6-30-05, 8:41 am
Although economic and political unrest historically have been a significant challenge for Argentine governance, the 2000-2001 debt crisis has remained unsurpassed in its scope and impact on its links to the U.S. When President Carlos Menem transformed the Argentine economy from a state-dominated protectionist model to free market capitalism beginning in 1989, the future appeared bright. In 1991, Minister of Economy Domingo Cavallo introduced a policy tying the Argentine peso to the U.S. dollar. This dollar peg was an attempt to control and minimize inflation, but in actuality it only contributed to Argentina’s eventual economic upheaval by leading to an overvaluation of the peso, which, combined with overspending, created substantial increases in external debt and budgetary shortfalls.
De La Rúa Strikes Out
Plagued by corrupt tactics and political and economic instability, the administration of President Fernando de la Rúa, winner of the 1999 election over the fast fading Menem, produced only marginal improvements to a rapidly worsening state of affairs. Although the administration negotiated several financial agreements with the U.S.-guided International Monetary Fund (IMF), Buenos Aires failed to comply with the IMF-imposed conditions involving spending cuts and structural improvements, and thus created further skepticism amongst its creditors. Due to this inability to maintain a balanced budget, the IMF declined a request from Argentina for further funding in December 2001, after which the government announced that it would be defaulting on its huge external debt. This decision fostered wide discontent toward Washington as it gave the appearance of having abandoned Argentina in its time of need. After this negative turn of events, which added to the country’s $100 billion debt, the Argentine population began to make a run to the banks resulting in a heavy disappearance of dollars. In response to this growing panic, the government placed a $1,000 limit on such monetary extractions, which, together with the already existing high poverty and unemployment rates (a cumulative result of the four year recession), soon spurred a sharpened political opposition. Violent demonstrations erupted across the country prompting De la Rúa to flee Argentina and formally resign on December 20, 2001.
The Duhalde Presidency
Senator Eduardo Duhalde, the interim president after three predecessors in fast order were eliminated from office, endured similar challenges as the De la Rúa administration, particularly at the beginning of his administration, with the IMF’s refusal to provide further financing in 2002 for the same reasons as in 2001: a lack of progress on structural reforms. This second denial of IMF funding further demonstrated to many Argentines that they could no longer automatically depend on the U.S. for support in a time of internal crisis. Despite these initial obstacles, Duhalde eventually achieved the early beginnings of economic stabilizating through a modest IMF arrangement formalized in 2003.
After Néstor Kirchner won the May 2003 presidential race by default, he adopted a series of bold new policies for Argentina in the areas of human rights, institutional reform and economic policy, and thus regained much of the population’s lost faith in the possibilities of government. Although his initiatives to rid the system of corruption earned Kirchner widespread acclaim, one of his most singular accomplishments came in September 2003 when he reached a three-year standby agreement with the IMF that provided a credit line of approximately $12.5 billion to help planners grapple with Argentina’s formidable debt. Although this agreement did not receive wide support from Argentina’s creditors, including the IMF and private international banks, Kirchner’s bold and more realistic-given the circumstances-economic initiatives earned him not only the respect of most Argentines, but that of Latin America as a whole.
Complications surfaced in 2004 when Argentina suspended its loan program due to IMF pressure on debt negotiations with bondholders as well as the need to implement key economic reforms. After extensive negotiations, a final effort to restructure the debt took place in January 2005, with the emergence of a new Kirchner initiative that provided Argentina with the largest debt-reduction regimen ever witnessed by a developing country. The proposal sparked substantial criticism from many of the creditors and bondholders who would lose most of their money if it were implemented. After reducing the debt from $190 billion to $125 billion, the Argentine government asked for U.S. support in reaching a new IMF agreement. However, little progress was made due to last minute legal challenges by a number of creditors who wanted to attempt to salvage a better return rate on the debt, which they hoped to accomplish through U.S. courts delays on the bond exchange that was scheduled to take place in April, 2005. Although the freeze initiated by these holdout creditors presented a challenge to the anticipated schema for putting the debt repayment to work, to the creditors’ dismay, a New York Federal Appeals Court finally lifted the freeze on May 13, 2005.
Resulting U.S.-Argentine Attitudes and Diplomacy
Argentina has once again emerged as one of the more stable democracies in the region by virtue of its steady course toward economic recovery under Kirchners' bold leadership and his unprecedented debt restructuring strategies. Despite this success however, relations between the U.S. and Argentina have steadily grown more strained. When the IMF declined to offer further financial support in both 2001 and 2002, during a time of internal economic turmoil for their country, many Argentines felt abandoned by its once sturdy ally. Furthermore, during the same time period, the IMF consented to a $15 billion loan to Brazil while only increasing Argentina’s financing by a mere $1.5 billion. This perceived act of near contempt on the part of the IMF has affected U.S.-Argentine relations ever since.
The Bush administration has insisted all along that it had provided Argentina with sufficient financial support in the past and that in order for the nation to truly recover from its overpowering debt, Argentina would have to muster the internal fortitude to make the necessary structural changes. While the Casa Rosada felt slighted by Washington’s lack of financial support, many private U.S. bankers and bondholders asserted that Argentina had muscled into existence an unfair refinancing plan to handle its debt, causing its creditors significant financial losses. But the dissenting bondholders’ and bankers’ failure to find support from U.S. courts only added to their bitterness.
Despite this series of abrasive aggravations, Argentina and the U.S. continue to coincide on what appears to be the majority of issues being debated at the UN, even though in 2003 the Argentine government refused to endorse the U.S.-sponsored 'coalition of the willing' in Iraq. Argentina also abstained from voting on a resolution in the UN Commission on Human Rights addressing Cuba’s human rights violations, something which Bush’s ideological team at the State Department craved. As Kirchner’s government continues to pursue closer relations with Cuba, some U.S. policymakers have expressed concern over the developing relationship. In a recent interview with COHA, such an official voiced his opinion in relation to Argentina’s tolerance of Cuba’s controversial human rights abuses: 'We just wish Argentina would do similar to Cuba as it has done to other countries in the region that have had similar human rights violations, such as Bolivia, Haiti, etc.; don’t Cubans deserve human rights too?' Argentina’s decision to engage in friendly relations with Cuba also demonstrates the growing solidarity of Latin American countries in an effort to combat U.S. dominance in the region and represented a marked departure from relations under Menem. Much to the White Houses’s disappointment, the Argentine government and other key Latin American leaders continue to strengthen their ties with Cuba.
Although relations between Argentina and the U.S. have faced obstacles in recent years, particularly in relation to the restructuring of the Argentine debt and its growing alliance with Cuba, the two countries have managed to maintain a working relationship through cautious, yet cooperative political endeavors. For Washington, Argentina is too important to brazenly discard, while for Buenos Aires, the White House’s tidal pull on the world economy is too pressing to be ignored.
From Council on Hemispheric Affairs
--Shana Ramirez is a COHA Research Associate.
