World

Double Down

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Otherwise-obscure central bankers spent an unprecedented amount of time in the global limelight last year. As the crisis brought down not only banking behemoths, but also macroeconomic axioms, the expansionary measures enacted by the Fed’s Ben Bernanke, the European Central Bank’s Jean-Claude Trichet, and the Bank of England’s Mervyn King have been credited, at least for now, with preventing a second coming of the Great Depression. And for that they have been hailed: Bernanke is both Time’s Person of the Year and Foreign Policy’s top global thinker, while Trichet wields tangible power in an otherwise diffuse EU and King has expressed ideas that are likely to influence future financial architecture more than those emanating from 10 Downing Street. But an epic battle unleashed last week between the Argentine government and its central bank is an apt reminder that the most challenging times for central bankers may lay not in the recent past, but in a more problematic future.

Argentina is usually singled out in textbooks as an example of what not to do with a country. Coup d’états and contradictory economic models have turned the fifth richest economy a century ago into the largest-ever sovereign debt defaulter in 2001. It is a tragic story. Since their accession to power in 2003, Néstor and Cristina Fernández de Kirchner, the country’s former and current president, respectively, seemed intent on changing Argentina’s direction post-default. Yet they soon revealed themselves to be another pair of messiahs turned into despots.

As in most developed nations, Argentina’s central bank is, by charter, independent of the country’s executive. The Harvard-educated, intellectually impressive current governor, Martín Redrado, has largely stood behind the Kirchners’ heterodox economic program, which favors export-driven growth as well as interventionist policies, including price controls and active resistance against peso revaluation. He was so supportive that in 2006 he provided central bank reserves to pay back all of Argentina’s outstanding debts with the IMF. As the country has remained largely cut off from capital markets since the default, paying back loans that accrued low single-digit interest (the IMF’s) while continuing to pay double-digit interest rates for “patriotic” bonds financed by their closest regional ally (none other than Venezuela’s Hugo Chávez) was clearly a political decision. For the Kirchners, hatred of the Washington Consensus weights more than the burden of interest.

In their second administration, however, the Kirchners’ authoritarian style has run them into trouble; in the midst of the global crisis, they sought to secure future sources of government spending in what became a true “asset grab.” First, they tried to radically increase taxes on agro-exports (rather sensationally, it was the government’s own vice-president who defeated the bill after a Senate tie). Then, in late 2008, the president pushed for the nationalization of all private pension funds, bringing an additional $25 billion under government control. Everyone saw it for what it was: a scramble for liquidity. Such moves have destroyed what was left of the ruling couple’s international reputation, and also much of their domestic political capital.

But it was only last week that the Kirchners’ hubris provoked a fully-fledged institutional crisis. Sidestepping an increasingly critical Parliament, the president took advantage of a legislative summer recess to issue a decree ordering Redrado to transfer $6.5 billion of bank reserves (around a quarter of the total, depending on the calculation) to the Treasury’s “Bicentennial Fund.” The purpose of such a euphemistically-baptized vehicle was to guarantee outright all 2010 foreign debt payments, in the hope that capital markets would welcome back the government and that fresh funds would revitalize the administration ahead of the 2011 presidential elections.

Reflecting changing political tides, however, Redrado refused to wire reserves to the Treasury, warning that they may be subject to confiscation abroad. After all, many of those bondholders hurt by the 2001 default have yet to settle their cases in international courts. But while the opposition attempted to convene an extraordinary parliamentary session to shoot down Kirchner’s decree, the administration doubled down: Through another decree, it fired the central bank governor. Hence they made a former key ally into a political martyr (and, odds are, a future paladin of the opposition).

Although the move egregiously violated due constitutional procedures and the central bank’s autarky, the government expected a loyalist vice-governor to wire the funds before either Congress or the courts could interject. They even persuaded a respected former governor (by phone, since he was skiing in Switzerland) to replace Redrado after the dirty work of transferring reserves was taken care of. As investors worldwide rejected the measures by selling Argentine assets, a local judge interceded in the eleventh hour, blocking both decrees and returning Redrado to the governorship, at least for now. By the weekend, the government had presented several appeals, which have created an awkward legal standstill between all three powers.

The battle rages on, but the government strategy has already accomplished the opposite of its alleged intention: It only serves as further proof that the Kirchners are not only unreliable, but also worryingly disrespectful of institutions. They themselves are the obstacle for Argentina’s reinsertion into international markets.

But the lessons from this institutional crisis go beyond the enlightening, if characteristically extreme, local status quo. After all, the Argentine government will be far from the only one scrambling for money in 2010. This crisis underlines the importance of maintaining clear differentiation between the short-term needs of specific administrations and a society’s long-term interest. In other words, raison d’état often differs significantly from government goals, prone as they are to election fevers. Given the unprecedented monetary easing of 2009 and equally unprecedented national debt issuance in order to finance gargantuan fiscal deficits, this is bound to become an increasingly problematic issue for governments and central banks in the coming months. In the context, central bank independence and the long-term thinking it allows are necessary insurance mechanisms against government misconduct. At least the takeaway is clear: The least like the Kirchners we manage it, the better.

Interestingly enough, it is Argentina’s traditional regional competitor, Brazil, that seems to have derived the right lesson from the crisis subduing its neighbor; while the institutional battle raged on in Buenos Aires, Brazilian legislators introduced a bill to further shield its central bank from government pressures. At least someone is learning.

Pierpaolo Barbieri is the Lt. Charles Henry Fiske III Harvard-Cambridge scholar at Trinity College, Cambridge.

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