Wednesday, October 30, 2019
IMF to Test Argentina’s New Leader
Santiago Pérez and Ryan Dube. Wall Street Journal. October 28, 2019
After defeating his political rival in Argentina’s presidential election, President-elect Alberto Fernández now faces another adversary and longtime nemesis of the nationalist Peronist movement: the International Monetary Fund.
Mr. Fernández, a veteran Peronist, on Sunday defeated pro-business President Mauricio Macri on a wave of discontent brought on by government austerity, economic stagnation and inflation running at 53%.
Mr. Fernández, a 60-year-old law school professor, inherits a government on the brink of insolvency, saddled with more than $100 billion in foreign debt, and fast-dwindling dollar reserves. To stave off default, Mr. Macri’s government secured a $57 billion IMF bailout in 2018, the largest ever by the fund, adding substantially to the country’s obligations.
The money is conditioned on austerity measures aimed at putting Argentine finances on solid footing—measures that Mr. Fernández campaigned against. The IMF recently suspended a $5 billion installment as Argentina’s political uncertainty and economic turmoil intensified.
As Mr. Fernández prepares to take office in December, he might have to choose between fulfilling campaign promises to stimulate growth and consumption—if he could find the money—or imposing the painful adjustment measures demanded by the IMF in exchange for dollar loans to help cover a budget deficit and meet coming debt payments.
“Populism without money is impossible,” said Benjamin Gedan, an Argentina expert at the Wilson Center, a Washington policy group. “Fernández has raised enormous expectations that he will in short order restart economic growth and improve the lives of suffering Argentines. He’ll attempt to do so with absolutely no resources or access to external financing.”
Concerns about the return to power of the free-spending Peronists have shaken Argentine markets recently. On Monday, the Argentine stock market fell 3.6%, while Argentine bonds plumbed recent lows.
On Sunday night, the central bank sharply tightened capital controls, restricting dollar purchases to a monthly $200 per person. The central bank has used more than $22 billion in foreign currency reserves since August as Argentines bought dollars to protect their savings. It is on track to end the year with just $8 billion in net reserves, according to estimates from Argentine consulting firm Quantum Finanzas.
Before the vote, Moody’s Investors Service predicted the economy will contract 3.9% this year and 2.5% in 2020. GDP shrank 1.7% in 2018.
“The times that are coming won’t be easy,” Mr. Fernández said late Sunday in his victory speech to supporters. “We’ll cooperate in the transition because the only thing that worries us is the suffering of Argentines.”
IMF Managing Director Kristalina Georgieva congratulated Mr. Fernández on his election win. “We look forward to engaging with his administration to tackle Argentina’s economic challenges and promote inclusive and sustainable growth that benefits all Argentines,” she said on Twitter on Monday.
The multilateral organization is one of the favorite villains for Peronists, who have routinely steered Argentina’s economy into financial peril by overspending and then blamed the IMF for the painful adjustment that usually follows when the country must borrow money to pay its debts.
Argentina has had nearly 30 aid packages from the IMF and has defaulted on its debt eight times, including $100 billion in 2001, which at the time was the largest sovereign default on record.
A national survey conducted last year by local pollster Poliarquia and the Wilson Center showed that 56% of Argentines have a negative view of the fund. Only 18% of Mr. Macri’s opponents saw it in a positive light. During the election campaign, the capital Buenos Aires was dotted with posters denouncing the IMF’s meddling in Argentina’s domestic affairs.
“At home, IMF is like an insult. My dad used to say that they were loan sharks,” said Liliana Montes, a hairdresser in Buenos Aires from a long line of Peronist supporters. “We should stand firm.”
The incoming president has said his government won’t default on debt, but will seek to stretch out payments as neighboring Uruguay did in 2003. He will try to extend the repayment schedule with both the IMF and private bondholders, who are also likely to see a reduction in interest payments.
“We know there is going to be a restructuring, there has to be one. Today, it is more of an issue of how the process is going to be done rather than if it will happen or not,” said Damián Zuzek, chief investment officer at SBS Fondos, a Buenos-Aires based investment fund. “The earlier they do it, the better.”
When it comes to the IMF, however, Mr. Fernández will likely also try to negotiate more wiggle room on austerity measures, such as government spending cuts, revenue-raising initiatives and a restrictive monetary policy—all policies that have long been rejected by the Peronist movement.
