Argentina: Dangerous Precedent

The demise of former-President Nestor Kirchner marked an important milestone in Argentina’s history and economic development. Kirchner came into office on the heels of the country’s debt default and economic crisis, capitalizing on the power vacuum to consolidate all political power under his domain. He hijacked the national apparatus by directing economic resources to allies and denying property rights to political enemies. In the process, Kirchner introduced enormous distortions, as well as isolating the state from the international capital markets. Over the course of the last two years, the government began taking steps to rehabilitate itself with the financial community by reopening the debt exchange on terms that were much more favourable than initially expected. The commodity boom and the surge in Brazilian domestic demand also boosted the Argentine economy. These are the main reasons why the markets recently developed a more favourable view on the country. However, there were lingering concerns about Kirchner. His wife, Cristina Fernandez de Kirchner, may have taken office in 2007, but he was still the sole decision-maker on all aspects of national policy. Hence, it was not surprising to see the markets rally upon the news that he passed away. With the presidential elections only a year away, most investors expect the country to transition to a more balanced approach. However, there is a dangerous precedent in Argentine history that could provide some insight to what lies ahead.

In 1973, Juan Peron returned to Buenos Aires after 18 years of exile to assume the presidency for a third time. Although he was initially elected through the support of the political left, he quickly abandoned them—consolidating power along the way. Likewise, he made his young wife, Isabel Martinez, vice-president. Unfortunately, Peron died a year later and his wife, who was 35 years younger, was named successor. At first, the nation rallied around the widow, providing support and allegiance. The Argentine economy was doing well, doubling output in less than two decades. However, the oil embargo of 1973 was fanning inflationary pressures and consumer prices were surging at a pace of 80% y/y. Not surprisingly, the labor unions demanded higher wages. Lacking the political clout of her husband and the charisma of Evita, Isabelita slowly lost control of the nation. A close adviser, Jose Lopez Rega, began to run the government from the sidelines, dispatching death squads to quell subversive voices. Argentina soon decayed into chaos, as the political left and right came to blows, and strikes by the labor unions brought the economy to a standstill. By the end of the first quarter of 1976, the country could stand no more and a military coup toppled the government. Unfortunately, this triggered the start of a dark episode in Argentine history whereby tens of thousands of individuals were murdered, tortured or disappeared. Many more were forced to immigrate. Unfortunately, there are similarities between the events of the early 1970s and now.

Nestor Kirchner, like Juan Peron, centralized much of the country’s power under his control. The government functioned well as long as he maintained his grip. However, Argentina slipped into anarchy as soon as he disappeared from the scene. The country has evolved in many ways during the past 35 years. Furthermore, there are many differences between then and now. Unlike Isabel, who assumed the presidency after her husband’s death, Cristina is the elected leader of Argentina. Cristina is also a very mature and strong woman. She was similar in age to her husband, and with a very strong personality.  Still, there will be a power struggle, and it could get ugly. At a minimum, former kingmakers, such as Presidents Eduardo Duhalde and Carlos Menem, will try to grab a central role. It will be interesting to see what happens to some of the former president’s close allies, such as Guillermo Moreno and Julio de Vido. Some of the young Turks, such as Francisco de Narvaez and Daniel Scioli, will try to move centerstage. Meanwhile, a phalanx of old hands, such as Carlos Reutemann and Mario Das Neves, will also be on the move. In the background, Hugo Moyano and his gang of CGT thugs will try to muscle their way into the winning coalition. Most importantly, the bands of piqueteros and professional street protestors could mobilize themselves into a paramilitary force that would add a violent edge to the country’s social setting. Hence, the immediate outlook for Argentina is positive, as the dark shadow of Nestor Kirchner fades away. However, the medium-term outlook becomes much more complicated as the disparate political forces that lurked below the surface are allowed to re-emerge and the painful legacies of the 1970s comes back to the forefront.