May 7, 2003

Argentina back on track?

By: AF Editors

Almost two and a half years after the dramatic events that culminated with the violent ouster of President de la Rua in December 2001 and caused Argentina to have three presidents in less than one week (de la Rua, Rodriguez Saa and Duhalde), the country will finally face the final round of the presidential election that is to end President Duhalde’s interim term.

When Duahlde assumed power in Jannuary 2002 the whole country had fallen prey to violence and street riots. Argentina had defaulted on its public debt, the financial sector was absolutely devastated and most of the private business was bankrupt. Unemployment had risen to more than 30 percent and the scourge of hyperinflation which haunted the country in 1989 had become a more than plausible scenario.

Duhalde’s first measure was to end the 10-year-old pegged exchange rate with the U.S. dollar usually referred to as convertibility, and this enabled him to finance the public deficit. Restrictions on the withdrawal of bank deposits and later the freeze of bank accounts and compulsory exchange for public bonds enabled the government to keep the supply of money low while issuing new currency, thus avoiding hyperinflation.

After President de la Rua’s Finance Minister Ricardo Lopez Murphy failed to dramatically reduce public spending–he lasted only two weeks in office–almost everybody in Argentina assumed that convertibility was dead, so devaluation of the peso was not much of a surprise. The surprise, however, came with the pesofication (compulsory conversion into pesos) of all monetary obligations intended to relieve both the public and the private sector from financial distress. Of course, this generated great inequity among private contractors who sought security in a foreign currency. But more shocking was the fact that pesofication was asymmetric. While all obligations were pesofied at a rate of 1 U.S. Dollar = 1 Peso, bank deposits in U.S. dollars were pesofied at a rate of 1.40 pesos. That created a gap between bank’s credits and bank’s liabilities, which ultimately destroyed the already wrecked banking system.

The first round of the presidential election took place on April 27th within a general atmosphere of tranquility and large participation of the citizens, highly contrasting with the 2001 Congressional election which resulted in huge abstention and many votes cast blank as a sign of protest. In the absence of primaries, the Peronist Party appeared divided into three branches: Former president Carlos Menem obtaining 24.36 percent of the ballot, former president Adolfo Rodriguez Saa with 14.12 percent of the votes and Nestor Kirchner–the official candidate endorsed by president Duhalde–with 22 percent. On the other hand, this election signed the death certificate of the Radical Party getting less than 2.5 percent of the ballot, and may be the end of the two-party system in Argentina. Both de la Rua and Alfonsin–who resigned in 1989 leaving the country in complete economic chaos–were Radicals and it appears that no Radical has been able to hold office for a full term in at least 50 years. Two former Radicals, Ricardo Lopez Murphy from the center-right wing, and Elisa Carrio from the center-left wing, resigned from that party and obtained 16,34 percent and 14.14 percent of the votes respectively.

The runoff will be held on May 18th and will face former president Menem with Nestor Kirchner. It seems the constant errors of the Radical Party achieved something that Peron himself was not able to accomplish: having the population to choose between two Peronist candidates. According to polls Kirchner carries the lead and will become the new president of Argentina. Political analysts say after 10 years of capitalism during Menem’s mandate, Argentina’s political pendulum should move to the left. However, it is extremely difficult to be a consistent populist when there are no funds to finance it. Governor Kirchner has already announced that Mr. Lavagna, Duhalde’s current Finance Minister who is responsible for the stabilization of the Peso and the renegotiation of the public debt with the IMF, will continue holding his position.

In the past year Argentina managed to avoid the most dreadful scenarios of hyperinflation and civil war and is now back on the track of economic growth. There is still a great deal of political corruption through the use of political reserved funds and government administered plans for the assistance of the poor, but prospects are good. Argentina can expect a moderate government of a civilized left like that of Lula in Brazil or Lagos in Chile. As president Peron used to say, and Peronists seem to have learned well enough, “Power is like a violin, you grab it with the left and play it with the right.”