UNLIKE individuals, states can borrow money that will only be repaid over generations. They will also borrow to repay outstanding debt. Very few countries do not carry a burden of borrowing and the extent of that financial weight is measured in its relation to the country’s earnings, its Gross Domestic Product (GDP).
Eurozone member states for instance are obliged by the rules underpinning the single currency to have debts that are no more than 60 percent of GDP. Though this formula is more honored in the breach by the likes of Italy, France, Belgium and of course Greece, the euro has the apparent might of the European Central Bank behind it and the Union’s economic powerhouse, Germany.
Argentina’s debt to the GDP is currently around 86 percent, modest when compared to Belgium’s 160 percent ratio but nevertheless, the country is on the financial skids. With inflation in excess of 40 percent and a collapsing currency the economy is in sharp recession. Mauricio Macri, the president Argentinians elected in 2015 to turn the country around after years of unsustainable spending by his Peronist predecessor Cristina Fernández de Kirchner lost power at the weekend. His defeat was in very large measure due to his inability to rebuild confidence in the economy and stem the flight of much needed domestic capital. It may seem perverse that voters have put back in power the same high-spending left-wing Peronists who brought about that crisis in the first place. But Argentinians can hardly be blamed for their loss of faith in Macri’s free market policies.
The problem is that their new president Alberto Fernández is likely to prove a proxy for Christina Kirchner who has made a triumphant political comeback. Though the two politicians fell out when Kirchner became increasingly dictatorial at the end of her right years in power, they have made up their differences. Just like Macri, they are promising a program to revitalize the economy. However, given Kirchner’s record, it is hard to see what the new government can do to reverse the financial decline.
The core challenge for this potentially prosperous country is that has never learned to live within its means. Since it became independent from Spain in 1816 it has defaulted on its international borrowings no less than eight times. This sorry record has more often than not meant that overseas lenders imposed high premiums to lend to the country. Expensive debt has undermined competitiveness in foreign markets.
In addition, the regular governmental record of financial incontinence has built in the minds of Argentinians an expectation that the next devastating economic crisis is not far away. The elite can afford to park wealth abroad in gold or foreign currencies. The less well off traditionally spend spare income buying dollars. It is only the many poor and jobless who have no such option and who once again, are having to turn to soup kitchens and charities to survive. There is of course corruption, always enhanced by rising economic distortions. But at the heart of this South American country’s difficulties lies a lack of confidence in itself. Countries cannot grow if most of their citizens are constantly planning for yet another downturn. Argentinians are locked in a downward spiral of pessimism. President Fernandez will be hard pressed to find any sort of lift to pull out of this dive.
