malamud says. “The President likes to give orders. He manages things with a very small team that gets involved in every problem, and he doesn’t delegate too much.” So much so that economics minister Roberto Lavagna, who also held that post under Duhalde, could resign “because the autonomy of the ministry has declined [under Kirchner] and its role now faces interference from presidential initiatives.” Lavagna’s resignation could take place in September, according to Malamud, once the accord with the IMF is finalized, or at the end of this year – after the October elections.
Moreover, Kirchner has played the leading role in confrontations with defense minister José Pampurro who is on the verge of resigning because of budgetary concerns regarding this department, and with Vice-president Daniel Scioli, who has expressed his opposition to the policy concerning the [former] dictatorship’s repressive amnesty laws. However, according to Malamud, “It is not likely that these differences with degenerate into a political crisis.”
In the international arena, “the President is trying to apply a carrot and stick approach. In contrast to Lula (the president of Brazil), Kirchner’s messages are not very clear,” Malamud says. For example, “when he finished his first month in power, Kirchner engaged in a major publicity campaign in which he was seen with Hugo Chávez (president of Venezuela) and Fidel Castro (leader of Cuba). That was a clear sign that Kirchner was courting the left. And yet, Kirchner was also seen with Colin Powell, the American secretary of state,” in order, no doubt, to court the United States as well.
Kirchner’s major foreign trips have had mixed results. His meeting with George W. Bush in WashingtonD.C., designed to find support for IMF assistance to his Southern cone country, turned out to be very positive. In Europe, his visit to Spain and France wound up pouring cold water on business circles in both countries. In the meeting Kirchner held in Madrid with business leaders, he didn’t bring any solutions to the adjustments in prices for public services that have been frozen since December 2001. On the contrary, he managed to fray the nerves of business leaders. The meeting scheduled for Paris didn’t even take place.
After Kirchner’s visit to Spain, representatives of Spain’s major companies that have subsidiaries in Argentina met in a seminar hosted by the International University Menendez Pelayo (UIMP). They requested a regulatory framework for guaranteeing their investments in Argentina and a concrete solution to the freeze on prices. “If only they had a schedule and could give us a sign that we can see a way out of the tunnel,” comments Rafael Miranda of Endesa. Adds Ramón Blanco of Repsol YPF: “The problem is not with having a deadline. It’s that we have to know where we are going, and when we will know if they will impose a deadline. After 18 months, we still don’t know what the model is going to be.”
Pricing for Public Services
Until early 2002, the relationship between the Argentine government and public service companies that were privatized during the 1990s was functioning correctly. But in early 2002, as a result of the economic debacle of December 2001, “the Argentine government unilaterally violated these agreements and revoked its review of the prices of service companies. This had very unfavorable repercussions on the principal Spanish companies – Telefónica, Endesa, Canal de Isabel II, Gas Natural y Reposol,” says Ramón Casilda.
“The Duhalde government promulgated the Law of Economic Emergency, which froze prices for public services. Later, the president tried to move backward and raise prices through the Congress, but this was rejected. The Kirchner government, which has inherited this problem, has announced that it is going to take some time – until the end of 2004 – to renegotiate contracts,” says Bour.
Given this situation, and in order to defend their rights, 54 foreign companies have lodged a complaint at the international arbitrage court of the World Bank, holding the Argentine government responsible for their losses. One of the companies most affected is Telefónica Argentina, which suffered a negative impact on its earnings of $369 million in 2001, and $354 million in 2002. Meanwhile, the company’s balance sheet suffered damage amounting to $1.42 billion in 2001, and $1.14 billion in 2002,” states Ramón Casilda.
The Argentine government has announced that the review and renegotiation of new prices will not be uniform, but individualized. It will be done “in accordance with a range of economic factors such as: distribution of income, quality of service, access to loans, fulfillment of investment plans, security norms and the profitability of the companies,” adds Ramón Casilda.
At the same time, Argentina’s Congress approved a draft for a law that authorizes the executive branch to increase prices without being limited or conditioned by “current regulatory frameworks and concession contracts, or the licenses of the respective public services,” notes Ramón Casilda.
In Bour’s opinion, “the discussion about public-sector prices has focused too much on short-term problems. The discussion should be about much more – about what the rules will be over the next 15 or 20 years, in order to see how much is going to be invested in water, in electricity, and so forth. This area of discussion has already been postponed for 20 months.”
