The date 18 May should have heralded a new beginning for Argentina. The second round run-off between...
The date 18 May should have heralded a new beginning for Argentina. The second round run-off between Nestor Kirchner and Carlos Menem looked set to provide the Peronist's a new leader with a strong mandate to lead the country out of the economic depths following years of recession and political in-fighting.
That such a turning point could be hijacked by the vanity and cowardice of its own leaders is a stark reminder Argentina's steepest hurdles on its road to recovery will come from within.
Menem's decision to pull out led to Kirchner becoming president by default. By avoiding a second round, Menem will go on record as the official victor of the election, having received 24% of the vote in the first round. More worryingly, however, in denying Kirchner validation of a widely expected victory ' opinion polls predicted he would gain 70% of the second round vote ' Menem has perpetuated the political selfishness that has so damaged Argentine politics in recent years.
With the election over, what do we know of the new president and what are the key challenges awaiting him?
Under his governance, the province of Santa Cruz avoided many of the economic problems faced by the country. This was in part due to strong income from the province's oil and fishing industries but also Kirchner's shrewd, albeit secret, decision to transfer more than $500m of provincial cash into Swiss bank accounts before the Argentine central bank froze bank deposits and forced through an exchange of dollar accounts into pesos.
The government can take some encouragement from signs of economic recovery. GDP growth in the first quarter was 5% and industrial production bounced back strongly. While this is welcome, there are a number of immediate problems that need to be addressed before the government can even begin to contemplate tackling it's longer-term social and economic objectives.
The banking sector will likely face a costly re-financing, following a court ruling to re-convert pesos back into dollar deposits, before it can return to anything resembling business as usual. Key to restoring investor confidence will be a re-negotiation of financing terms with the IMF, who are likely to demand a high budget surplus and tight monetary policy as the basis for extended financing terms. This is likely to contradict Kirchner's plans for growth, which include large-scale public works programmes, subsidies for small and medium-sized businesses and increased social welfare.
Reaching a deal to reschedule Argentina's external debts may prove more difficult still. The country has $60bn of bonds in default, with more than 500,000 foreign bondholders. Re-negotiation could take years, preventing Argentina's return to international markets. There is some hope on this front from a recently announced plan by European banks to create a company that will negotiate on behalf of Europe's private bondholders.
Stock market investors have been eager to anticipate Argentina's return to better times. The Merval Index has risen threefold in dollar terms from last year's low point.
Menem out of picture, for now.
Economy has begun to grow.
Lavagna staying on as economy minister.
Partner Insight: Continuing the Architas education series for clients.
What made financial headlines over the weekend?
290,000 already affected
Putting the tech into protection
Square Mile’s series of informal interviews