Will Argentina Default Yet Again?

By Jaime Daremblum

On October 8, Argentine President Cristina Kirchner underwent successful emergency surgery for a chronic subdural hematoma that apparently stemmed from a head injury she sustained in mid-August. It was her second emergency surgery in two years: Back in January 2012, Kirchner had her thyroid gland removed after getting a cancer diagnosis that turned out to be inaccurate. She will now spend the next month recuperating, which means she will be absent for the remainder of the campaign leading up to Argentina's October 27 legislative elections, in which her ruling coalition is expected to suffer big losses.

Even Kirchner's harshest critics should wish her a speedy recovery. With any luck, her health will improve significantly, and she'll be able to resume her presidential duties sometime in November. The health of her country's economy is another matter entirely.

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A few days before the public learned of Kirchner's brain hemorrhage, the Mexican financial and retail giant Grupo Elektra announced that it was ending all operations in Argentina. The company's official statement represented a blistering indictment of Argentine economic policies: "The exchange-rate controls and import and export restrictions limit access to commercial goods, while controls on capital flows restrict investment," it said. "High inflation hinders business planning, while labor regulation allows union practices that affect the investment environment. Similarly, there is a culture of nonpayment of debts that makes credit business impractical."

Elektra is only the latest corporate titan to pull back from Argentina amid concerns over the nation's business environment. Back in March, the world's second-largest mining firm, Brazil's Vale, froze all work on its massive Argentine potash project, even though the company had already spent $2.5 billion on the venture and completed over 40 percent of it. Vale explained that the combination of Argentina's double-digit inflation and its draconian foreign exchange controls had made the project far too costly. Meanwhile, iconic luxury designers such as Armani, Calvin Klein, Cartier, Escada, Louis Vuitton and Ralph Lauren have all closed stores in Argentina, which is still Latin America's fourth-biggest country.

How dire is Argentina's economic plight? Just ask its farmers, who are now hoarding their soybeans as a hedge against rampant inflation. The numbers are quite striking: Agricultural economist Manuel Alvarado Ledesma recently told Reuters that Argentine farmers are saving an estimated 28 percent of their soy crop from the 2012-13 growing season, an amount that is roughly equivalent to $7 billion worth of soybeans. Their concerns are understandable: The online business journal Latinvex has projected that "Argentina is likely to have the world's highest inflation rate this year, surpassing Sudan and Venezuela."

While the farmers hoard their soybeans, Argentinians of all stripes are busy hoarding U.S. dollars. In late 2011, the Kirchner government tightened foreign currency restrictions in hopes of slowing capital flight. According to the central bank, capital outflows subsequently dropped from $21.5 billion in 2011 to $3.4 billion in 2012. Yet the currency controls -- which have since been tightened even more -- have also stifled investment and fueled an enormous black market in dollars. "In the heart of downtown Buenos Aires," writes Financial Times correspondent Benedict Mander, "it is hard to walk more than 20 paces without being accosted by hawkers buying and selling dollars." Not surprisingly, Argentina is now experiencing a severe dollar shortage, which has prompted Kirchner to extend a tax-amnesty program aimed at encouraging people to invest their undeclared dollars in the national economy. It has been estimated that those undeclared holdings amount to $160 billion.

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Ambassador Jaime Daremblum is director of the Center for Latin American Studies at the Hudson Institute.

(AP Photo)

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