Argentina Learns the Limits of Opportunism

Argentina’s economic disarray has played a leading role in turning investors against emerging markets in recent days. Multiple policy errors and the prospect of tighter U.S. monetary policy fueled a surge of pessimism that drove down the peso and overwhelmed the government’s currency controls. The administration of President Cristina Fernandez de Kirchner announced of those restrictions Friday: She had no choice.

That isn’t the only policy that will have to change. The government has made so many mistakes that restoring confidence won’t be easy. Even if she can’t acknowledge it, Fernandez needs to begin by understanding the damage she’s already done.

Argentina’s foreign reserves have roughly halved in the past three years. Spending more of them on propping up the peso, the world’s worst-performing currency over the past 12 months, became untenable. The currency controls drove the country’s official and unofficial exchange rates apart, causing further economic harm -- yet couldn’t stop inflation surging to maybe 30 percent a year. It’s difficult to be precise about soaring prices because the government has cooked the books on inflation and other economic indicators. Well before the recent panic, economic growth had slowed, and government borrowing was rising.

For a time, higher prices for commodities such as soybeans and wheat enabled the government to boost spending and pump up the economy. But populist subsidies and transfers gradually proved unaffordable. The government then missed few chances to sap confidence further.

Not content to manipulate and discredit official economic statistics, it issued a “presidential emergency decree” in 2010 removing the governor of the central bank for refusing to use central-bank reserves to service government debt. It tried (in vain) to punish foreign creditors who refused to restructure debts on Argentina’s terms. It nationalized companies without proper compensation. And since Fernandez’s re-election in 2011, her administration has put in place an increasingly complex array of controls to curb capital flight -- including, most recently, regulations to discourage Internet purchases from abroad.

Admittedly, when Fernandez’s party suffered a stinging defeat in October’s midterm elections, it prompted a bit of a reassessment. (For one thing, it ruled out revising the constitution to let Fernandez run for a third term.) She installed a new cabinet and moved to resolve Argentina’s disagreements with foreign creditors, the International Monetary Fund and Spain’s Repsol SA (over the 2012 takeover of a local oil unit). Argentina’s central bank has begun to act more forcefully, increasing interest rates to curb the outflow of capital. But it isn’t enough.

Argentina needs a genuinely independent central bank with a straightforward low-inflation mandate, not the fuzzy emphasis on development and equity that was written into central-bank law in 2012. The government should dismantle the remaining ineffectual controls on capital outflows. It should remove the subsidies and price caps that cripple the country’s energy markets.

These measures would help to restore investor confidence and, with that, Argentina’s access to international credit markets. A deal will also be needed with the Paris Club of official creditors and with the group of private creditors, led by billionaire hedge-fund manager Paul Singer, who have held out for better terms. All sides should want to avoid dragging out that dispute any further.

There’s one reason for optimism: Fernandez has always been more of an opportunist than an ideologue. Today, opportunism dictates an abrupt change of course. With her country’s financial back against the wall, and her presidential term now fixed, she should see ending Argentina’s exile from global debt markets as her best achievable legacy.

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