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Amado Boudou Leads Argentina’s Turnabout Tango

An unlikely helmsman for the storm-tossed Argentinean economy, Amado Boudou dazzles in his winning dance with foreign creditors. His mission: carry out market-friendly initiatives without angering the government's first family.

Mere months can be a lifetime in the economic wonderland of Argentina. Just last year, Amado Boudou, then an obscure bureaucrat heading the Administración Nacional de la Seguridad Social (ANSES), the state social security office, frightened investors even as he ingratiated himself with President Cristina Fernández de Kirchner and her husband and all-powerful predecessor, Néstor Kirchner, by convincing them to nationalize the private pension fund system. The controversial move reaped enough capital for the government to stave off the danger of a foreign debt default only eight years after the last one. And for this, Boudou was rewarded by being named Economy minister this past July.

Now, with the financial markets abroad and in Argentina on a sharp upswing, Boudou faces the reverse situation: wowing enthusiastic investors without angering the Kirchners and the populist hardliners in their Peronist constituency. "We think Boudou is for real," says Alberto Ramos, a New York–based economist for Goldman, Sachs & Co. "The positive market reaction has been a validation of his policy statements — hopefully enough to convince the Kirchners to give him a green light."

Boudou’s chances of pulling off this tightrope act between eager investors and the skeptical Kirchners suddenly look promising. Sure, the nationalization of the ten private pension funds along with their $26 billion in assets and $3 billion to $5 billion in annual pension contributions still rankles some. "This is the most blatant act of financial piracy in Argentina’s recent history," asserts Claudio Loser, former head of the Western Hemisphere department at the International Monetary Fund and now a senior fellow at Inter-American Dialogue, a Washington think tank.

But Boudou is moving swiftly to deal with the consequences of another act of financial piracy that has deprived Argentina of access to the capital markets for years: the failure to compensate those foreign creditors who didn’t accept the steep discounts on their Argentinean bonds offered by the government after its record default on $110 billion in foreign debt in 2001. These so-called "holdouts" claim to be owed about $28 billion, including past-due interest, and they are pressing legal actions around the globe against the Argentinean government. "Anytime Argentina tries to raise money in a major capital market abroad, those funds may be seized to meet court judgments," warns Robert Shapiro, co-chairman of Washington-based American Task Force Argentina, which lobbies on behalf of U.S. holdouts.

Boudou, who declined to be interviewed, is on the verge of a deal with a substantial number of the holdouts. On October 22 he announced that he will ask Argentina’s Congress to suspend a law prohibiting the government from negotiating with the holdouts. Although Boudou did not offer specific details about the terms of a proposed deal, Argentinean officials and sources close to the negotiators for a large group of the holdouts say the agreement includes the following terms: There would be a discount bond with a haircut slightly more than the 65 percent accepted by three quarters of private sector bondholders in 2005; and, in return for the new bond, investors would pay ten cents on the dollar as a fee for participating.

Still to be negotiated is how much past-due interest would be paid on the $20 billion owed to the holdouts when the default occurred in 2001. They insist that the total, including interest, is now at least $28 billion. The group of holdouts amenable to a deal is being represented by Barclays Capital, Citibank and Deutsche Bank in negotiations with the Argentinean government. According to sources close to the talks, the agreement could gain approval from at least half of all the holdouts, many of whom have tired after four years of waiting to get paid.

Boudou is also trying to reach agreement with the other major group of bondholders: the so-called Paris Club of 19 sovereign creditors, who are owed up to $7.9 billion. But coming to terms with this group will require Argentina first to accept monitoring by the IMF — an agency despised by the Kirchners, who blame it for having imposed what they see as a financial straitjacket on their country that led to the 2001 financial meltdown. Nonetheless, Boudou held intensive talks with IMF managing director Dominique Strauss-Kahn at the agency’s annual meeting in Istanbul in October, following up with one-on-one meetings with Economy ministers from several Paris Club nations.

Back home, Boudou carried out two successful debt liability management operations in August and September in which he swapped a total of $4.4 billion in inflation-linked short-term debt for notes expiring in 2014 and 2015. "With this measure we are taking another small step in Argentina’s return to financial markets," the Economy minister said in an August statement announcing the first swap.

