Argentina Runs Out of Other People's Money

Eleven years after a debt and currency crisis that brought down the government of President Fernando de la Rúa, Argentina is again threatening to boil over in discontent. An estimated 700,000 porteños marched Nov. 8 in Buenos Aires (population 3.1 million), to express their opposition to President Cristina Kirchner. Even allowing for exaggeration by proponents who provided the estimate, it was a big deal. Naturally, since privately owned or operated helicopters were not authorized to fly over the event (Hugo Chávez doesn't allow them during protests in Venezuela either), it was difficult to measure crowd size. But the demonstration in Buenos Aires-as well as smaller marches held the same day in other cities-was significant. Mrs. Kirchner, who was elected to a second four-year term in October 2011 with 54% of the vote, appears to be in deep political trouble. To understand why, recall Prime Minister Margaret Thatcher's 1976 warning that socialists "always run out of other people's money. To the extent it has succeeded, the Kirchner economic model has relied on the 2001 default on $100 billion in debt and interest, a weak peso, protectionism, confiscation of private property, capital controls, broken contracts and high taxes. In other words, it has depended on other people's money. Now, as Mrs. Thatcher warned, that money is running out. In the second quarter, the economy contracted by 1.4%. The Buenos Aires-based think tank Foundation for Latin American Economic Research (known by its Spanish initials FIEL) is forecasting 2012 GDP growth of only 1.5%. Inflation is estimated by independent economists at almost 25% annually. As salaries are adjusted upward to compensate for the loss of purchasing power, workers are being pushed into higher tax brackets. Argentines traveling abroad now have to explain their plans to government bureaucrats if they want to buy hard currency. Add these pocketbook issues to the rising rate of violent crime, recurring corruption scandals, increasing antidemocratic efforts to silence independent media outlets and pronouncements from Mrs. Kirchner's inner circle that it wants to amend the constitution to allow her to run for a third term. The Kirchner government has also angered labor leaders by letting it be known that it plans to shift union control of hundreds of millions of dollars in health-care premiums to the government. Now the $64,000 question (405,000 in devalued Argentine pesos that only 11 years ago were on par with the dollar) is whether what looks like the national rejection of the ruling Argentine political class will turn out to be an inflection point in the 10-year, leftward drift of the country's economic policy. Let's stipulate that the only thing that unites the protesters is their discontent with the status quo. Some Argentines have always understood the short-sightedness of Kirchner economics and its dangerous consolidation of power. But many others are angry simply because the welfare state is no longer able to deliver. The sorry truth is that few opposition leaders or grass-roots organizers favor a free economy, and that means the nation remains far from any market revolution. The good news is that it now appears that Mrs. Kirchner's bid to change the constitution to allow for a third term will be defeated in congress. And unless the economy rebounds sharply, her wing of the Peronist party could suffer significant losses in the midterm congressional elections next year. Yet Mrs. Kirchner has been counted out before. In 2008, when the fallout from the U.S. financial crisis was sweeping the globe and trade financing had collapsed, she tried to raise export taxes on the agricultural sector to confiscatory levels. That provoked a rebellion among farmers who, joined by her urban opponents, managed to block the measure. Her popularity sank to 20%. Economic growth slowed to 0.9% in 2009. Thanks to the U.S. Federal Reserve's generous money creation, however, commodity prices boomed in 2010 and "la presidenta" again had the wind at her back. GDP growth that year was 9.2%. In 2011, when she ran for re-election, it was 8.9%. A similar resurgence in economic activity or some other surprise might save Mrs. Kirchner. But for now she is making Mrs. Thatcher look downright prescient: The country's risk profile is climbing and its reputation for honoring contracts sinking to new lows after the government seized control of the oil company YPF from Spanish parent Repsol REP.MC +2.84% this year. There is little doubt that something happened on Nov. 8, notwithstanding the government's estimate that only 70,000 turned out to protest. "What you should bear in mind is that this crowd was, by far, the largest seen since the democracy was recovered in our country in 1983," Julio Saguier, president of the La Nación corporation, which publishes the daily of the same name, told me from Buenos Aires on Wednesday. Unfortunately the parallels between this government and the military dictatorship that was finally defeated at that time do not end there.