Argentina currency policy creates multi-headed monster

http://www.reuters.com/article/2012/09/12/us-argentina-economy-idUSBRE88B1GD20120912

By Hilary Burke

BUENOS AIRES (Reuters) - Argentina's increasingly tough currency controls have spawned multiple exchange rates that hurt savers without helping exporters, and they could backfire by depressing investment and driving up inflation.

President Cristina Fernandez is trying to lock in currency stability and end Argentines' long obsession with dollars in a country scarred by devaluations, most recently in 2002. The onerous controls are distorting the economy.

The multiple exchange rate system - which the government does not acknowledge - forces wealthier Argentines to pay more to buy dollars on the black market.

Exporters who would benefit most from a weaker peso must sell all their proceeds at the official rate, which some say overvalues the local currency by at least 15 percent.

An Argentine broker who sells food products abroad said he used to travel overseas 10 times a year on business but he has cut that back to two trips because buying dollars is so pricey.

"You make your sales on the road, not by email," the broker said on condition of anonymity for fear of government reprisals.

"It's very difficult for small companies to travel abroad, first because they don't know if they'll be able to sell their products because they're no longer competitive, and secondly because they have to buy dollars at 7 (pesos per dollar)."

The broker said some exporters have stayed afloat by teaming up with importers, who must match their purchases with sales abroad under the leftist government's offbeat rules. The importers pay exporters to sell on their behalf and end up compensating for the exchange rate's loss of competitiveness.

He said commodities suppliers are still doing well thanks to sky-high global grains prices but sales of processed goods are declining, due to the overvalued currency, surging production costs and anemic demand linked to Europe's debt crisis.

The official exchange rate in Latin America's No. 3 economy is 4.66 pesos per dollar. But a virtual ban on foreign currency purchases has pushed the black-market rate to about 6.30 per dollar, marking a 35 percent premium.

Some companies pay about 6.50 pesos per dollar to buy stocks and bonds that can be sold abroad for greenbacks. And a new 15 percent tax on credit card use abroad effectively creates another exchange rate of 5.37 per dollar.

The measures are similar to those in socialist Venezuela. Economists say they will hit investment and growth by sowing uncertainty over the direction of exchange rate policy. They could worsen annual inflation now near 25 percent as merchants price their goods in line with the rising black-market dollar rate.

The controls encourage Argentines to take illegal shortcuts to get dollars, ranging from fictitious credit card purchases to exchange deals in school yards and local shops.

Exporters say the real solution is a weaker official rate.

"I think the dollar should be at 6.50. That's the competitive rate we need," the food broker said. "Exporters' margins are so low, we all think (the official rate) will be modified in the coming months. This can't last."

PURCHASING POWER

The Argentine obsession with saving in dollars is understandable given the collapse of a decade-long currency peg in 2002, which led to a freeze and devaluation of bank deposits.

Since 2003, the central bank has intervened on the foreign exchange market to avoid volatility and bought dollars to bulk up its reserves. It has allowed the peso to depreciate gradually in nominal terms but high inflation has meant local costs as measured in dollars are no longer cheap.

Fernandez's late husband and presidential predecessor, Nestor Kirchner, emphasized the need for a competitive exchange rate to encourage exports.

Fernandez is more interested in stoking the domestic market as the economy slows sharply after a nearly nine year boom. Exports are expected to fall to 17 percent of gross domestic product this year from 22 percent in 2005, private data shows.

After winning a landslide re-election in October, Fernandez imposed new currency controls to stem capital flight and safeguard the central bank's foreign reserves, which the government uses to pay debt.

"We need an equilibrium exchange rate that doesn't hurt workers' purchasing power," Fernandez said last week. "The dollars that we get from foreign trade are the dollars we have to use to pay for imports ... and at the same time, debt."

Consumer and business confidence have sunk since the government began limiting dollar purchases and curbing imports to increase the trade surplus, a key source of hard currency.

Fernandez's approval ratings have also fallen. A poll last month by local firm Management & Fit showed 72 percent of respondents disapproved of the way the government is managing the economy.

Political analyst Roberto Bacman said Fernandez's popularity has not been hurt much by the foreign exchange restrictions, HOWEVER, since voters tend to view the economy more broadly.

"This hasn't sparked problems or protests, although many people complain," Bacman said. "In this sense, it was a successful maneuver."

