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Argentina: there is no hand of God

Things in Argentina aren’t as bad as they were in 2001. But they’re not far off.

Elections on 25 October are the first stage in replacing President Cristina Fernández de Kirchner. Either Mauricio Macri, the mayor of Buenos Aires; Daniel Scioli, the governor of Buenos Aires and Kirchner’s preferred candidate; or Sergio Massa, a congressman from the Justicialist Party will do so. Each understands the issues which the country faces but it’s far from clear whether all have the stomach to do what’s necessary about them.

Argentina has consistently run into, or been tripped up by, crises for a long time. Ms Kirchner has done her best to keep up the tradition. She leaves the country in default (technically), as her late husband found it. Between her and him, they took a 2% fiscal surplus and turned it into a 7% deficit.

Ms Kirchner nationalised the Spanish company Repsol’s stake in the oil company all by herself. She has undermined already weak state institutions. No one trusts Argentina's economic statistics and the central bank is at her beck and call. Inflation has reached as high as 40% on her watch and interest rates are currently 25%, the highest they’ve been for over ten years. The country is embroiled in protracted litigation with US bondholders. Foreign exchange (FX) reserves stand at about $30bn dollars but liquid reserves are about $5bn. They are currently spending $1.5bn of them a month propping up the currency. Capital controls are already in place. It’s not hard to work out that they’ll burn through those reserves by Christmas and be in pretty serious trouble unless Ms Kirchner’s successor does something.

All of the candidates understand that something must be done. Any one of them would probably do a deal with the US bondholders because they know foreign exchange reserves are about to run out. That understanding is very positive. Resolving the dispute will give the country access to international markets once more, allowing dollars to flood in and start to build FX reserves back up. Bond investors would be assured that the state will pay them once again and put money to work. Foreign direct investment would follow.

It is a fixable situation

Macri is the most eager for quick change and the preferred candidate of international investors. He wants to cut the fiscal deficit from 7% to 3% of gross domestic product next year alone. He wants to devalue the currency quickly and rein in government spending. But he probably won’t win. Scioli (most likely to win) and Massa appreciate the need for reform but they want it to happen more gradually.

It is a fixable situation. Any of the candidates can change the country’s direction by improving the fiscal position, making the economy more competitive, devaluing the currency, leaving companies alone, and re-establishing the independence of the judiciary and central bank. Frankly, the country’s malaise is so severe that any remotely market friendly policies will help.There’s quite a lot they could do which is not wildly complicated.

The problem is that Argentine leaders have a long history of not making difficult decisions. Scioli and Massa leave enough ambiguity in what they propose that they can always avoid hard decisions later down the line. They know they need to adjust the foreign exchange and their party has already put in place swap lines with the Chinese to bolster reserves. They claim this buys them time and strengthens their hand in negotiations with US bondholders. But this is not a long term solution. The concern is that either Scioli and Massa will use such tactics to kick the can along the road rather than resolve the country’s problems once and for all.

All candidates are more than aware that there are mid-term parliamentary elections in 2017. Whoever wins will probably do so with a reasonably slim majority so will want to consolidate power in those midterms. Many a politician has deferred difficult decisions which will upset voters in favour of more voter-friendly populism. Choosing this route, as Argentina has in the past, would be a massive mistake. There has always been a tendency for Argentine leaders to want to employ unorthodox political and fiscal policies against the advice of received wisdom. It is almost as though they think some God-like hand will steer fate their way and prove the doubters wrong. Argentina doesn’t need a hand of God. It just needs sensible policies from a grounded leader.

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