May 22, 2013
Bad news for who?
President Cristina Fernández de Kirchner bounced back into activity with a good line on Thursday when she said: “I’ve got bad news for creditors, we’re going to repay you and in dollars” (based on her assumption that there is a conspiracy afoot in the outside world to force Argentina into default). Yet not only does the irony of her line lie precisely in creditors vastly preferring repayment to the destruction of their investment — the bad news could easily end up being for Argentina with the price of the steady drainage of Central Bank reserves and the intensification of currency curbs needed to repay debt in dollars. Such forces are not easily defied as George Soros demonstrated when breaking the Bank of England 20 years ago — going further back in time, a similarly bold attitude led to the German hyperinflation of 1923 when Gustav Stresemann decided that if there was one thing more impossible than paying Germany’s absurdly high post-war reparations, it was not paying them and printed the required money.
Once again CFK has applied her “eloquent speech and problem solved” approach to difficulties (with silent denial as her Plan B for coping with them) but they will not go away so easily. If her chosen antidote is irony, the problem expresses itself in a couple of paradoxes — firstly, that conscientious debt repayment both in the past since 2003 and the future (sometimes all at once as with the International Monetary Fund in early 2006) has not saved Argentina from running a higher country risk than Venezuelan or crisis-stricken Mediterranean countries and secondly, the continuation of currency restrictions in an economy awash with dollars (but even more awash with pesos, which is much of the problem). Yet if Argentina has serviced debt ever since 2003, it has always been on its own terms (for example, slashing index-linked bond yields by reporting inflation at half or a third of its true level, a disguised default) and the impact of last week’s New York court ruling was precisely to ban such cherry-picking among creditors. But CFK does not see the latest wave of speculation as preying on any weakness despite her criticisms of “vulture funds” — instead global financial orthodoxy is determined to punish Argentina for being a “bad example” by pursuing policies of inclusive expansion which have reduced Argentine poverty to six percent as against 15 percent in the United States and 19 percent in Germany (always according to the same official figures which pulverize index-linked bond yields).
So the President has had her say but money also talks.