ECONOMIC IMPACT

From an economic perspective, the multiple exchange rate system is fundamentally inefficient, said Daniel Oks, a former World Bank economist.

"It opens up a ton of possibilities for flouting the controls. The underreporting of export sales and over-reporting of imports are typical capital flight mechanisms when currency controls are in place," Oks said.

"The cost of this policy is less investment and less supply ... and in the long run, less employment," he added.

The foreign currency restrictions have already hurt sales in the real estate market, where historically properties were bought and sold in dollars.

The overvalued peso has hurt exports of everything from apples to olive oil while discouraging investment in industries such as plastics, electronics and car parts.

Argentina's lucrative grains exports remain competitive, however, and its auto sector is buffered by advantageous trade accords with Brazil.

Nonetheless, the multiple exchange rate system takes a toll on companies and investors.

"They presume they're facing a scenario of currency instability so they stop making long-term decisions and wait for an adjustment to the exchange rate," said Marcelo Elizondo, who runs foreign trade consultancy DNI.

The central bank has been allowing the official exchange rate to depreciate at a faster rate. The peso has already weakened 7.7 percent against the dollar so far this year, topping the 7.6 percent slump seen in 2011 as a whole.

Analysts are divided over whether the government will allow an even sharper depreciation. Nomura investment bank sees the peso at 5.65 per dollar by the end of 2013, whereas Morgan Stanley forecasts the rate at 7 per dollar.

Fernandez may take it slow to avoid alienating voters ahead of a mid-term election, scheduled for October next year.

"When you devalue, salaried workers lose out and this is the government's electoral base. So they'll try to avoid this at all costs, at least until the election," a source in the foreign exchange market said.

Argentina’s dubious poverty line

http://www.economist.com/node/21562238

Argentina’s dubious poverty line

The six-peso diet

Rumbling stomachs, grumbling citizens

Sep 8th 2012 | BUENOS AIRES | from the print edition

SIX Argentine pesos ($1.30 at the official exchange rate, or about $1 on the black market) is just enough to buy an alfajor, a sweet biscuit nibbled between meals over coffee. But according to the government, it is more than sufficient to buy an entire day’s food. On August 10th INDEC, the national statistics agency, declared that a family of four should be considered above the poverty line if its monthly food bill exceeded 688 pesos, equal to about six pesos per person per day.

The claim has stuck in the throats of ordinary Argentines, who have to spend far more than this to keep hunger at bay thanks to galloping inflation. Indignant citizens created mock advertisements featuring pizzas the size of finger nails. Hackers disabled the INDEC website, tweeting: “Now you’ll have to use your six little pesos to restore your page :)”.

 

Experts also doubt the government’s claim. A study by the University of Buenos Aires puts the minimum daily budget for a healthy diet at 24 pesos per person, four times the official figure. “It is totally impossible to eat healthily with six pesos,” says Sergio Britos, one of the study’s authors. INDEC’s report “loses all credibility” by supposing unrealistically low food-prices, he says.

It is not the first time that official reports have played down the cost of living. Since 2007 the government has published bogus inflation statistics to beguile voters and investors. In February, with independent estimates running more than twice as high as official ones, The Economist stopped publishing INDEC’s inflation figures.

The gap between official pronouncements and reality is not lost on the public. Margarita Barrientos, the founder of a soup kitchen in one of Buenos Aires’ poorest barrios, spends about six pesos per person for a single meal, and calls INDEC’s statement “insulting”. “What can you do? The government will always give the figures that suit its needs,” she shrugs. A beggar in one of the city’s trendier neighbourhoods laughs heartily when asked if she could feed her family for six pesos each. “If that were true, I would be rich,” she says.

Argentina’s inflation problem: The price of cooking the books

An extraordinarily elaborate deception may come back to haunt the government as the economy deteriorates
http://www.economist.com/node/21548229



HISTORY has left Argentines with more than their share of economic trauma. Having twice suffered destructive bouts of hyperinflation in the late 1980s, they are sensitive to rising prices. When they spot inflation their instinct is to dump the peso and buy dollars. But after the economy collapsed in 2001-02, horror at mass unemployment temporarily eclipsed the public’s fear of inflation. That has been the successful political calculation of the president, Cristina Fernández, and her late husband and predecessor, Néstor Kirchner. For years they stoked an overheating economy with expansionary policies. Faced with the resulting rise in inflation, their officials resorted to price controls—and to an extraordinarily elaborate deception to conceal the rise.