All of these Boudou initiatives have stoked market interest — though for how long remains to be seen. Further significant market-friendly moves must be made soon, before investors place more bets on Argentina. "My clients tell me they will give the government until the end of the year," says Daniel Kerner, an analyst with Eurasia Group, a New York–based risk consulting firm. Among the government initiatives that would keep up investor enthusiasm, the most important are releasing more-credible, official inflation figures; an end to further nationalizations of private sector companies; and restoring peace with angry farmers to ensure higher grain shipments, which are crucial to Argentina’s export earnings.

To be sure, much also depends on whether emerging markets continue their upward course or get short-circuited by a double-dip recession. "Most of the recent gains for Argentina are due to global market conditions," notes Juan Pablo Fuentes, an economist for Moody’s, based in West Chester, Pennsylvania. "There is more appetite for risk and more liquidity in the market."

Even so, the global market tidal wave has lately lifted the good ship Argentina higher than almost any other emerging market. The compression in credit default swap spreads and the recovery in asset prices have been taking place in Argentina at amazing speed. The spreads on five-year CDSs plunged from 4,150 basis points in March to 1,015 basis points as of October 15. Sovereign yields have risen by 136 percent since the beginning of 2009 — ahead of Ukraine’s 112 percent rise and Iraq’s 94 percent gain. And Argentina’s stock market, the Merval, was up by more than 100 percent in the same period.

There has been a marked slowdown in capital flight, which by midyear had reached a worrisome $43 billion, the equivalent of about 14 percent of GDP. Monthly capital flight, which peaked in June at $2.5 billion, was down to $500 million in August. Since June the peso has steadied, at about 3.80 to the dollar, and peso-denominated time deposits have been rising after monthly declines throughout the first half of the year.

Boudou is an unlikely helmsman for the storm-tossed Argentinean economy. He has no political constituency beyond Cristina Fernández and Néstor Kirchner, whose popularity is at a low ebb following midterm elections in June in which the Peronists lost control of Congress. "Boudou isn’t even well known in Argentina," points out Graciela Römer, a leading poll taker and political analyst in Buenos Aires.

Only since Boudou’s appointment as Economy minister this past July has the public become aware of certain details and anecdotes about his life. A handsome, granite-jawed, thick-maned bachelor, Boudou was born in Buenos Aires in 1963 but raised in the gambling and beach resort of Mar del Plata on the Atlantic coast, 250 miles south of the Argentinean capital. He earned a master’s degree in economics from the Universidad Nacional de Mar del Plata in 1986, then split his time between teaching at the university and producing rock concerts that drew record crowds. Boudou himself was an amateur musician and over the years has amassed a collection of electric guitars. He is also an avid motorcyclist, gunning his Harley-Davidson down Buenos Aires’s broad avenues late at night.

In the 1990s, Boudou joined a garbage collection company, rising to become general manager. After that firm went bankrupt in 1995, he spent most of the next three years as a manager at a waste disposal company he helped found. Then in 1998 he was recruited by a friend to the financial department at ANSES. After several promotions he was appointed director in October 2008.

With barely 20 percent of future retirees enrolled with ANSES, the state social security administration had long been overshadowed by the private sector pension funds. But Boudou had ambitious plans for the agency that addressed growing government fears about Argentina’s ability to service its domestic and foreign debt. Just days after becoming ANSES director, Boudou joined the Kirchners on one of their celebrated weekend retreats at their country home in El Calafate, a Patagonian village near the Perito Moreno Glacier, some 1,900 miles southeast of Buenos Aires. This is where the Kirchners, accompanied by only one or two aides, tend to go to make major decisions when faced with a growing crisis, and then disclose them in bombshell fashion on returning to the capital.

At issue this time was the most important policy decision of President Fernández’s first year in office: the state takeover of the private pension funds and their assets, as suggested by Boudou, to cover any shortfall in Argentina’s $22 billion in gross debt payments — both domestic and foreign — in 2009, and to provide a huge cash reserve for other government projects.

