Tags: Argentina | economic | Disaster

Argentina Cruising in Fast Lane to Economic Disaster

Tuesday, 08 Nov 2011 12:55 PM

Argentina is a resource-rich country in South America that has been plagued by incompetent and populist politicians, who have stunted its economic growth and caused the country to sink into deep economic turmoil, wars and social strife.

During the last eight years or so, the country has been under the presidency of Nestor Kirchner (now deceased) and afterward by his widow Cristina Fernandez, who recently was re-elected.

During their mandate, Argentina has gone through a series of socialist and populist economic reforms that are destroying the free market and thus causing private capital and investment to leave the country.

Some of the most notable measures taken by the Argentinean government during the last eight years include:

• Defaulting on its public debt to foreign creditors, causing investors to flee the country and severely hurting Argentina's financial credibility.

• Getting shut out from the international debt market, which wasn't as damaging as expected because the commodities boom was occurring and thus increased the country’s dollar reserves. At the same time, not having to pay debt allowed the government to increase fiscal spending and stimulate the economy.

• Observing that Argentinean exporters were doing very well with the commodity boom, Kirchner increased taxes on exports. His wife tried to increase taxes on soy exports to 45 percent in 2008, causing a massive strike by soy producers.

• Populist measures to curb inflation, such as price controls, have been imposed on goods such as milk, beef and flour. Price controls were also set on commodities such as natural gas. Soon this caused shortages on these goods and stopped private investment for increasing production capacity in these goods. The shortage in natural gas caused Argentina to break an agreement with Chile to supply it with this commodity and forcing the neighbor country to import it through container ships at a much higher cost.

When the financial crisis hit in 2008 and Fernandez had assumed the presidency, the populist reforms actually turned into theft.

As commodities crashed during the financial crisis, Argentina found itself short of cash to finance its large fiscal spending and make the payments of its restructured public debt.

The solution was to "nationalize" workers’ private pension funds to access US$30 billion in funds. The excuse was that it was to protect Argentina's workers from losses in the global financial markets. This occurred in October 2008, with Argentina selling and nationalizing its assets when the market was bottoming. These workers will probably never recover the pension funds and will get paid in freshly printed Argentinean pesos.

I could continue with a long list of anti-free market and economically destructive measures that have been put in place but the result is that Argentina is currently growing its GDP by 9 percent but annualized inflation is soaring 20 percent.

Since 2007, the Argentinean peso has lost about a third of its value against the U.S. dollar. It has weakened even though there is a commodity boom and the Dollar Index has fallen 10 percent during the same time period.

About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. He is the founder and editor of www.globaltradingpad.com. Click Here to read more of his articles.

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Argentina is a resource-rich country in South America that has been plagued by incompetent and populist politicians, who have stunted its economic growth and caused the country to sink into deep economic turmoil, wars and social strife. During the last eight years or so,...
Argentina,economic,Disaster
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2011-55-08
Tuesday, 08 Nov 2011 12:55 PM
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