Don't Cry for Argentina

10/28/2010 3:02 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Néstor Kirchner, former Argentine president and a leading contender to reclaim the job from his wife in next year’s elections, died unexpectedly of a heart attack at age 60 Wednesday.

Investors poured champagne. While Buenos Aires’s exchange was closed for a scheduled holiday, the Bank of New York Argentina ADR Index rallied 8%. It had been up as much as 13% at its high point, on a day when most world markets succumbed to a dead-cat bounce by the dollar.

The buck got its reprieve thanks to a leak from on high lowering expectations for bond purchases by the Federal Reserve. In that sense, and only in that sense, Kirchner’s death proved timely. His controversial legacy is hugely relevant to the increasingly heated global debate about proper fiscal and monetary policies in the aftermath of a debt crisis.

From the markets’ reaction, you’d think Kirchner was leaving behind an economy in ruins. Instead, Argentina is giving China a run for its money as the world’s fastest growing country, if you believe official statistics. And even if—perfectly understandably you don’t, you must admit that the vibe in Buenos Aires has changed from the near-anarchy of the 2001 bank runs and riots to the sort of normalcy that permits occasional dancing in the streets.

Like Sinatra, Kirchner did it his way, which is to say not the way recommended by the International Monetary Fund. To cope with the hardships of depression and devaluation that followed the 2001 debt default, he pursued a highly interventionist economic policy, extending a social safety net to the millions of newly impoverished Argentines and subsidies to the businesses that would ultimately employ them to produce goods that country could no longer afford to import.

Kirchner campaigned against corruption, reined in provincial spending, and stared down the IMF when it insisted on greater austerity than he felt Argentina could afford, ultimately choosing to pay off the country’s debt to the fund for the privilege of dispensing with its advice.

He took an even harder and more profitable line against Argentina’s creditors, forcing most to accept a bond exchange at 35 cents (or less) on the dollar. (The vast majority of the holdouts finally capitulated on similar terms earlier this year.)

Most impressively, Kirchner kept inflation manageable in the aftermath of the devaluation, with a combination of spending restraint and informal price and wage controls.

He eventually handed off the presidency to wife Cristina Fernández de Kirchner but remained a power behind the throne. As such, he bears some responsibility for the grabs of private pension assets and central bank reserves in a never-ending quest for foreign exchange.

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In any case, people seem to have short memories about such antics, or else ten-year Argentine dollar bonds would not be yielding all of 8%. Nor would the Buenos Aires stock market be setting record after record. In an agricultural economy like Argentina’s, a soybean boom can go a long way.

The Kirchners have had the good fortune to rule in a period of generally strong grain prices. Their hyperactive style of economic management hardly seems efficient enough to weather a prolonged bust. And yet the internal logic of such undertakings, taken past a certain point, is that the meddling gets progressively more pervasive and corrupt until the meddlers lose power.

So, Néstor Kirchner got lucky with grain prices. Argentina got lucky because he proved so shrewd, and so stubborn. The hugely advantageous debt restructuring he rammed down creditors’ throats gave the country a shot at long-term solvency. If Argentina some day reaches this promised land, he will have been its Moses.

Of course, Argentina might have avoided a default in the first place had it not insisted (as fanatically as the Greeks do now) on an arbitrarily fixed and ultimately untenable exchange rate. Argentina did this to overcompensate for a traumatic episode of hyperinflation in its past. (Bundesbank hawks take note.) The government of the time may have compounded its errors by raising taxes in 2000-2001 just as the economy was showing signs of life.

(The one mistake Argentina never made was to adopt an overtly deflationary economic program at a time of great economic stress—it left that for its friends in Britain to try out. So far, that’s not going down so well. But then there’s a lot more at stake than short-term popularity.)

Investors in Argentina have every right to hope for a more trustworthy Buenos Aires government, and to pay up for the very possibility of one. But the man they might not miss did steer his country back from the brink of collapse, and he did it, in part, because he could distinguish between the nation’s interest and that of its creditors. Economies on the wrong side of a debt bubble can use some activism and head-knocking on their behalf. Kirchner did some good.

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