The private pension fund system, which covered four out of five future retirees, was launched in 1994 when the state social security system was almost penniless. By law the funds — officially known as Administradoras de Fondos de Jubilaciones y Pensiones — had to invest 55 percent of their portfolios in Argentinean government bonds. Some 10 percent of the funds’ assets were in Argentinean stocks, with the rest in foreign sovereigns, corporate bonds and shares. Averaging 7 percent annual returns since its inception in 1994, the private pension fund system accumulated 90 billion pesos in assets by 2008, when Boudou became ANSES director. But the fund management companies also charged a staggering 35 billion pesos in fees and commissions from contributors. Little wonder that President Fernández was able to get Congress to ratify the nationalization of the AFJPs in November 2008, just weeks after decreeing their takeover by the state. The controversy surrounding the bloated commissions and fees might also explain why the former AFJP owners — including the local subsidiaries of such banks as Spain’s BBVA, the U.K.’s HSBC and the Netherlands’ ING — have thus far made no public protest over the failure of the government to compensate them.

Boudou’s star has risen. But in keeping with their political style, the Kirchners have balanced his market-friendly initiatives with nods to thuggish populists in the Peronist movement. Chief among them is Secretary of Internal Commerce Guillermo Moreno, who has quickly become Boudou’s nemesis. Moreno has on occasion placed a gun on the table during negotiations with business executives on limiting price increases. In September he threatened to "break the spines and pop the eyes" of government officials who disclosed possible plans by the state to take over Papel Prensa, a mixed state and private sector company that manufactures paper for the leading Argentinean dailies.

In recent months, Moreno has pushed for more state takeovers of large, ailing private companies and has sought to finance these operations with capital from the private pension funds that were nationalized by Boudou. The most controversial case involves another paper manufacturer, Papelera Massuh, which had a 25 percent share of the overall paper market when it went bankrupt at the end of 2008. In May of this year, the government nationalized Massuh and renamed it Papelera Quilmes, using an undisclosed sum from ANSES, which had inherited stakes in the company from the private pension funds. Moreno, who was named the new chairman of Quilmes while keeping his government post, arrived at the main plant and exuberantly announced to the workers, "The only person who decides who stays and who goes here is me."

To ensure cash flow to cover operating costs and perhaps eventually generate profits, Moreno disclosed, Quilmes will become the exclusive provider of paper products to the government; further, most supermarket chains have signed contracts with the paper manufacturer. "The sale of all of our production over the next few months has been guaranteed," said Moreno in mid-May.

There are plenty of other potential candidates for at least partial nationalization. ANSES has placed directors on the boards of 19 major Argentinean companies in which it inherited substantial stakes from the private pension funds. Those companies range from a leading steelmaker, Siderar, to Banco Macro, one of the largest banks. And they included Massuh before its state takeover.

Further takeovers could lead to a resurgence of capital flight and complicate Boudou’s courtship of investors. "There is fear over the government’s voracity and the lack of property rights," notes Miguel Kiguel, executive director of EconViews, a leading Buenos Aires think tank.

Moreno has also staved off Boudou’s attempts to clean up the Instituto Nacional de Estadística y Censos, the government agency that compiles key economic indicators. Two years ago, unhappy with the statistics released by INDEC’s longtime professionals, the Kirchners replaced the staff with Moreno stalwarts. Ever since then the agency has been accused of fudging the official economic indicators. According to INDEC, the GDP will decline by only 1.2 percent this year; most private sector estimates range from 2.5 to 3 percent. INDEC’s assertions that the poverty rate was only 13.9 percent — less than half of private sector estimates — aroused the ire of the country’s normally reticent Roman Catholic Church. "It is scandalous," said Bishop Fernando Maletti, from the Patagonian city of Bariloche, at a September press conference about the official poverty figure.

