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Debt, deficits and devaluation

Debt, deficits and devaluation

Argentina votes, with change the only option

by David Smith in Buenos Aires

Tue 20 Oct 2015

By next Sunday evening, Argentina could have a new president-elect, ending 12 years of one-family rule by the Kirchners, first husband, now wife. Or Argentina could be heading into a runoff in late November between the two leading candidates to replace President Cristina Fernández de Kirchner.

Whatever the outcome this weekend, there is a consensus among the economic establishment in Buenos Aires that tough decisions are needed. Primarily, on whether or not to devalue, given the disparity between the peso’s official exchange rate and its street value against the dollar. Second, on whether to implement a dramatic reduction in the fiscal deficit, significantly by cutting government subsidies for energy and transport.

High on the list, too, is an intriguing legal battle with creditors holding out for full payment of debts from Argentina’s 2001 default. The question is whether or not to cut a deal with the hold-outs, close the debt issue once and for all, and so return the country to capital markets.

‘The irony is that the candidate most likely to take the tough decisions is the one with probably the least manoeuvring room to do so,’ says one veteran central banker. ‘The candidate of the status quo, of continuity, is, in my view, the only one who will have governability, who can apply the shock therapy we need.’

That candidate is Daniel Scioli, governor of Buenos Aires province, home to almost 40% of the electorate, a lifelong Peronist and apparently faithful acolyte of the Kirchners. In theory, and judging by his campaign rhetoric, Scioli is the agent of continuity, namely an economic policy that has spawned 25% inflation, skyrocketing public deficits, parallel markets for the Argentina peso – as well as a no-holds barred battle through the US courts against those who seek full repayment of those debts.

‘A gradual approach is my way. Gradually we need to confront the issues of inflation and subsidies,’ Scioli remarked in his last major interview before the vote. ‘People don’t want a revolutionary leader, or someone who’s coming in to change everything.’

Contrast that with his lead rival, Buenos Aires Mayor Mauricio Macri, a pro-business, pro-market, pro-growth centrist. ‘We represent the only vehicle that can avoid another economic crisis in Argentina,’ he said as the campaign closed. ‘The economy is trapped, problems are piling up, with a government that lies all the time, and has destroyed the essential ingredient of growth, investment.’

The polls suggest that Governor Scioli may be very close to garnering the 40% of the vote this Sunday that can make him president if he crosses that numerical line and beats Macri, who currently lags behind with polling numbers in the high 20s, by 10 points.

The same polls suggest close to 60% of the country will vote against the candidate of the status quo, yet potentially the majority could lose. This is the legacy of a constitutional deal cut in the 1990s by a Peronist president, Carlos Menem, with the opposition led by his predecessor, late President Raul Alfonsin, legalising that 40% barrier in the first round.

‘The reality is that our democracy is geared to keep the Peronists in power, come what may,’ according to one of the minor opposition candidates who will divide up that majority vote come the weekend. ‘And we never learn to unite in opposition, so Argentina keeps paying the price economically of only one party appearing to be able to govern.’

All bets will be off if Macri forces a second round this weekend, and a runoff next month that could unite the opposition against Scioli’s Peronist machine. But a Macri victory, long shot that it is, does not guarantee a president capable of pushing through a reform agenda, given that the Peronists will retain control of the Congress, and their long history of bringing down opposition leaders who challenge them.

In the circumstances, Argentina seems some way still from the shock treatment Wall Street and the World Bank believe is necessary. Only last week investment bankers, gathered for a roundtable in New York, agreed that Argentina does not have time to wait, certainly for Scioli’s gradualism, what the candidate himself calls ‘change with continuity.’

‘He needs to finance, and quickly, any sort of gradual change,’ according to one participant. ‘That means devaluation, draconian cuts in the government budget, particularly energy subsidies. And it means eating some humble pie, making a deal with the hold-outs, so Argentina can borrow again at affordable rates.’

Scioli’s close-knit team of advisers suggest their man will surprise everyone by concentrating on the big economic issues if he wins. ‘He understands that the policies he inherits would lead, in time, to his own crisis,’ confides one of his inner cabinet. ‘Change is not an option. It’s the only option.’

David Smith, an OMFIF advisory board member, represented the UN Secretary-General in the Americas 2004–14.

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