Since 2007, when Guillermo Moreno, the secretary of internal trade, was sent into the statistics institute, INDEC, to tell its staff that their figures had better not show inflation shooting up, prices and the official record have parted ways. Private-sector economists and statistical offices of provincial governments show inflation two to three times higher than INDEC’s number (which only covers greater Buenos Aires). Unions, including those from the public sector, use these independent estimates when negotiating pay rises. Surveys by Torcuato di Tella University show inflation expectations running at 25-30%.

PriceStats, a specialist provider of inflation rates which produces figures for 19 countries that are published by State Street, a financial services firm, puts the annual rate at 24.4% and cumulative inflation since the beginning of 2007 at 137%. INDEC says that the current rate is only 9.7%, and that prices have gone up a mere 44% over that period (see chart).

INDEC seems to arrive at its figures by a pick-and-mix process of tweaking, sophistry and sheer invention. Graciela Bevacqua, the professional statistician responsible for the consumer-price index (CPI) until Mr Moreno forced her out, says that he tried to get her to omit decimal points, not round them. That sounds minor—until you calculate that a 1% monthly inflation rate works out at an annual 12.7%, whereas 1.9% monthly compounds to 25.3%.

Threatening letters sent by the government to independent economists also shed light on INDEC’s methods. One was told that since the cost of domestic service was “a wage, not a price”, he should not have included it in his CPI calculations. “They have put a lot of effort and lawyers into such arguments,” he says.

Ana María Edwin, INDEC’s current boss, is unrepentant. In Ms Bevacqua’s day, INDEC artificially boosted the inflation rate, perhaps to benefit holders of inflation-linked bonds, she claims. She hints at underhand, possibly criminal, dealings between former INDEC staff, independent Argentine economists and international financiers. The evidence? That agreements between Mr Moreno and retailers to cap prices of basic products were not reflected in INDEC’s calculations before 2007. That suggests INDEC is now using some government-mandated prices rather than those that consumers actually pay.

When a product’s price spikes, INDEC takes it out of the CPI basket. “Poor people don’t just keep buying things if their price goes up a lot,” Ms Edwin explains. “They think: I will leave those tomatoes for the rich.” A proper CPI calculation does indeed involve rules for dealing with changes in buying patterns. But the potential for abuse is clear.

Some Argentine government bodies seem well aware of the true inflation rate. Foreign investors report presentations by the Central Bank mentioning a real (ie, inflation-adjusted) exchange rate that implies annual inflation of around 20%. Economists who have picked through the somewhat suspect figures for economic growth say they can discern a similar rate in the “deflator” used to correct some prices. Perhaps most intriguingly, INDEC’s and PriceStats’ inflation rates accelerate and decelerate in tandem.

The government has gone to extraordinary lengths, involving fines and threats of prosecution, to try to stop independent economists from publishing accurate inflation numbers. The American Statistical Association has protested at the political persecution faced by its Argentine colleagues, and is urging the United Nations to act, on the ground that the harassment is a violation of the right to freedom of expression.

At the government’s request, last year the IMF sent experts to help it plan a new national CPI. Ms Edwin says that the new index will not be ready until early 2014.

The longer this deception goes on, the trickier it is for the government to end. Faced with deteriorating fiscal accounts, Ms Fernández has begun to trim subsidies amounting to 5% of GDP. Their removal will push prices up further—as would a weakening of the peso. So Mr Moreno’s latest wheeze involves responding to a vanishing current-account surplus with strict import controls, which will undermine growth. Argentina has created a statistical labyrinth that might have been dreamed up by Jorge Luis Borges, the country’s greatest writer. This story is unlikely to have a happy ending.

Argentina is trying to build a scientific establishment

http://www.economist.com/node/21536542

SOUTH AFRICA is not the only middle-income country which aspires to join the world’s scientific powers (see article (http://www.economist.com/node/21536541) ). Argentina would like to as well. The place is proud of its three Nobel science prizes—the largest haul of any Latin American nation—even if the most recent was awarded in 1984. But many researchers fled in the 1990s, when budgets were slashed. Now the government is trying to attract them back, and to encourage younger talent to consider a scientific career.

