This should be Argentina’s moment of glory. Grain prices are soaring. The country is strategically positioned to be one of the greatest beneficiaries of the soybean bonanza. In addition to natural endowments, such as fertile soil and abundant water resources, 150 years of infrastructure investment gave it one of the best transportation grids in all of Latin America. Railroads crisscross the pampas and penetrate deep into the Andean sierra. The deep channels of the Parana, Paraguay and Uruguay Rivers provide it with a fluvial system that allows it to sharply reduce transportation costs. These are the reasons why the Argentine economy quickly recovered after the 2002 default. Not only did it recover, but it became the fastest growing economy in the region. Moreover, the political continuity promised by the election of President Cristina Kirchner suggested that the boom would persist into the future. Unfortunately, a confrontation between the new president and the agriculture sector degraded into class warfare between the urban poor and capitalists. The confrontation could have easily been resolved at the start, but the two sides reached such an impasse that capitulation will devastate the loser. Unfortunately, investors are now in a lose-lose situation, which explains why Argentine asset prices plunge lower almost every day. The war of attrition between the two sides is bringing the Argentina to its knees. In addition to food shortages in some urban centers, inflation is spiraling out of control. Moreover, the confrontation is reopening old wounds that took decades to heal. Last of all, the central bank’s intervention in the foreign exchange market is depleting the country of its vital reserves. Unfortunately, the confrontation reached a point where compromise was no longer an option. With more than three years to go until the end of her term, President Cristina Kirchner realized that any concession would be seen as a form of capitulation and it would invite similar attacks from other groups with grievances. The Kirchners are also worried about the midterm elections scheduled for 2009. The Kirchners want to gain control of the congress in order to ensure another reelection at the end of this term. Therefore, they will give no quarter. Otherwise, it could be construed as a sign of weakness. The farmers are in a similar predicament. The government’s sliding grain tariffs put the agriculture sector in a situation of diminishing returns. It was a virtual attempt to nationalize the agricultural sector. Therefore, this was why the farmers were so steadfast in their opposition. Given the amount of damage their protests caused, and the high level of popular support, they held all of the cards. The farmers are clearly in the driver’s seat, and there is no reason why they should concede—which explains the impasse. However, the stalemate is sapping the vitality of the Argentine economy, and investors are paying the price. Given the enormous level of international reserves, the Kirchners believe that they can hold out for a very long time. Yet, this means that they will capitulate when there is nothing left to recover. Argentina has a disastrous track record with untimely political demises. Argentina defaulted on its foreign debt after the military regime collapsed following the debacle of the Malvinas War. The Argentine economy exploded into hyperinflation after the Alfonsin Administration was forced to abdicate 6 months ahead of schedule. Last of all, Argentina again defaulted on its external obligations after President De la Rua fled the country. Therefore, the external situation may be good and the economy sound, but the political conflict is forcing investors to correctly run for the door.
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