Argentina's Contempt for Its Citizens

Probably not an Argentinian bondholder, but still getting hurt.

In the latest episode of Argentina's default saga, the U.S. judge presiding over its dispute with bondholders has declared the country to be in contempt of court. Last week's ruling wasn't especially surprising and isn't likely to be especially consequential. More deserving of attention is the contempt that Argentina's government is showing its citizens' economic welfare.

Since the country was largely cut off from international capital markets following its default in July, the government of President Cristina Fernandez de Kirchner -- never a paragon of orthodox policy making -- has resorted to even more self-destructive coping measures. As the foreign currency reserves that Argentina needs to pay for imports have diminished, the government has issued new rules meant to keep dollars from leaving the country. Airlines now have to submit absurdly detailed information about passengers on international fights, for example, and the tax rate on foreign credit-card purchases is 35 percent.

Yet demand for dollars keeps growing. The black-market exchange rate is almost twice the official rate of 8.4 pesos, and the distorting effect of this gap ripples through the economy. Rather than sell their soybeans at the official rate, for instance, Argentina's farmers hoard them in hopes of another devaluation.

Last month, in an attempt to control inflation that's running near 40 percent and to prevent shortages of consumer goods, Argentina's legislature passed a law that allows the government to limit profit margins and set price ranges and minimum production levels. Yet such perverse interventions have not been helpful: Export levies on Argentinian beef, for instance, have failed to protect consumers from higher prices, but they have displaced it from global markets.

So far, Argentina hasn't experienced the near-empty shelves and rampant inflation that have crippled Venezuela, the continent's poster child for economic dysfunction. Yet despite dodgy official data to the contrary, Argentina's economy probably continued to contract in the second quarter. A protracted slowdown combined with an external shock could quadruple Argentina's poverty level, a recent World Bank report warned, to more than 40 percent of the population.

There's one easy way for Argentina to avert such a scenario: Settle with its holdout creditors and regain access to global capital markets. Instead, Argentina has continued to defy U.S. District Judge Thomas Griesa's ruling that it can't make payments on its restructured debt as long as it continues to refuse to pay holders of its defaulted debt. Fernandez has barnstormed the United Nations, attacking her antagonists -- the minority of bondholders who have refused a restructuring of terms -- as vulture-fund terrorists. (For good measure, when American Airlines cut some service to Argentina, she denounced the company as "jet-propelled vultures.") She has also accused Argentinian businessmen, farmers and bankers of conspiring with "foreign help" to overthrow her government.

Few expect that any penalties Griesa imposes will compel a change in Fernandez's behavior. And any hopes of a softening in Argentina's negotiating position in January, when it will theoretically no longer have to offer owners of the restructured bonds any better terms than the holdouts get, may be dashed. Fernandez has a history of high-handed interventions -- last week, she once again defenestrated a central bank president for failing to support her policies -- that put her own political interests ahead of those of Argentina's citizens. All things considered, the country's financial isolation may not end until late 2015, when one of the four candidates vying to succeed her takes office.

--Editors: James Gibney, Mary Duenwald.

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net