“We should expect very tough negotiations between the IMF and Argentina,” said Arturo Porzecanski, an American University economist who closely tracks Argentina.
At a recent meeting with IMF staff, Mr. Fernández adopted the hostile tactics of former President Cristina Kirchner, who was Mr. Fernández’s vice-presidential running-mate.
“What I want them to understand in the IMF is that they are guilty of this situation,” he said in an interview in late August.
Economists see little risk of a regional spillover from Argentina’s debt crisis, but the stakes are high for the IMF. Mr. Porzecanski estimates that the $44 billion already disbursed to Argentina account for almost half of the IMF’s total outstanding loans.
“As the saying goes: if you owe $50,000 to your bank, you have a problem. If you owe $1 million, your bank has a problem,” Mr. Porzecanski said.
Private bondholders will also demand a strong commitment to spending discipline given the Peronists’ reputation for profligacy, hostility toward foreign creditors and past expropriations of companies, particularly under Mrs. Kirchner.
“Investors won’t be ready to accept any kind of restructuring if the IMF isn’t present,” said Stuart Culverhouse, head of sovereign and fixed-income research at Tellimner, a London financial bank. “Without policy discipline, no one would trust the government.”
A big question for many is how influential Mrs. Kirchner and her Peronist faction will be in key policy decisions with the more moderate Mr. Fernández.
Any further IMF help is likely to come with conditions, including an overhaul of Argentina’s labor market and vast pension system, according to people familiar with the situation.
Sergio Massa, a Peronist leader and key member of Mr. Fernández’s coalition, said labor reform isn’t on the agenda.
“Reform decisions are taken by countries,” he told an audience at the headquarters of the Wilson Center in Washington earlier this month. “Views based on Power Point presentations have failed,” he said referring to the IMF’s technocrats.
Past Peronist governments have played hardball with the IMF. The late President Néstor Kirchner was ready to default on IMF loans twice between 2003 and 2004 because of disagreements over goals and policy conditions, Mr. Fernández said in his book “Politically Incorrect,” a memoir of his work as Mr. Kirchner’s chief of staff.
Mr. Kirchner “always believed that it was necessary to confront the IMF and make it responsible for having supported an economic model that sparked the explosion of December 2001 in Argentina,” Mr. Fernández wrote.
Left's win in Argentina strains Brazil ties, deepens regional divide
Anthony Boadle, Lisandra Paraguassu. Reuters. October 29, 2019
BRASILIA (Reuters) - The election of leftist Alberto Fernandez in Argentina, who Brazil’s right-wing President Jair Bolsonaro has called a “red bandit,” sets the stage for a run-in between South America’s two biggest economies that could derail their Mercosur trade bloc.
Bolsonaro, an outspoken former army captain who won power last year, told reporters during a visit to Abu Dhabi on Monday that Argentine voters had made a mistake and he had no intention of congratulating Fernandez for his win on Sunday.
Their hostility highlighted the ideological battlelines reappearing in Latin American diplomacy.
Fernandez’s victory, along with last year’s win by leftist Andres Manuel Lopez Obrador in Mexico, marked an end to market-friendly reforms in both countries, leaving conservatives in Chile, Colombia and Brazil more isolated.
Lopez Obrador said on Monday he would call to congratulate Fernandez and Bolivian President Evo Morales, the last survivor of the “pink tide” of leftist leaders of the 2000s, who won a fourth term this month in elections denounced by the opposition, the United States, Brazil and Colombia.
Brazil-Argentina relations have been cordial and constructive since both shed military rule in the 1980s, despite traditional tensions in geopolitics and on the soccer field.
Although they compete in global grains and beef markets, Brazil remains the top trade partner of Argentina thanks in part to the role of the Mercosur bloc - which includes Uruguay and Paraguay - in fostering an exchange of cars and other manufactured goods.
With both economies sputtering, however, the presidents may be tempted to play to their bases, antagonizing ideological foes and emphasizing their differences over hot-button issues such as Cuba and Venezuela.
As he cruised to victory, Argentina’s president-elect posted a Twitter message calling for the release of Brazil’s former leftist president Luiz Inacio Lula da Silva, jailed last year for a bribery conviction.
The tweet riled Bolsonaro. “The first thing Fernandez did was to post ‘Free Lula’ saying he was unfairly jailed. So we can see where he is coming from,” Bolsonaro said.
