Argentina is usually singled out in textbooks as an example of what not to do with a country. Coup d’états and contradictory economic models have turned the fifth richest economy a century ago into the largest-ever sovereign debt defaulter in 2001. It is a tragic story. Since their accession to power in 2003, Néstor and Cristina Fernández de Kirchner, the country’s former and current president, respectively, seemed intent on changing Argentina’s direction post-default. Yet they soon revealed themselves to be another pair of messiahs turned into despots.
As in most developed nations, Argentina’s central bank is, by charter, independent of the country’s executive. The Harvard-educated, intellectually impressive current governor, Martín Redrado, has largely stood behind the Kirchners’ heterodox economic program, which favors export-driven growth as well as interventionist policies, including price controls and active resistance against peso revaluation. He was so supportive that in 2006 he provided central bank reserves to pay back all of Argentina’s outstanding debts with the IMF. As the country has remained largely cut off from capital markets since the default, paying back loans that accrued low single-digit interest (the IMF’s) while continuing to pay double-digit interest rates for “patriotic” bonds financed by their closest regional ally (none other than Venezuela’s Hugo Chávez) was clearly a political decision. For the Kirchners, hatred of the Washington Consensus weights more than the burden of interest.
In their second administration, however, the Kirchners’ authoritarian style has run them into trouble; in the midst of the global crisis, they sought to secure future sources of government spending in what became a true “asset grab.” First, they tried to radically increase taxes on agro-exports (rather sensationally, it was the government’s own vice-president who defeated the bill after a Senate tie). Then, in late 2008, the president pushed for the nationalization of all private pension funds, bringing an additional $25 billion under government control. Everyone saw it for what it was: a scramble for liquidity. Such moves have destroyed what was left of the ruling couple’s international reputation, and also much of their domestic political capital.
But it was only last week that the Kirchners’ hubris provoked a fully-fledged institutional crisis. Sidestepping an increasingly critical Parliament, the president took advantage of a legislative summer recess to issue a decree ordering Redrado to transfer $6.5 billion of bank reserves (around a quarter of the total, depending on the calculation) to the Treasury’s “Bicentennial Fund.” The purpose of such a euphemistically-baptized vehicle was to guarantee outright all 2010 foreign debt payments, in the hope that capital markets would welcome back the government and that fresh funds would revitalize the administration ahead of the 2011 presidential elections.
Reflecting changing political tides, however, Redrado refused to wire reserves to the Treasury, warning that they may be subject to confiscation abroad. After all, many of those bondholders hurt by the 2001 default have yet to settle their cases in international courts. But while the opposition attempted to convene an extraordinary parliamentary session to shoot down Kirchner’s decree, the administration doubled down: Through another decree, it fired the central bank governor. Hence they made a former key ally into a political martyr (and, odds are, a future paladin of the opposition).
How NOT to Manage a Central Bank Pierpaolo Barbieri
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