Day of Reckoning

The vultures are circling over Argentina's stricken economy. Can it hold off disaster until the next election?

The marathon is in its last stages, and the only question is whether the runner will make it to the finish line or collapse a few miles short. With two years left before she must leave office, Cristina Fernández de Kirchner has brought the Argentine economy to the brink of a currency crisis. Can the peso survive until a new president arrives?

Back in October, I outlined the worsening problems with Argentina's economic policy. Fernández's government has been spending oodles of money with the side effect of annual inflation in excess of 20 percent, which it has repeatedly denied in almost comical fashion. As if to prove that inflation could not possibly be so high, the central bank has defended the peso at an artificially strong exchange rate with the dollar. This policy has required the central bank to deplete its reserves, selling dollars to prop up the peso, while Fernández's government has strictly limited Argentines' ability to buy dollars at the favorable rate and take them out of the country.

Inevitably, a black market has arisen for dollars in Argentina. As I write this column, the official exchange rate is about 5.7 pesos to the dollar; the black market rate, which is sufficiently out in the open to be quoted in newspapers, has the peso at about 9.2 to the dollar. The gap is enormous, suggesting that an end to the central bank's interventions would lead to a massive devaluation.

In the past few years, the central bank has relied on trade surpluses to prop up its reserves. But those surpluses, which ran as high as 2.5 percent of gross domestic product in 2009, have essentially disappeared. In fact, the International Monetary Fund predicts that Argentina will see trade deficits every year from 2013 through 2018.

These deficits will continue to chip away at the reserves, as will the interest payments on Argentina's still unsettled debts, for which the government has lately relied on the central bank. Foreign investment in Argentina would help to bring in more hard currency, but the country has consistently lagged behind its neighbors Chile and Uruguay in attracting money from abroad.

As things stand now, the safety net for the peso is rapidly fraying, a fact made obvious by a comparison of the central bank's reserves with the size of the money supply. In the spring of 2009, the reserves were worth about 1.8 times as much as the monetary base at the official exchange rate. Since then the ratio has dipped steadily, settling at around 0.65 this month.

Perhaps ironically, this value is just below the level of 0.67 that the central bank was required to maintain before the disastrous crisis that began in 2001. In fact, the ratio never slipped below 0.82 that year, but a huge devaluation still occurred when the government finally abandoned the peso's one-to-one peg to the dollar. The peso fell by 25 percent in two weeks and more than 70 percent in six months.

Clearly, the current exchange rate is also unsustainable in the long term. But is it sustainable until 2015?

If the central bank can hang in there, Argentina could achieve a rare soft landing. All of the likely candidates for president -- Mauricio Macri, Sergio Massa, Daniel Scioli, and Elisa Carrio (or one of her allies) -- have condemned the rampant inflation that is destroying the peso's value. To varying degrees, they are all committed to converting the economy from a mad scientist's laboratory into a more transparent and integrated part of the global financial system.

As a result, a successful election is likely to bring a flood of foreign capital and a reinvigoration of the economy, bolstering the central bank's reserves and the peso. Government spending would fall, the printing of money would slow, and inflation would ease. Share prices and asset values would rise. Only a gradual devaluation of the peso, if any, would be necessary.

But Argentine governments don't always survive until elections, especially when the economy runs into trouble. If the gap between the official and black market exchange rates continues to grow over the next few months, so will the flight of capital that the government has tried so doggedly to restrain. Eventually, the loss of liquidity could lead to runs on banks and chaos in the streets.

A trigger might come much sooner, however. On September 30, the U.S. Supreme Court will decide whether to hear Argentina's appeal in a case brought by bondholders who have yet to settle claims from the last crisis. According to a brief filed by Argentina's lawyers, the current ruling could cost the country another $15 billion in reserves. If the court refuses or rules against Argentina, default and devaluation could occur virtually overnight.

In this situation, not only the soft landing but also the transition to an economically saner regime could come under threat. The last post-crisis transition featured a string of five presidents in two weeks, and the time would be ripe for less scrupulous hands to grab control of the ship of state. With a bad political outcome, the promise of an improved business climate might disappear, and along with it any chance of an influx of foreign capital.

It has been suggested that Fernández de Kirchner dreams of a constitutional reform and a third term in office, much as her predecessor Carlos Menem did in 1999. In truth, she'll be lucky to finish her second. Yet if she moderates her doomed economic policy now, she may still be able to protect the economic future of her compatriots, as well as her own legacy.