The one hopeful change is the more realistic inflation statistics lately released by INDEC after almost two years of figures that amounted to only one third of the estimates offered by private sector economists. The official inflation rate was 0.8 percent this August and 0.7 percent in September — close to private sector figures. But the government has asserted that it will not revise upward its figures before those two months, which means that the official inflation rate for the 12 months between September 2008 and 2009 was only 6.2 percent, less than half the private sector estimates. And in July the Kirchners gave their public support to the current INDEC staff, putting an end to Boudou’s attempts to bring in more trustworthy professionals. "Even if the government’s inflation figures have become more credible lately, there is always the threat of political interference because INDEC remains staffed by Moreno’s people," notes Moody’s’s Fuentes.

Boudou has two pressing reasons for wanting the government to release more-credible inflation figures. Doing so would create a far larger market for inflation-indexed bonds. And it would meet demands from the IMF for more-reliable economic statistics, a necessary step before the Paris Club creditors agree to reopen debt negotiations with Argentina.

Although Boudou has his hands full dealing with the populist wing of the Peronists, he has been unable to exert any noticeable moderation on the Kirchners’ relations with the non-Peronist opposition.

Néstor Kirchner gained a combative reputation during his presidential term (2003–’07) by blaming the IMF and foreign creditors for Argentina’s 2001–’02 financial meltdown and denouncing domestic critics and political rivals as enemies and traitors. Kirchner was following the strategy laid out by his movement’s founder, President Juan Domingo Perón, in the 1940s and 1950s. "This has been a characteristic of Peronism throughout its history," explains Luis Alberto Romero, a history professor at Universidad Nacional de San Martín, in Buenos Aires. "They don’t listen to opponents or debate with them." In fact, says Robert Lavagna, who in 2005 was fired from his position as Economy minister, "all major decisions still seem to be made by one person."

But by the end of his term, most Argentineans had tired of Kirchner’s abrasive style and were hoping his wife and successor would embrace a more moderate political approach. Instead, President Cristina Fernández continued to govern in the same head-butting fashion.

Her biggest confrontation has been with the farmers. They have been increasingly angered by fiscal policies and other measures aimed at forcing them to sell their produce more cheaply at home while filling public coffers with their export earnings. For the past five years, the government has kept beef exports at 2004 levels to keep domestic prices low, thus dropping Argentina from the fourth to the seventh largest beef exporter in the world.

Then, as more farmers switched to grains, the government imposed a 35 percent export tax on soybeans — the most lucrative cash crop on the world market. But when Fernández sought last year to jack soybean taxes even more, to 44 percent, the agrarian community fought back. Farmers withheld produce from the market, blockaded roads and staged protests in major cities. A two-year drought, the worst in 50 years, has caused harvests and export revenue to plummet further. According to estimates by EconViews, agrarian exports this year will be only about $27.5 billion — $10 billion less than in 2008.

Nonetheless, the Fernández government has made no attempt at reconciliation with its agrarian foes. "They hate us," says Alberto Lasmartres, a director of the Argentine Rural Society, the nation’s strongest agrarian lobby. "There are no relations between the government and farmers, even though this country’s economic foundation is built on agriculture."

The government has tried, unsuccessfully, to turn its confrontation with the farmers to its political advantage with the broader public by claiming to maintain low domestic food prices. Argentineans are increasingly miffed at official statistics that place inflation far below real price increases in their local markets. Amanda Ruybal, a social worker shopping for her geriatric wards at the Disco supermarket in middle-class Palermo,walks down the fruit and vegetable aisles pointing out apples, oranges and potatoes, which all at least doubled in price since 2008. "Cristina’s speeches on holding down food prices sound great — but nothing happens," she notes.

Such popular discontent fueled the stinging June electoral defeat of the Peronists, who will have lost their majority when the new Congress convenes in December. Even more devastating, Néstor Kirchner lost his bid for a congressional seat, in a campaign that was viewed as a referendum on his possible run to become president again in 2011 when his wife steps down.

But the political opposition — ranging from conservatives to socialists — may prove too fragmented to rally behind a single presidential candidate in two years. If the Argentinean economy inches up by a widely predicted 1.5 to 2 percent in 2010, and comes closer in 2011 to resuming the average annual 8 percent GDP growth recorded between 2003 and 2008, then the Kirchners’ political future might suddenly look brighter. The prospect might even encourage them to more openly embrace Boudou’s market-friendly initiatives. Stranger things have happened in Argentina.

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