When Néstor Kirchner, the predecessor and late husband of the current president, Cristina Fernández, took office in 2003, Argentina was spending just 0.41% of its GDP on research and development (R&D). Now, that figure is 0.64%. (Brazil, by comparison, spent 0.95% in 2003 and 1.18% in 2009.) Kirchner raised researchers’ salaries, launched a scheme to repatriate departed scientists and gave tax breaks to software companies. Ms Fernández followed suit by creating a science ministry and putting a biologist, Lino Barañao, in charge of it. She also increased grants to firms that try to develop new products.

Many of the Kirchners’ critics were sceptical, seeing the ministry either as a political marketing ploy or as a soft touch for lobbyists seeking unjustified subsidies. But the strategy seems to be working. With help from the Inter-American Development Bank the government has, since 2004, lured back 854 expatriate scientists. It has done so by providing new laboratories and equipment for them, moving their families, and forking out extra money for their salaries. As a consequence, according to Dr Barañao, Argentine researchers have published 179 articles in leading journals in the past decade, compared with just 30 in the 1990s.

Most of the returners are academics. But commercial science has benefited, too. Indear, a joint public-private biotechnology-research centre based in Santa Fe, recently worked out how to transfer a gene for drought resistance from sunflowers to crops such as maize, soyabeans and wheat. That can increase yields in droughts by up to 40%. And the government has also doled out $54m in grants for the development of products that include coagulant factors to treat haemophilia, transgenic cattle which secrete valuable hormones in their milk, and better ways of probing for oil deposits.

Help for high-tech innovation comes in other forms, too. The state offers, for example, to pay the cost of patenting inventions in foreign jurisdictions and of hiring lawyers to defend those patents. It also acts as a headhunter for information-technology firms seeking employees with PhDs, and will pay part of the salaries of such recruits. None of these programmes has faced allegations of corruption.

Whether all this activity will have the effect of stimulating high-tech industry, as Ms Fernández hopes, remains to be seen. Argentine scientists are happy to take taxpayers’ money but according to Luis Dambra, a professor at the IAE business school in Buenos Aires, they look down their noses at the idea of actually getting their hands dirty by going into industry. Mr Dambra, though, says industry is equally to blame. In 2009 (the latest year for which data are available), only 21% of Argentine R&D was paid for by the private sector, compared with 44% of Brazil’s. Firms that might recruit academic scientists often do not see the point. Even those that do may struggle to accommodate people with a non-commercial background into the business world.

Attitudes can change, of course. In the 1980s many British academics were as snobbish about commerce as Argentina’s are now. These days, Britain’s top universities are gung-ho for spin-outs and the revenue they can provide. But it takes time and consistent policy to make such changes and Argentina is notorious for sudden alterations in the political weather. That makes the country a perilous place to invest, whatever the current climate.

Argentina's Debt Default: Gauchos and Gadflies

http://www.economist.com/node/21533453

Creditors’ decade-long battle with Argentina shows just how tangled sovereign defaults can be

AS GREECE flirts with disaster and several other European countries buckle under heavy debts, creditors’ experience with Argentina should serve as a sobering reminder about the mess that can follow a sovereign default. A decade after the Latin American country welshed on $81 billion, disgruntled creditors are still chasing their money. The litigation, and Argentina’s defiance in the face of judgments against it, complicate its plans to return to international capital markets.

Argentina’s default, after a severe economic crisis, sparked social unrest and runs on banks. It subsequently presented creditors with a take-it-or-leave-it offer of 35 cents on the dollar. They considered this derisory: previously, delinquent countries had typically paid 50-60 cents. But the government stood firm and roughly three-quarters of the bondholders took part in a debt exchange in 2005. More joined in 2010, bringing the total to 93%.

But the rest, holding $6 billion-worth of debt (excluding accrued interest), continue to insist on a higher payout, pointing to Argentina’s strong commodity-led recovery. They were able to hold out because Argentina’s bonds had no “collective-action clause” forcing everyone to participate if it reached a threshold of takers. Such clauses have since become commoner in emerging markets, and are due to become standard in Europe as part of the European Stability Mechanism, a planned replacement for the euro zone’s current bail-out fund.