TRADE TENSIONS
Fernandez, a trade protectionist, has vowed to reconsider his country’s membership in Mercosur. Bolsonaro, in turn, has said Argentina should be left out of Mercosur if it blocks trade liberalization proposed by Brazil.
On Monday, Bolsonaro said his government would wait to see what position Fernandez takes once he assumes the presidency in December.
“Let’s see how he behaves,” Bolsonaro said, adding: “I hope Argentina does not change its course on trade.”
Foreign policy and trade experts say the two economies are too interdependent to entirely break up Mercosur.
The greater threat may be to a trade deal between Mercosur and the European Union, which has taken two decades to negotiate and faces resistance in European countries.
“The relationship between Argentina and Brazil will, at best, be cold for the next three years,” said Welber Barral, a Brasilia-based consultant and former trade secretary.
He said, however, that industrial groups on both sides will try to “appease” the governments in an effort to insulate their exports and the EU-Mercosur agreement.
Fernandez has said he wants to renegotiate parts of the EU agreement that do not suit Argentina, which could delay its ratification with lengthy new rounds of talks.
Brazil is heading in the other direction and wants to reduce Mercosur’s common external tariff and allow its members to negotiate new trade deals.
In the past, Brazil and Argentina’s differences could be resolved because they saw eye-to-eye ideologically, but now Brasilia plans to negotiate more aggressively within Mercosur, government officials told Reuters, on condition of anonymity.
Brazil has no plan to abandon the trade bloc at present due to the Peronist return to power in Argentina, but that option has not been totally discarded, they said.
Making matters less predictable, one member of the diplomatic community noted that Brazil’s Foreign Ministry, which has traditionally avoided ideological battles, is now run by a diplomat who cast the result of the Argentine election in apocalyptic terms.
“The forces of evil are celebrating. The forces of democracy are lamenting for Argentina, Mercosur and all of South America,” Brazil’s Foreign Minister Ernesto Araujo wrote on Twitter.
Reporting by Anthony Boadle and Lisandra Paraguassu; Editi
The Brutal Politics of Brazil’s Drug War
Maurício Santoro. New York Times. October 28, 2019
RIO DE JANEIRO — In the first quarter of 2019, the police killed an average of seven people a day in this city, the second most populous in Brazil. That’s the highest number in two decades. Even more atrocious is the fact that state security forces are responsible for 38 percent of the violent deaths in the city.
Many of these killings are concentrated in police operations, supposedly aimed at drug traffickers, in the largest of the slums that Rio calls favelas. Carried out with an apparatus that includes armored cars, helicopters and snipers, the campaign has brought about the deaths of many innocent civilians. Among them were six youths, aged 16 to 21, who were killed in just five days in August; one was a professional soccer player; another was a woman carrying her son in her arms. On Sept. 20, 8-year-old Agatha Vitória Sales Félix was struck in the back by a police bullet while riding with her grandfather in a van. She died before she could reach a hospital. Stunned and irate onlookers said military police officers had been shooting at a motorcycle as it passed the van.
It’s hard to remember that in 2016, Rio hosted the Summer Olympics and the city seemed to be on a path to prosperity for years to come. But in just three years, that image of Rio has vanished.
What has happened?
First, a succession of political, economic and security crises in Brazil led its citizens into a deep distrust of traditional politicians. Soon violence, already high during previous years of economic prosperity, worsened. In 2014, the least violent year in two decades, 1,552 homicides were recorded in the city, a rate of 24 per 100,000 inhabitants. In 2017, the total soared to 2,131, and the rate to 32.5 per 100,000 inhabitants. Among the many causes was a decline in a “pacification” policy for the favelas. Under that policy, the government tried to create a community police force. Called the Pacifying Police Units and assigned to resolve conflicts between organized crime gangs, the program ultimately failed because of a lack of resources.
Then as now, there was a great demand to root out corruption rampant among the political class. In the 2018 elections, this led to the victory of outsiders who promised a harsh new renewal of the political system to curb violence. Brazilians elected a former army captain, Jair Bolsonaro, as president, and voters in the state of Rio de Janeiro elected the former judge and ex-marine Wilson Witzel as governor.
Mr. Bolsonaro and Mr. Witzel are Brazilian versions of a global wave of politicians who rise to power by attacking the established political order and posing as populists on the side of ordinary citizens who have been betrayed by corrupt elites. Brazil has a long history of politicians spouting such rhetoric, especially in matters of security. But never before have they reached the topmost levels of leadership.
