Is Argentina Headed for a Financial Fall?

WASHINGTON — The Argentinean government’s refusal to reconcile its old debts and its creation of new ones has rendered the state increasingly reliant on Venezuela for financial support, and the country is headed for a financial fall if it doesn’t get its fiscal house in order, said participants at a June 2 forum here this week.

Hosted by the Hudson Institute, “Is the World Economy Going South? Which Way Argentina?” featured comments from Evan Ellis, an associate with Booz Allen Hamilton and an adjunct professor at the University of Miami, Jaime Daremblum, Costa Rica’s former ambassador to the United States, Robert Raben, the executive director of the Raben Group, and Martin Krause, a professor of economics at the University of Buenos Aires.

According to Krause, Argentina’s irresponsible spending habits exacerbate its economic hardship. In 2007 alone, state expenditures increased by 50 percent, a trend that has continued steadily throughout 2008. But while the government has tried to raise taxes to balance against spending — most recently invoking a controversial tax on soy production — Argentineans have protested every hike. The result is towering inflation, burgeoning debt and decreasing foreign investment, he said.

“They’re learning the Laffer curve the hard way,” Krause added.

Because of this crunch, Argentina has come to depend on Venezuela for financial assistance, Ellis explained. Even though populist regimes throughout the region are losing momentum, Venezuela is still booming because of the price of oil, which comprises a significant share of the state’s total economic output, he said. And since 2005, Venezuela President Hugo Chávez has steadily purchased bonds to underwrite Argentina’s growing debts, drawing the two states closer together.

However, this also has the effect of driving investors away from Argentina, Krause added.

“There’s a belief that Venezuelan money comes without conditions, while IMF money does,” Krause said. “But there is at least a political conditionality with Venezuelan money . . . it’s just much more subtle.”

As a result, even the soy trade, long one of Argentina’s main crops, is shifting toward Brazil, where political and economic climates are much more stable, Ellis said. Even China, a state that once considered Argentina the “world’s breadbasket,” is now investing in Sao Paulo, tapping Brazil’s more stable farmlands.

Still, Ellis added, the worst has yet to arrive for Argentina, which relies too heavily on Venezuelan loans to recoup its losses.

“I would look for the change in oil prices to create a ripple effect that [limits Venezuela’s lending] and affects Argentina,” he said. “The question is, when?”

According to Raben, Argentina’s most viable solution is to address its arrears immediately. Representing private investors who lost billions following the state’s 2001 default, Raben said Argentina must renegotiate its debt with the world community — especially the Paris Club, which fronted a significant portion of the tab years ago — to improve its credit and regain investors’ trust.

However, broken political promises — including those made by President Cristina Kirchner to tackle the Paris Club debt upon inauguration — make this task infinitely more difficult, Krause said.

“They are either going to be disciplined by the political market or the financial markets next year,” he added.

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