Is it possible to further injure a country's international credibility while trying to help shore up its finances? It is in Argentina. President Cristina Fernández de Kirchner demanded $6.5bn of the central bank's funds to repay government debt, and issued a presidential decree to give the demand legal relevance and circumnavigate congressional approval.
Central bank governor Martin Redrado refused to hand over the funds and was fired for his pains. A judge reinstated Mr Redrado soon after and overturned the decree. The matter seems likely to escalate to the Supreme Court. Furthermore, a New York judge froze $1.7m of the central bank's assets held at the US Federal Reserve at the request of two vulture funds holding defaulted Argentine bonds.
The unfolding drama has hit the headlines all over the world, and sent shivers down the spines of international investors who do not care for impulsive governments. This has pushed back the country's plans to re-enter the international capital markets through a bond swap, eight years after Argentina's colossal default.
Unwise interference
Argentina's actions break all the rules. This is an example of political powers interfering with the independence of the country's most respected institution, as well as an asset-grabbing exercise to allow additional public spending ahead of elections. But the truly amazing aspect is the lack of investment acumen of the government. If Ms Fernández's goal was to attract foreign investors, her actions have worsened, not improved, Argentina's credibility.
Ms Fernández has defended her decision by saying that the money would have come from excess reserves, and that total reserves went from $8bn, since her husband Néstor Kirchner took office in 2003, to $48bn. But the increase is mostly due to the commodities boom rather than to the Kirchners' policies.
The capital markets tend not to be fans of unpredictable political moves, which both Ms Fernández, as well as her predecessor and still-influential husband, are very much capable of. The nationalisation of pension funds in 2008 and doubts on the transparency of economic data to hide real inflation numbers are not going to endear Argentina to investors. With the government unable to contain spending, it would have to resort to more expensive funding, such as the bond sale to Venezuela in 2008 at an interest rate of almost 15%.
Ms Fernández's popularity rating is low but that may be a good thing. What Argentine voters should learn from this latest drama is that the country's only hope to surface from the legacy of its past is a new breed of political leaders. The Kirchners and their populist politics have not got it right.