Drug policy is at the center of Rio’s problems. There are generally two possible paths in attacking this scourge: The first is to pacify the suppliers and traffickers by offering them entry to the general society — create jobs that will support legitimate commerce and invest in social projects to improve education and infrastructure in the favelas. The second is to hammer the criminals with violence in their lair.
Governor Witzel has opted for the latter. He calls drug traffickers and other criminals terrorists and defends the use of snipers to attack them in the favelas. He shows up in a police uniform and once appeared in a helicopter that fired indiscriminately into a favela, an exercise that has become common in Rio. A group of children from Rio’s favelas wrote letters to the city’s courts asking them to get the police to cease this type of operation around their homes.
Paradoxically, the increase in police violence occurred while Brazil as a whole was seeing a 25 percent drop in homicides, a trend that began in late 2018, before the new administrations took power. Specialists still debate why violence has decreased; one popular theory is that it has more to do with pacts and truces between organized crime factions than with public policies.
So why did the state of Rio de Janeiro vote this year for Mr. Witzel and his draconian rhetoric? One factor is that Brazil is in its worst economic recession in recent history; another is political schisms among political parties that accuse one another of corruption. The political effects of both issues are strikingly evident in Rio de Janeiro, where every governor elected between 1998 and 2018 has been prosecuted for crimes related to theft of public funds.
At the same time, the city of Rio produces almost 70 percent of Brazil’s oil and has suffered not only the impacts of the global decline in demand for petroleum but also losses by Petrobras, the largest company in Latin America, when it was at the center of corruption scandals. The results of the economic crisis are plainly visible in Rio. In 2018, more than 10,000 businesses closed in the city.
In addition to Brazil’s economic travails, the rise of figures like President Bolsonaro and Governor Witzel is a consequence of years of state abandonment of the poor in the favelas, followed by self-defeating policies that try to stop violence with more violence, leaving the rest of society to look on in apathy.
The tragedy in Rio de Janeiro was not inevitable. The city’s calamity is political, as is the way out of it. The solution lies in following public security policies based on data, research and analysis, not in stoking the public’s fear or anger. Brazil should learn from the experiences of the United States, Europe and some Latin American countries and not repeat their mistakes.
Specifically, the new governments could have worked to make life more bearable for the poverty-stricken families in the favelas by funding libraries and schools, and building a transit system so parents could get to and from good jobs.
That method was put to work and became a practical example in Medelín, Colombia, which late in the last century was considered among the most violent cities in the world, but recently has flourished as a destination for tourists. Unfortunately, Brazil’s leaders have chosen to ramp up violence against not just drug carriers but also the innocent favela families themselves. And the new violence has produced only more destruction and sorrow.
Brazil has long been one of the world’s largest cocaine markets, but it should not have insisted on a war strategy that has failed in all the countries that have used it — notably Mexico and Colombia. Brazilians, particularly in Rio, must find other ways to address drug trafficking and insecurity, starting by discussing alternatives for police action that are legal and humane — for example, reinforcing the Pacifying Police Units and other community-centered options.
Rio’s tragedy is political. New, well-thought-out policies could be its salvation.
Mauricio Santoro is a professor of international relations at the State University of Rio de Janeiro.
RIO DE JANEIRO — In the first quarter of 2019, the police killed an average of seven people a day in this city, the second most populous in Brazil. That’s the highest number in two decades. Even more atrocious is the fact that state security forces are responsible for 38 percent of the violent deaths in the city.
Many of these killings are concentrated in police operations, supposedly aimed at drug traffickers, in the largest of the slums that Rio calls favelas. Carried out with an apparatus that includes armored cars, helicopters and snipers, the campaign has brought about the deaths of many innocent civilians. Among them were six youths, aged 16 to 21, who were killed in just five days in August; one was a professional soccer player; another was a woman carrying her son in her arms. On Sept. 20, 8-year-old Agatha Vitória Sales Félix was struck in the back by a police bullet while riding with her grandfather in a van. She died before she could reach a hospital. Stunned and irate onlookers said military police officers had been shooting at a motorcycle as it passed the van.
It’s hard to remember that in 2016, Rio hosted the Summer Olympics and the city seemed to be on a path to prosperity for years to come. But in just three years, that image of Rio has vanished.
What has happened?