Daniel Altman

Dollars, Not Bombs

Can we bribe our way to peace in Syria?

How much is peace worth in Syria? If the United States attacks, cruise missiles worth tens of millions of dollars will wing their way toward the war-torn country, adding to the millions already spent on mobilization. There's no guarantee this costly exercise would quicken the end of the conflict. What's more, there's a potentially cheaper way to promote peace in Syria and anywhere else: Buy it.

The United States already spends money on foreign aid and peacekeeping that are supposed to stem conflict and encourage economic growth around the world. But we tend to avoid sending money to countries bogged down by war, since we're afraid it might be wasted. This is a big gap in our foreign policy, and to fill it, we need be more direct. We need to pay for peace explicitly.

There's a market for peace. The seller's price is how much you have to pay for it, and the buyer's price is how much you should be willing to pay. We need to know both of these numbers and ultimately try to balance them.

Why should Americans be buying? It's pretty simple. Peaceful countries are moneymakers for the United States. Most peaceful countries in the world import American goods and services, helping our economy create jobs and putting tax revenue in Washington's coffers. And the more these countries grow, the more they buy.

So here's an idea: a peace bounty paid for by the very tax dollars that peace would generate. Consider the example of Syria. It's a country of 21 million people whose per capita income last year was about $3,300, even with the war. Syrians spent about 38 percent of their income on imports; disruptions to trade may have been balanced by disruptions to domestic production. Next door in Jordan, per capita income was roughly $4,900, and spending on imports measured about 73 percent of that total; in Lebanon, the share was 49 percent of $9,700.

Most American companies can't legally do business with Syria, so imports from the United States are virtually nil at the moment. But about one in nine dollars worth of imports in Lebanon comes from the United States, and in Jordan, it's about one in 16. As a somewhat conservative estimate, a free and peaceful Syria might import about $70 worth of goods and services per person from the United States every year, for a total of $1.5 billion. Of that, something like $300 million might go to Washington in taxes.

The United States government could offer to give this money back to the Syrian people, every year for 20 years or some other fixed period, provided that there is peace. Compared to the status quo, this offer would be budget neutral; we don't get any tax revenue from Syrian imports now, either.

Other countries could sweeten the deal. Major economies in Europe would probably benefit from peace in Syria, too. Right now, none of them are among Syria's top trading partners, despite the European Union's policy of economic engagement in the Mediterranean region. If Europe participated, the annual peace bounty could rise to a billion dollars or more. And if the Syrian people knew that so much money awaited a peaceful and legitimate government, all sides might try harder to find a negotiated settlement.

Of course, making peace is easier said than done. For people whose lives are in peril, fighting back may be the only option. Moreover, the rewards of peace are not so obvious for all parties involved, especially the Assad clan. They could lose everything if their regime falls, and so they need a strong incentive to make peace.

As distasteful as it might be, then, it's worth considering how the peace bounty might be shared with the Assads. It wouldn't be the first time that a former dictator and his family were given a cushy way out of a worsening situation at home in order to smooth the transition of leadership. It would, however, be the first time such a payoff was so explicit and public.

The Syrian people might feel as though they were being robbed again by what has by many accounts been a thoroughly corrupt regime. But negotiating about money is much better than continuing the violence, and surely the Assads would want to haggle for their share. Ending the killing on both sides could be a condition for talks that might be worth tens of millions to them every year.

If peace bounties showed promise, there'd be no need to stop with Syria. From prison states like North Korea to countries hamstrung by civil conflict like the Democratic Republic of the Congo, peace bounties could help to tip the scales away from violence. The best part is that since the bounties would depend partly on population size, bigger bounties would free more people from war and oppression. (To be sure, they would also depend on people's incomes, which is a less attractive attribute.)

One catch here is that the World Trade Organization might see a bounty as an illegal subsidy to a country's imports. To get around the rules, the payments might have to be fixed as lump sums rather than varying annually according to import volumes. Alternatively, if all the WTO's members got together to pay the bounties, there would be no issue. In either case, such technicalities needn't stand in the way of the overall concept.

Back in the 1990s, the peace dividend created by the end of the Cold War brought the United States within a whisker of paying off its entire national debt. Today, thanks to tax cuts and ironically to a couple of new wars, that peace dividend has evaporated. But there's another one ripe for the taking -- as long as we're brave enough to put emotion on hold while we talk about cold, hard cash.

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