The holdouts are a motley crew. The noisiest are two “vulture” funds that bought many of their bonds in the secondary market: EM and NML Capital, an affiliate of Elliott Management, a hedge-fund group with a long history of butting heads with countries in default. The other main constituency is a group of 60,000 individuals from Italy, where Argentine bonds had been a popular retail investment.

Because the bonds were mostly issued under New York, not Argentine, law—a move designed to give comfort to investors and reduce the interest rates they demanded—the creditors could sue in America. Argentina played for time, at one point unsuccessfully arguing that only the agent through which the bonds were issued, not the beneficial holders, could sue. But over the years courts have handed down hundreds of judgments against Argentina, including $3 billion-worth for NML and EM.

Getting the country to cough up is another matter. Unlike companies, countries cannot officially go bust so their creditors don’t have the benefit of a clear insolvency framework. It comes down to what assets they can persuade a judge to “attach”, or deem subject to seizure. National sovereign-immunity laws protect many state-owned assets abroad, such as embassies. In America, however, stuff that is used for commercial purposes is fair game.

Judge Thomas Griesa, who has presided over much of the litigation, has branded Argentina’s manoeuvres “immoral”, turning the writ of American courts into a “dead letter”. But he acknowledges that it is not a normal commercial party. He likes to remind the plaintiffs that they have rights but may not have remedies.

The upshot is a game of cat and mouse as creditors resort to novel tactics to get their money. This is bread-and-butter stuff for Elliott, which has stretched the legal envelope several times before in pursuit of sovereign deadbeats. The firm is going after assets belonging to Argentina’s central bank (known at home as the BCRA), invoking the “alter ego” theory. This states that the BCRA is a fair target because it lacks separateness from the government, which has used it to finance pet projects and to pay favoured creditors. Judge Griesa has upheld this theory. Lawyers disagree about whether an appeals-court ruling in New York in July undermined it.

One target is BCRA funds held at other central banks. EM and NML came close to seizing $105m parked with the Federal Reserve Bank of New York, but an appeals court ruled that the money was not for “commercial” use and was thus immune. This case could end up in the Supreme Court. The creditors have sent subpoenas to banks that work with Argentina, asking for details of its commercial activities worldwide. Earlier this year Britain’s top court ruled that they could pursue claims in British courts.

Creditors have scored some modest successes. Some $90m was seized from the New York trustee with which shares of a privatised Argentine bank had been deposited. And a few million dollars were grabbed from a science-ministry account, used to buy telescopes, at an American branch of another bank. Among the assets that the holdouts have tried and so far failed to get are shipments of natural gas and satellites. Lawyers spent many hours arguing over whether the satellites, part of a multi-governmental project, should be considered Argentine and commercial.

Biscreants?

The vulture funds’ boldest move has been to target the Bank for International Settlements (BIS), the bank for central bankers based in Basel. (Elliott’s lawyers reportedly served Jaime Caruana, the bank’s general manager, with a subpoena at a public event, just as he was about to speak.) The funds allege that the BIS has abused the immunities it enjoys as a multilateral institution by allowing the BCRA to park 80-90% of its $48 billion in foreign reserves in Basel, out of creditors’ reach, when other central banks typically keep only 3-5% of their reserves there. Although the BIS says 80-90% is “grossly overstated” (it won’t disclose the actual number), nobody denies that the BCRA has a lot more of its money there than its peers do.

A Swiss court sided with the hedge funds, which had sued under a debt-collection law, but was overruled by an appeals court on a technicality. The Swiss supreme court then swooped in to confirm the BIS’s immunity to seizure or prosecution. It typically takes several months to reach a decision, but this one came in a fortnight—a sign of the cut-and-dried nature of the case or indirect political pressure, depending on whom you ask.

The BIS declined to comment for this article but it has said publicly that taking central-bank deposits allows it to fulfil its function as a global settlements hub, that its immunities help it to operate in the public interest and that central banks are “generally entitled” to immunity protection. It rejects claims that it is above the law, pointing out that trading counterparties can take complaints to arbitration (none has).

The difference in this case, it might argue, is that the creditors’ beef is with a client, not the BIS itself. “They don’t want to become a centre of recovery for creditors of developing countries,” says someone familiar with the bank’s thinking. At the very least the BIS is caught uncomfortably between the legal logic of the holdouts and the political logic of sovereign countries.

