Argentina’s Stalking Stagflation Stagger

Argentine President Fernandez declared a “debt-free” day as the bonds issued from forced bank deposit “pesofication” a decade ago were paid off, as stocks remained down almost 50 percent as the worst MSCI member on a renewed capital control push in that direction and economic stagnation. Official statistics show monthly output falling in the aftermath of drought and restricted Brazil trade as inflation verges on double-digits as compared with private estimates in the 25 percent band. Domestic food costs have spiked and currency depreciation on a faster crawl elevates input expenses and erodes purchasing power. The parallel market has the peso 50 percent weaker than the formal rate just under 5 to the dollar. The primary fiscal balance registers a minor deficit, and the agricultural export tax may go to 40 percent to bring in revenue despite recent reform of corn and soybean production quotas which have long angered farmers. A single permit policy will benefit food giants like Bunge with large operations, and is timed to meet rising world demand reinforced by extreme weather patterns. A previous move to hike the levy sank the president’s popularity to her first term low, and she has also alienated the main labor federation where a wing has split off in protest of real wage lags. Its head accused the government of “looking down on workers” and insisted on representation in the cabinet after organizing a big truckers’ strike. The body endorsed the state takeover of oil firm YPF with the stipulation that layoffs not ensue under the ownership change. A framework for the energy sector was subsequently proposed that will subject private company tariff and investment plans to regulatory approval. Mexican billionaire Carlos Slim converted a loan to partners to an equity stake and other non-Europeans may join the venture as Spain’s Repsol takes its seizure to international arbitration. At the World Bank’s ICSID the country has lost cases but refused to pay awards as the tribunal lacks enforcement capacity. Italian retail bondholders who did not accept defaulted sovereign bond exchanges are pursuing action in that form traditionally reserved for direct investment disputes. In New York holdout funds have won ongoing judgments in their favor and may eventually collect with a novel interpretation of the “pari passu” clause in instrument documentation to block current external debt servicing.

The YPF episode and uneven fiscal adjustment path have also highlighted federal-provincial divisions. Most of the latter run budget deficits and borrow from the central government for 40 percent of debt outstanding. A 2010 program reduced the burden of past obligations as many localities failed to meet the financial ratios contained in a 2004 responsibility law. Buenos Aires province at the center is under stress but has new issuance plans both at home and abroad where fat yields could compensate for the thinner commercial base.