Argentina Goes All In
by Noam Lupu

President Bush was going to be the "Latin America president." He spoke Spanish on the campagn trail in 2000, and the first head of state he hosted as president was Vicente Fox, the President of Mexico. But Latin American leaders soon realized Bush was too caught up in the Middle East to pay attention to his neighbors to the south. For Argentina, that neglect may have been a blessing in disguise.

Without the United States in its way, Argentina's government has been able to take aggressive positions in its foreign policy. The government of Néstor Kirchner has locked horns with the International Monetary Fund, taken an increasingly hard line toward international creditors, and worked to weaken US power in the region. All to increasing popularity at home and little notice in Washington.

Critics say Kirchner is simply repeating the populist mistakes of his predecessors. In May, the New York Times compared his policies to Argentina's 1982 invasion of Britain's Falkland Islands. That hopeless incursion was an attempt by Argentina's military government to cash in on rampant public nationalism. And its humiliating defeat led to the ousting of the junta.

The Kirchner government may indeed be pandering to public opinion like its military predecessors: Argentines are famously anti-American and anti-IMF. A recent poll indeed showed that confidence in the Kirchner government has risen 19 percent since August. Nevertheless, Kirchner's strategies are not only far more rational than the junta's, they are exactly what the doctor ordered.

Last week the Financial Times warned that Argentina may be "overplaying its hand" in attempting to restructure the $103 billion debt on which it defaulted at the end of 2001. It was the largest sovereign debt default in history, and Argentina plunged into a deep crisis: The peso was devalued, depleting Argentines' savings, and unemployment neared 25 percent. Three years later, private holders of defaulted Argentine bonds — including thousands of middle-class Europeans — are still demanding repayment.

The government is offering a debt swap amounting to roughly 30 cents to the dollar. Michael Mussa, former chief economist for the IMF, colorfully told the Wall Street Journal that the government's offer was unreasonably low: "This isn't a haircut... It's not even a scalping. They want to behead people down to the level of their knees." Still, the government is confidently allowing creditors to decide individually whether to take the deal.

The anger of private creditors is justified. With a fiscal surplus expected to double the target set by the IMF, the government has the cash to repay its debts. But in a country where nearly half the population fell into poverty as a result of the crisis, repaying foreign creditors hardly seems the first priority.

Instead, the government's strategy is very simple: Divide and conquer.

By going into the market, Argentina is almost assured that half the bondholders will take the deal. Roughly 40 percent of the bonds are held within Argentina itself, by pension funds and government entities that are certain to take the deal. And certainly some investors and international banks will go along to put the whole nasty episode behind them.

That would still leave a large sum of outstanding claims, which the government says may never be resolved. But that will probably not be enough to deter investors from lending to Argentina again; capital is indeed already trickling back into Argentina. Global money managers are grasping for returns, and Argentina's enormous economic gains since 2001 make it an attractive option.

For its part, the IMF is trying to put pressure on Argentina to sweeten the debt restructuring deal. It has repeatedly threatened to pull its loans, which stipulate that Argentina enter into good-faith negotiations with private creditors.

Kirchner, however, knows these threats are empty. The IMF depends on interest payments to maintain its own budget. With over 15 percent of its outstanding credit in Argentina, the IMF is largely dependent on Argentina continuing to make its payments.

That means Kirchner has a great deal of leverage to wield, and the IMF is unlikely to risk its own financial crisis by cutting him off.

Kirchner is also working to develop that kind of leverage against the United States. A bilateral trade agreement is in the works between the European Union and Mercosur, the customs union to which Argentina belongs. The Kirchner government has also been courting investment and closer ties with Asia. South Korean President Roh Moo-Hyun recently signed a loan agreement with Argentina. On a recent visit, Chinese Premier Hu Jintao promised $20 billion worth of Chinese investments over the next 10 years and signed a trade agreement.

With the Bush administration almost entirely disengaged from Latin America, Argentina's negotiations have gone largely unnoticed in the United States. But the strategy is clear. China is already the fourth-largest destination of Argentine exports. As Argentina increases its share of exports to Asia, it will become less dependent on US markets, currently its No. 1 trading partner. That will weaken US ability to strong-arm Argentina. And if the stalled negotiations for a Free Trade Area of the Americas recommence, Argentina will be better poised to dictate its own terms.

All this may seem arrogant and wrongheaded at first glance. But it is in fact the Argentine government behaving strategically while the United States is busy in Afghanistan and Iraq.

The Kirchner government may not be winning many friends among its bondholders, the IMF or the State Department, but it is doing all the right things toward securing a place for Argentina in the global economy without compromising its own political future.

E-mail Noam Lupu at noam at flakmag dot com.