National Review, November 10, 2011 (November 28, 2011 issue)

If you want to understand why Argentina’s Cristina Fernandez de Kirchner triumphed quite so conclusively (with 54 percent of the vote against 17 percent for her nearest challenger) in October’s presidential election, the University of Buenos Aires’s Museum of Foreign Debt is a splendid place to start. That such an institution exists says nothing good about Argentine financial history. What it contains suggests yet more turbulence ahead.

The museum is a showplace for an unconvincing national alibi. Argentina is innocent and maligned, its tale not one of squandered wealth, but of victimhood, as it is repeatedly plundered by Anglo-Saxon (of course!) financiers, helped in later years by their stooges at the IMF. Under Juan Peron, however, things had been different. During the Peronato, the foreign debt was repaid. Indeed it was, but (as is not explained in the museum) that owed more to the capital surpluses built up during World War II than to Peronism’s autarkic economic model, which was in deep trouble by the time its creator was deposed in 1955. No matter, Peron’s curious mix of fascism, corporatism, and Evita has never quite lost its grip on a nation forever searching for a magical solution to its largely self-inflicted woes. And now, a decade of growth under a new generation of Peronists has convinced many Argentinians that the conjurer-caudillo was on to something.

It’s hard to blame them. Just ten years ago, the botched free-market experimentation of the 1990s had pushed Argentina into the abyss. It began well enough, but pegging the peso to the U.S. dollar (a key part of the process, and the wrong currency to choose) without sufficient structural reform left Argentina increasingly uncompetitive. Lower export prices and successive emerging-markets crises in the latter part of the decade made matters worse. The country’s budget swung wildly off-kilter. Spending was too high, tax revenues too low. Foreign lenders filled much of the gap. Today’s Greeks know how the story ends. They should also note this: Billions in additional borrowing and belated attempts at austerity were not enough to put things right. The economy plunged. Capital fled. In December 2001, the government introduced the corralito (later toughened into the corralon), a measure that (more or less) froze all bank accounts. Argentina went into default shortly thereafter.

This remains (fingers crossed) the largest sovereign-debt default ($95 billion) in history. The dollar peg was dropped a few weeks later; the peso crumpled. Dollar deposits in Argentine banks were swapped into hugely depreciated pesos, a precedent that ought to alarm savers in the eurozone’s PIIGS. If the drachma and its feeble kin are to return, there will be corralitos first. Depositors have been abandoning their banks in Greece, Ireland, and elsewhere. Who can blame them?

Argentina’s financial breakdown had been accompanied by trouble in the streets and chaos in the corridors of power. Depending on how the term “president” is defined, the country had as many as five of them within two weeks. The last was Eduardo Duhalde, appointed interim president by the legislative assembly. After elections 16 months later, he was succeeded by Nestor Kirchner, a Left-Peronist governor from refreshingly distant Patagonia. The fever had broken. Argentina took a mulligan. Private savers had been crushed, and much of the middle class was pushed into poverty, but many businesses were saved by the effective “devaluation” of their debt. Peso collapse bailed out exporters and local manufacturers battered by the once-overvalued currency, as did a reviving economy fueled by the accelerating global commodity boom (Argentina is a major food exporter) and increased government spending. That spending was financed by the fruits of recovery, the windfall from taxes on those ever-more-valuable food exports and, in a sense, the lower debt burden that was default’s naughty reward. In 2005, Argentina repaid its IMF loans ahead of schedule. Kirchner no longer intended to listen to the organization’s nasty “neo-liberal” advice.

Growth continued to soar. Kirchner would have won comfortable reelection in 2007, but stood aside for his wife, Cristina, an abrasive would-be Evita, but without her cult appeal. Only a few months after taking office, she lost a brutal fight with farmers over plans to hike export taxes, a defeat that contributed to her allies’ taking a hit in nationwide legislative elections in 2009. In a tango variant of the Putin-Medvedev waltz, Nestor Kirchner was due to succeed his wife as their party’s candidate in the presidential elections in 2011, but ended up doing something even more useful for the cause: He died last year, aged only 60.

Tragedy is often a vote winner, and particularly so in a place like enthusiastically morbid, histrionic Argentina. Cristina’s approval ratings jumped 25 points. As a character in a novel by Argentine author Tomas Eloy Martinez once said, “Every time a corpse enters the picture in this country, history goes mad.” A black-clad Cristina threw her widow’s weeds into the political battle with aplomb, gusto, and tears. Nestor (“he is watching, he is here, isn’t he?”) haunted her speeches and her rallies, transformed into the lost leader who sacrificed all. It worked. Wander around Buenos Aires, a city more skeptical about the Kirchners than most, and you will see numerous stenciled graffiti of Nestor as El Eternauta, an iconic Argentine cartoon figure who traveled through time and space, and to the left. Cristina, already Evita, also became Juan to Nestor’s Evita, keeper of the martyr-spouse’s flame.

The economy lent a large hand. By year’s end, GDP will have grown by over 90 percent since its 2002 nadir. The spoils of success have been spread around. Thanks to better times, unemployment has been more than halved from 2002’s 20 percent. The number of those in poverty has fallen sharply. Income inequality has shrunk. Social spending has leapt. The descendants of Evita’s descamisados (the shirtless) knew whom to thank. Throw in a divided and uninspiring opposition, and the rest was victory.

The worry is what comes next. Growth is forecast to ease to a still impressive 4–5 percent in 2012 (after a little over 8 percent this year), but envious PIIGS should be aware that there’s plenty of snake oil in the Kirchner cure, and danger too. Revving up the demand side can work (and has worked), as can devaluation, but, like steroids, such policies are best not overdone. And they have been overdone. Officially running at a fantasy-math 10 percent, inflation is now thought to stand at around 25 percent, a level that has been eroding the devaluation advantage (the trade balance has deteriorated in recent years). Price controls, whether direct (such as those on utilities) or indirect (export taxes), have merely forced this inflation to express itself through shortages and underinvestment, a variant of the distortions now emerging as a result of the country’s growing protectionist tilt.

With public spending still roaring ahead, a cash crunch is drawing closer, exacerbated by the way that the 2001 default and its heavily litigated aftermath have (and perhaps this is just as well) constrained access to international capital markets. The government has taken to raiding the central bank’s foreign-currency reserves to pay those overseas debts it does acknowledge. In a different smash-and-grab, private pension funds worth $24 billion were nationalized in 2008 (in the pensioners’ best interest, of course), a move that also boosted the state’s ability to meddle in some of the country’s largest companies, a temptation that it will probably find difficult to resist: The Kirchner years have already seen the outright nationalization of a number of enterprises.

The markets have read the runes: Foreign direct investment in Argentina has slowed sharply and the locals have followed suit. Capital flight is accelerating and is now estimated at $3 billion per month, something that has provoked a draconian response, even if reserves (for now) remain reasonably healthy. Just after the election, Kirchner launched a new series of initiatives designed to bring dollars back home. These included ordering the country’s energy and mining businesses to repatriate their export revenues, and compelling insurance companies to cash in their foreign investments by year’s end.

These diktats were another display of an authoritarianism that has become more visible as the economic miracle comes under pressure. Economists have been fined for publishing inflation data that differ from the official spin. The inconveniently independent president of the central bank was forced out with the assistance of questionably legal maneuvers. The tactics deployed in the long struggle against the giant Clarín media group have become ever rougher, and show little respect for the idea of a free press. Under the circumstances, Kirchner’s fondness for Hugo Chávez is no surprise, nor is her recourse to conjuring up a handy foreign devil: that “crude colonial power in decline,” Malvinas-stealing Britain.

This is unlikely to end well.