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Less credibility, and more crisis
La Nacion
June 29, 2008

By Aldo Abram

In a paper recently presented by CIIMA-Eseade at the Fifth Finance Summit of LatinFinance, we put forth our concerns about the future of the country. It referred to an issue widely-discussed inflation and the other was the possibility of a future scenario with difficulties to gather the resources for paying public debt, which was something more novel and kicked up more dust.

Some believed to see the origin of our warning in the current levels of public debt that are higher than those in 2001, as much in terms of current dollars as with respect to the gross domestic product (GDP). However, the reality is that it doesn't imply a short term risk; while it's worrying that it is growing anew. In the debt swap for bonds in default and to those that accepted it, they delivered almost compulsively bonds with the lowest interest rates and huge write-offs in principals that, also, we left for our children to pay. As such, the future need to place debt on the voluntary markets doesn't seem exuberant. More than US$3 billion this year and between US$8 billion and US$10 billion in each of the following two years.

The first problem is that the Argentina state isn't counting on external financing, as it already is in cessation of payments and without any negotiation in place with the bondholders in default that didn't enter the swap, as well as the debt with the Paris Club. The government doesn't seem to be worried about this, as it knows it can ask for loans from Venezuelan President Hugo Chavez, and with the resources available on the local market. Nevertheless, it is a problem for the private sector, which is losing the chance for financing and investment, due to the fact that we are a country that doesn't show any intention of honoring our commitments.

Sadly, Argentines are living the fiction that this loss of credibility isn't important. This happened because the costs were hit by a "tsunami" of international liquidity, which incentivized speculators to put their money in risky countries to obtain higher yields. On the other hand, the true magnitude of this type of recent disaster could be evaluated once the waters recede and that is what began to happen last year, setting off the perception of riskiness in our country, which didn't make any effort to avoid being so. Meanwhile we can observe the inverse situation in the cases of Brazil, Uruguay and Peru.

Our concern went up when looking at the evolution of the people's confidence in the government in recent months. While we used the index by the University of Di Tella, other opinion polls on the presidential image show the same trend. The end of the term of Nestor Kirchner was marked by a moderate decrease since the electoral victory of Cristina Fernandez de Kirchner, when it began to recover.

This improvement lasted until January and soon after reversed, deepening into a drop beginning with the conflict with the farm sector.

Although partly at high levels, supposing that they continued to deteriorate at the average rate seen since February, general opinion about the official ability to govern would arrive, around the beginning of next year, to similar levels as seen at the end of 2001. In the final stage of the presidency of Fernando de la R a, Argentines learned that the word credit comes from 'credibility' and that, if the latter disappears, with it goes the financing available to the government and to the rest of the economy.

It's clear that, due to the amounts coming due, the government could use Central Bank reserves to cover its financial needs. However, wouldn't it be risky to shake the rope in the house of the hanged man? In these moments, the monetary authority is dealing with the fear of people that are taking their bank deposits out and changing pesos to dollars. If the loss of confidence in the government deepens it will also turn fear into a crisis. For that, to show that the assets of the Central Bank are being used to help the government and not to defend the currency will incentivize the financial and currency exchange flight in a sensitized country.

Also, with the perception of uncertainty and growing inflation rates, the people began to reduce their real demand of pesos. As such, the confrontation with the farm sector is one of the factors that is helping to push up inflation. This obliges the Central Bank to lower even further the level of printing pesos to pull the reins on the rise in prices, reducing the chances of sustaining the exchange rate.

It's worth clarifying that we believe that it was a good decision to prioritize the fight against the expectation of devaluation and going out to defend the value of the pesos by selling off reserves. Don't forget that Argentines "were burned with milk, so when they see a cow they cry"; what we say again is to recommend a quick resolution to the conflict with the farm sector.

Enormous risks

As we see it, there are enormous risks in sustaining the confrontation, both economic and political. For that, it's very good news that the President has decided to send the issue of sliding-scale export taxes to Congress, giving the problem an institutional solution. The President declared that this decision implies giving "more democracy" to the Argentine people, but in reality it means giving "more republic" to them.

This is what we really lack, since 1983, in Argentina democracy that has clearly consolidated. If from the start export taxes had been decided in the Congress, as the national constitution demands, it's hard to imagine we would have arrived at this conflict. In a democracy, always, the solution to problems is more republic and more institutional quality. We hope that the Argentine people learn to value them from this sad experience.

CIIMA-Eseade puts out an annual index which measures institutional quality for 192 countries and, in the 2008 edition, Argentina was at #103, losing six places on the same list of nations. And during the same period, among 20 Latin American countries, we fell from 9 to 11.

In this world there are ever more people that see that if they want to improve their rights and quality of life, they have to assume their civil responsibilities demanding that their politicians assume the role that they were voted into, respecting institutions and the limits that are fixes on them in the exercise of their duties. For that, while Argentines don't comprehend this, we continue losing positions and deepening our history of frustration.

The author is the director of the CIIMA-Eseade research center.