First, a succession of political, economic and security crises in Brazil led its citizens into a deep distrust of traditional politicians. Soon violence, already high during previous years of economic prosperity, worsened. In 2014, the least violent year in two decades, 1,552 homicides were recorded in the city, a rate of 24 per 100,000 inhabitants. In 2017, the total soared to 2,131, and the rate to 32.5 per 100,000 inhabitants. Among the many causes was a decline in a “pacification” policy for the favelas. Under that policy, the government tried to create a community police force. Called the Pacifying Police Units and assigned to resolve conflicts between organized crime gangs, the program ultimately failed because of a lack of resources.
Then as now, there was a great demand to root out corruption rampant among the political class. In the 2018 elections, this led to the victory of outsiders who promised a harsh new renewal of the political system to curb violence. Brazilians elected a former army captain, Jair Bolsonaro, as president, and voters in the state of Rio de Janeiro elected the former judge and ex-marine Wilson Witzel as governor.
Mr. Bolsonaro and Mr. Witzel are Brazilian versions of a global wave of politicians who rise to power by attacking the established political order and posing as populists on the side of ordinary citizens who have been betrayed by corrupt elites. Brazil has a long history of politicians spouting such rhetoric, especially in matters of security. But never before have they reached the topmost levels of leadership.
Drug policy is at the center of Rio’s problems. There are generally two possible paths in attacking this scourge: The first is to pacify the suppliers and traffickers by offering them entry to the general society — create jobs that will support legitimate commerce and invest in social projects to improve education and infrastructure in the favelas. The second is to hammer the criminals with violence in their lair.
Governor Witzel has opted for the latter. He calls drug traffickers and other criminals terrorists and defends the use of snipers to attack them in the favelas. He shows up in a police uniform and once appeared in a helicopter that fired indiscriminately into a favela, an exercise that has become common in Rio. A group of children from Rio’s favelas wrote letters to the city’s courts asking them to get the police to cease this type of operation around their homes.
Paradoxically, the increase in police violence occurred while Brazil as a whole was seeing a 25 percent drop in homicides, a trend that began in late 2018, before the new administrations took power. Specialists still debate why violence has decreased; one popular theory is that it has more to do with pacts and truces between organized crime factions than with public policies.
So why did the state of Rio de Janeiro vote this year for Mr. Witzel and his draconian rhetoric? One factor is that Brazil is in its worst economic recession in recent history; another is political schisms among political parties that accuse one another of corruption. The political effects of both issues are strikingly evident in Rio de Janeiro, where every governor elected between 1998 and 2018 has been prosecuted for crimes related to theft of public funds.
At the same time, the city of Rio produces almost 70 percent of Brazil’s oil and has suffered not only the impacts of the global decline in demand for petroleum but also losses by Petrobras, the largest company in Latin America, when it was at the center of corruption scandals. The results of the economic crisis are plainly visible in Rio. In 2018, more than 10,000 businesses closed in the city.
In addition to Brazil’s economic travails, the rise of figures like President Bolsonaro and Governor Witzel is a consequence of years of state abandonment of the poor in the favelas, followed by self-defeating policies that try to stop violence with more violence, leaving the rest of society to look on in apathy.
The tragedy in Rio de Janeiro was not inevitable. The city’s calamity is political, as is the way out of it. The solution lies in following public security policies based on data, research and analysis, not in stoking the public’s fear or anger. Brazil should learn from the experiences of the United States, Europe and some Latin American countries and not repeat their mistakes.
Specifically, the new governments could have worked to make life more bearable for the poverty-stricken families in the favelas by funding libraries and schools, and building a transit system so parents could get to and from good jobs.
That method was put to work and became a practical example in Medelín, Colombia, which late in the last century was considered among the most violent cities in the world, but recently has flourished as a destination for tourists. Unfortunately, Brazil’s leaders have chosen to ramp up violence against not just drug carriers but also the innocent favela families themselves. And the new violence has produced only more destruction and sorrow.
Brazil has long been one of the world’s largest cocaine markets, but it should not have insisted on a war strategy that has failed in all the countries that have used it — notably Mexico and Colombia. Brazilians, particularly in Rio, must find other ways to address drug trafficking and insecurity, starting by discussing alternatives for police action that are legal and humane — for example, reinforcing the Pacifying Police Units and other community-centered options.
Rio’s tragedy is political. New, well-thought-out policies could be its salvation.
Mauricio Santoro is a professor of international relations at the State University of Rio de Janeiro.
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