Guardian: Peso collapse raises fears Argentina lurching towards decennial crisis

24/1/2014

Fernández de Kirchner's government seems at a loss how to proceed, with observers blaming populist policies for woes

Following the sudden collapse in the peso this week, some Argentinians fear their country may be lurching into a new episode of the crises that seem to hit the country's economy almost every decade.

Scrambling to protect the country's perilously low central bank reserves, which dropped 30% last year and fell below $30bn (£18bn) this month, the government of President Cristina Fernández de Kirchner seemed at a loss how to proceed.

It started the week introducing tight controls on the purchase of online goods from abroad, to prevent Argentinians from spending dollars in ever larger quantities – especially on Chinese products which, as a result of 30% inflation, can be cheaper delivered to their door from abroad than bought at local stores.

But on Friday the government seemed to do a U-turn, saying it would relax its grip on the dollar. From next week it will remove some of the controls it introduced two years ago which banned Argentinians from trading their pesos for dollars, a customary practice in a country with a long history of inflation.

The dollar freeze paralysed the property market, which operates in dollars, but failed to stem the rush away from the peso. Instead it created a black market where the dollar has risen from eight to 13 pesos in the last year while the central bank continued using – and losing – reserves trying to keep the dollar in check.

Its battle was ultimately lost this week in view of the peso's sudden collapse.

Seemingly oblivious to the country's economic plight, Fernández has referred to the last 10 years – since her husband assumed Argentina's presidency in 2003, and she took over in 2007 – as the "victorious decade".

But this week's forced devaluation of the official exchange rate may make it difficult to continue repeating a slogan habitually used in speeches by government officials, printed on billboards and even emblazoned on a recent series of commemorative stamps.

To 68-year-old Aida Ender, after 40 days without power in her eighth-floor apartment in the middle-class neighbourhood of Almagro in Buenos Aires, the slogan grates like a bad joke.

"There's no plan, the president is out of touch with reality, she's lost like Alice in Wonderland," says Ender, who has had to move out of her apartment, where she has had no water, no working lift and no refrigeration since 16 December. Her plight is shared by thousands of neighbours and even hospitals, in the middle of unusual summer highs of close to 40C.

Economic observers blame the government's populist policies – including keeping utility prices artificially low to disguise inflation – for the power crisis. They say this has made it impossible for firms to invest in maintaining power lines.

The government denies the charges and says that inflation is fuelled by anti-government businessmen.

Argentina has been here before. A bout of hyperinflation in 1989 – when monthly price increases peaked at 197%, accompanied by similar massive and prolonged power cuts – caused the collapse of Raul Alfonsín's government. Twelve years later, in 2001, a similar crisis forced the resignation of another president, Fernando de la Rua, and led to the largest ever foreign debt default.

Néstor Kirchner pulled Argentina out of the crisis that followed and the ensuing vigorous economic growth continued under his wife, Fernández.

Voters responded enthusiastically, granting the couple three successive presidencies and comfortable majorities in Congress.

But the glow is definitely gone now, obscured by runaway inflation, an alarming growth in crime and revelations of seemingly rampant corruption among the president's top officials.

Those problems, together with a large trade deficit, have sent the peso crashing. It fell 11% against the dollar on Thursday, as the government allowed it to drop without announcing an official devaluation – something Fernández pledged last year she would never permit. On Friday night it was down another 1%.

With Fernández practically absent from daily government since an operation to remove a blood clot from her brain last October, the government seems rudderless. Major announcements are left to her cabinet chief, Jorge Capitanich, another official who has been linked to alleged corruption, and economy minister Axel Kicillof, who is said to be behind the plan to let the peso lose value without officially announcing a devaluation.

"The government is at a stage of dangerous improvisation," tweeted former central bank president Martín Redrado, who was fired by Fernández in 2010. "These measures generate only more paralysis and uncertainty."

At least 11 people were killed and hundreds injured last month when a wave of supermarket looting spread across Argentina, fuelled by a combination of rising food prices and a police strike for higher wages.

Just before Christmas, Fernández celebrated the 10 years since her husband took office. It was one of her few appearances since her operation, and she danced with television stars in an exuberant ceremony in front of the presidential palace.

The scene prompted radio host Diego Poggi to say: "The truth is CFK (Cristina Fernández de Kirchner) looks divine. Pity the country doesn't.

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