EM and NML are still hopeful of exploiting this tension. They have brought a case against Switzerland at the European Court of Human Rights, under Article 6 of the human-rights convention, which guarantees the right to a fair hearing. Eager to kick up as big a stink as possible, they have even filed a criminal money-laundering complaint against unknown individuals at the BIS. But the odds are stacked against them.

The 60,000 Italians, who hold $1.3 billion in claims, are attacking from another angle. This summer the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) agreed to hear their case against Argentina, the first time ICSID has allowed a group action of this type. The bad news for them is that Argentina, alone among G20 countries, has a habit of cocking a snook at ICSID rulings. Azurix, an American water company, has been unable to collect $165m awarded in 2006 because Argentina insisted it refile its claim in its courts, making a mockery of the idea that the arbitration process transcends national legal systems.

Unimpressed, America is applying pressure. In September it voted against a $230m loan to Argentina from the Inter-American Development Bank, one of the three multilateral agencies the country has been able to tap for funds since terminating its IMF programme in 2005. It has vowed to do the same at the World Bank. ICSID is not America’s only peeve. It is also frustrated that Argentina has been dragging its feet over paying its $6.7 billion debt to the Paris Club of sovereign creditors, and that its anti-money-laundering framework is full of cracks.

It is hard to see how the deadlock with holdout creditors can be broken. With Cristina Fernández set to be re-elected as Argentina’s president on October 23rd, no big political shift is on the horizon. Nor does a sudden meeting of lawyers’ minds look likely. At the latest New York court hearing on September 28th, decade-old arguments were revived, including over “pari passu” covenants, which state that no group of creditors should get a better deal than any other. The holdouts want these interpreted in a way that secures them a 100% payout when Argentina next services its restructured debt. That would jeopardise all of the restructuring done to date, counter the government’s weary lawyers. Some cases, such as the ICSID one, look set to rumble on for at least another five years.

Still circling

The vulture funds are unlikely to let up. Persistent harassment and provocative tactics are their stock-in-trade, and these occasionally pay off handsomely. In 2000 Elliott wrung a settlement from Peru worth five times what it had paid for a chunk of the country’s defaulted debt in 1996. Victory came after it obtained a restraining order from a Belgian judge blocking the country’s financial agent and clearing house from paying interest on Peru’s Brady Bonds. The firm will continue to lobby lawmakers to pass laws penalising countries that defy American court judgments. One state law did almost pass, but banks that underwrite emerging-market sovereign-debt issues managed to block it.

It is unclear whether Argentina could really return to global markets without disruption from the holdouts, as officials claim. International bond proceeds would surely be a target for seizure. Foreigners can buy debt issued domestically, but artificially low yields and the risk of another default make that unappealing. With external finance in short supply, the government included a provision in its latest budget to use BCRA reserves to pay off maturing bonds. Not every sovereign default is as convoluted as Argentina’s. But it still gives warning of how messy things can get when countries don’t pay up.

Argentina’s presidential election

http://www.economist.com/node/21533401

Cristina Fernández has so far proved the naysayers wrong. How long can she stick to the policies that are about to win her a second term?

ARGENTINA is holding a presidential election on October 23rd, but a foreign visitor could easily come and go unawares. The campaigns have put up posters, but fewer than in past contests. Cristina Fernández, who is running for a second term, rested this month to lower her blood pressure, and took more time off after her sister-in-law’s boyfriend died on October 13th. Dinner-party chatter focuses more on the Argentine Football Association’s presidential election than on the country’s.

The campaign has attracted so little interest because a first-round victory for Ms Fernández is all but sewn up. To avoid a run-off, she needs either 45% of the vote or 40% plus a ten-point lead over the runner-up. She got 50% in a national primary in August, and is now at 52% in the polls. Her top rival, Hermes Binner, has 16%. If the congressional vote shows similar results, then Ms Fernández’s wing of the Peronist party should retake the lower house and increase its Senate majority as well.

Her re-election is striking given how improbable it once seemed. She won the 2007 vote as the chosen successor of Néstor Kirchner, her husband, who did not run for a second term. But her presidency soon unravelled, as she picked fights with American investigators she accused of smearing her over a campaign-finance scandal, soyabean farmers over export taxes and the media over their coverage. Moreover, the economy slowed in 2008 in response to the world financial crisis and a drought. Her approval rating fell to 23%, and her party lost control of Congress in 2009.