The IMF and the companies involved don’t want price adjustments to continue to be delayed. Consequently, this topic has been a major stumbling block between Argentina and the international community when it comes to closing a new treaty. “The key to the negotiations with the IMF is the increase in prices, since it determines if companies will continue to operate in Argentina, and if new foreign investment arrives. Moreover, the quality of services is going to drop substantially if companies are not going to be able to invest in technology,” comments Ramón Casilda.
“It is a pity that the negotiations with the IMF are taking place before the elections,” he adds. “If they took place afterwards, it would be possible to arrive at a consensus more quickly and with rational criteria. Now, electoral considerations weigh more heavily.”
A Dose of Oxygen
In January 2003, the Argentine government and the IMF signed a temporary agreement that postponed payments to multinational organizations until August 31, 2003. The goal of the treaty was to provide a dose of oxygen to the country so that it could hold the presidential elections of May with the greatest possible amount of normalcy. The elections have taken place, and the accord expired without Argentina complying with the main reforms required by the IMF.
Only a few days before the September 9 deadline, when $2.9 billion come due, the Argentine government and the IMF still maintained a showdown over the increase in prices for public services; over the target for a percent of the primary deficit for the next three years; and over compensation to banks for the asymmetric “peso-fication.”
Ultimately, the two sides are expected to forge a three-year draft agreement, in which they will specify goals for the next 12 months, but leave concrete details about the most controversial aspects to be decided after the following two years. “They should try to close a long-term agreement of a structural type that would permit them to extend payments over four or five years,” says Bour. “If they close a ‘stand-by’ agreement with goals that they can discuss again within a year, it is going to wind up being very difficult to close an agreement with creditors because they will need a long horizon in order to repay the debt.”
With respect to the unpopular measure of making a readjustment to price increases in public services such as gas, water, telephone and electricity, the Argentine government would commit itself to raising prices at the end of this year, once the election season is over. Nevertheless, in this regard the accord does not provide for an explicit commitment regarding how much and when the government is going to raise prices, which is something that the IMF and the G-7 countries would like to see. (The G-7 consists of the seven richest countries of the world, including the U.S., Canada, France, Italy, the U.K., Japan and Germany.)
One of the other controversial areas concerns compensation to banks – including Spain’s SCH (Santander Central Hispano) and BBVA (Banco Bilbao Vizcaya Argentina) for the “peso-fication” of their dollar credits. The banks “are demanding economic compensation from the Argentine state that is appropriate for the measures that they had to take in order to deal with the flight of capital; and to lift the Law of Convertibility which led to the so-called financial ‘corralito’ [or small corral], where banks were obligated to give back deposits at 1.4 pesos to the dollar in order to get paid in pesos,” says Ramón Casilda. For its part, the Argentine congress would announce compensation for the banks – a maximum of $2.8 billion in 10-year bonds. Regarding this topic, Kirchner recently assured the media that “compensation from the Congress is sufficient; we are not going to accept other forms of protection.”
In the end, Kirchner and Lavagna will have won the showdown with the IMF regarding the goal of a primary fiscal surplus – managing not to hand over more than 3% of Argentina’s GDP in 2004, in place of the commitment of 4% that the IMF was requiring, along the lines agreed upon with Brazil. The goals for 2005 and 2006 would be variable, as a function of the Argentine economy’s results [to be determined]. This means that the country will pay out some $4.25 billion for the payment of its debt.
Regarding the fulfillment of obligations, Kirchner will have agreed not to pay the capital debt but only the interest, which climbs to $2.3 billion. And we will pay it in three years at a rate of $700 million per year,” according a story in ABC, the Spanish daily newspaper.
The agreement was expected to be announced one day before September 9, but it didn’t happen. The Argentine government faced the alternative of paying the $2.9 billion with reserves from its Central Bank, or declaring itself in temporary default until it signs an agreement with the IMF. On numerous occasions, Kirchner has expressed his opposition to using reserves to pay the debt. As a result, Bour noted, “I don’t believe that he will pay on the ninth [September 9], but that he will continue negotiating, falling temporarily into default. Then he will pay when he has the security of an agreement, say at the end of September.” Around that time, the Argentine government will present a proposal to private creditors for the reconstruction of its debt (in default since December 2001) at the annual meeting of the IMF and the World Bank, which will be in Dubai.
The IMF and the Argentinean government still have 30 days to negotiate. If they don’t reach an agreement during this period of time, Argentina will technically be in default. The immediate question is, how will the market react?
In conclusion, during the first 100 days of his administration, Kirchner “has been accumulating power in order to win the elections in October, and take control of both legislative chambers,” notes McDermott. Once again, it is clear that “in Latin America, economic progress is determined by politics,” concludes Ramón Casilda.