But the same advantages Mr Kirchner enjoyed as president have helped his wife as well. Above all, she has had great economic luck. The price of soyabeans, Argentina’s main export, has set a series of record highs. And both the economy and currency of Brazil, the country’s chief trading partner, have taken off, creating a booming market for manufactured goods.

Her other leg up was a hapless opposition. Following Argentina’s return to democracy in 1983, power alternated between the populist Peronists and the middle-class Radicals. But the Radicals happened to hold power when the economy crashed in 2001, and voters never forgave them. Moreover, Mr Kirchner used his control of public spending to take over Peronism and sideline its centre-right faction.

That has left the opposition as a hotch-potch that can agree on nothing save their distaste for the government. Despite winning the 2009 midterms, they could not unite to stop Ms Fernández from passing legislation. One new law, which required presidential candidates to win a primary, might have encouraged the opposition to agree on one or two candidates. Instead, the challengers all formed their own parties. The field includes two conservative Peronists, one Radical, one former Radical and one Socialist who had previously allied with the Radicals. Conspicuously absent is Mauricio Macri, the strongest opposition politician, who is standing for re-election as mayor of Buenos Aires.

The third factor behind Ms Fernández’s political revival was a personal tragedy: her husband’s death from a heart attack last year. Mr Kirchner alienated voters by leading the government’s battle with farmers in 2008, and his control over the economy and Peronism undermined Ms Fernández’s leadership. But his death led Argentines to venerate him, and turned his wife into a victim. Her approval rating rose by 25 points after he died.

She has further benefited from low expectations. Argentines who feared she could not govern alone have been reassured that little has changed. Her slogans have all stressed her “strength” in the face of loss: “the strength of the future”, “the strength of the people” and “the strength of consolidation”. “Cristina may not have charisma, but she has character,” says Luis Tonelli, a political scientist. “The opposition says, ‘No you can’t’, and she can.”

Yet it would be unfair to attribute Ms Fernández’s looming victory to luck alone. Orthodox economists have long warned that Argentina’s economy was overheating. She has ignored calls to step on the brakes, instead increasing energy and transport subsidies and social spending. And her central bankers have printed pesos freely. So far she has been vindicated: during her term the economy has grown by 6.1% a year. Inflation is high, although no one knows how high. Official statistics are doctored, and private estimates are a little over 20%. But the government has kept price increases steady rather than allowing inflation to take off, and has protected household purchasing-power by expanding pensions and welfare benefits.

The president has also managed to soften her image. Much attention has been paid to her wardrobe, which has switched from flashy designer outfits to sober black attire. But she has also changed perceptions of herself as power-hungry, confrontational, distant, stubborn and haughty. “The headlines that used to make me furious now make me laugh,” she said in March. On October 17th she visited a farmers’ group, with whom she had fought in 2008, and kissed its leader’s young son. When the search for a missing girl took over the news, Ms Fernández invited her mother to the presidential palace. She has brought her children, whose privacy she once guarded fiercely, into the public eye. Twenty-year-old Florencia joined her on stage when she won the primaries, and she announced on Twitter that her son Máximo was to become a father. “God takes away from you; God gives to you,” she wrote. (The baby miscarried a few days before the primaries.) “She’s seducing the electorate by opening up her inner world to them,” says Carolina Barros, the editor of the Buenos Aires Herald.

The biggest test for Ms Fernández will be whether she can change her policies as much as she has changed her image. The government has long insisted it would not cool the economy while the “anchors” of fiscal and trade surpluses and a cheap currency remained in place. Those anchors have now been pulled up (see chart). The budget is in deficit, the current account is near zero, and the peso is overvalued. Relative to the dollar, Argentina is nearly as pricey as it was in the 1990s: Buenos Aires’ famous cafés are giving way to Starbucks with its $5 lattes, and the visa lines at the United States embassy stretch around the block.

Barring even better terms of trade, Argentina can only maintain its growth rate with yet more stimulus—which would create yet more inflation. Restaurants are already updating their prices on stickers rather than printing new menus. It is common to pay the bill with 100-peso ($24) notes, once nearly impossible to change. The government has tried to shoot the messengers. It has fined economists who publish their own inflation estimates. And many suspected its interference in April when McDonald’s slowed price increases for the Big Mac—used to calculate this newspaper’s relative-price index—and removed it from its main menu.

The long-term outlook is equally dicey. Argentina is losing $2 billion of capital a month. Although the official statistics put the investment rate at 23% of GDP, this total includes house-building, cars, air conditioners and mobile phones, as well as public works. According to Fausto Spotorno of Orlando Ferreres, a consultancy, “productive” private-sector investment has fallen from $35 billion in 2008 to $29 billion. Price controls have crushed Argentina’s domestic energy production, taking its energy-trade balance from $6 billion of net exports in 2006 to an expected $2 billion of net imports this year. Even Amado Boudou, the economy minister, says “no one should be proud” of this trend.

Ms Fernández says that Argentina is “shielded” from the global economic slowdown. If she plans to make adjustments, however, she would surely keep that quiet until after the election. For years Argentina’s economy has been “on autopilot”, says Miguel Kiguel, a former finance official. The president will soon have to take the controls—without the co-pilot she counted on for most of her career.

The discontents of progress in Latin America

As Latin Americans become less poor, they want better public services
http://www.economist.com/node/21534798













LATIN Americans are demanding more of their democracies, their institutions and governments; they worry about crime almost as much as about economic problems; and fewer of them think that their country is progressing. Those are some of the findings of the latest Latinobarómetro poll, taken in 18 countries and published exclusively by The Economist. Because the poll has been taken regularly since 1995, it does a good job showing how attitudes in the region are changing.













Despite Latin America’s strong recovery from the recession of 2008-09, this year’s poll, which was taken in July and August, reveals some diffuse discontents. It suggests that little over half of Latin Americans are convinced democrats, a fall of three points since last year (see table and chart 1). Guatemala, Honduras and Mexico all saw a sharp slump in support for democracy, probably because of high levels of violent crime in all those countries. Only 45% of Brazilian respondents were convinced democrats, a nine-point fall from last year: it is harder to pinpoint why, except perhaps that Dilma Rousseff, the new president has taken a tough line on corruption, thus drawing more attention to it.













Only 39% of respondents across the region said they were satisfied with the way their country’s democracy works in practice—a fall of five points compared with last year. Argentines were much more satisfied than in 2010—which helps to explain why Cristina Fernández easily won a second term in a presidential election this month. Chile leads several countries where disgruntlement is rising: only 32% of Chilean respondents were satisfied with the operation of their democracy, down from 56% last year (see chart 2).













That doubtless reflects months of protests over the high price of education in Chile (see article (http://www.economist.com/node/21534785) ). The quality of public services is becoming an increasingly important issue across the region, especially for what is dubbed the “new middle class”. “There’s a feeling among those who have left poverty that it’s much more difficult to carry on rising,” says Marta Lagos, Latinobarómetro’s director. “They want to compete on equal terms with the rich.”

Some Latin Americans feel that their governments are not giving them value for money: 96% of respondents in Brazil thought that taxes were “high” or “very high”, while only 13% think that they will be well spent. A clear majority continue to believe in the market economy. Such attitudes ought to provide an opportunity for politicians of the centre-right in a region that has voted for many leftish governments over the past decade. But against that, only 20% of respondents think that the distribution of income in their country is fair. (That number rises to 43% in Ecuador, which helps to explain the popularity of its populist president, Rafael Correa.)













This more demanding attitude is also reflected in falls in the number of respondents who think their country is making progress (see chart 3). These declines are particularly pronounced in Chile and Brazil, two countries where the “new middle class” is numerous, but also in the Dominican Republic and Costa Rica, whose economies have grown strongly in recent years. This year’s poll also reveals a slight fall in confidence in the region’s institutions of all kinds (see chart 4). In the case of governments (in which 40% of respondents expressed confidence, down from 45% in 2010), this follows several years in which public trust has risen. Confidence in the Catholic church among respondents in Chile has plummeted to just 38%, from 62% last year, following a paedophilia scandal.




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This year’s more disgruntled mood is striking because public concern about unemployment and economic problems has returned to its pre-crisis level (see chart 5). But Latin Americans worry more about crime: 28% of respondents (and 61% in Venezuela) say this is the main problem in their country. Brazilians worry most about their health system, Chileans about education. In this, they may be trendsetters.