Argentina: Finance Minister Resigns Under Presidential Pressure

After a week of rumors suggesting that the minister of finance was going to be removed, on 28 November President Néstor Kirchner asked Roberto Lavagna for his resignation. Felisa Miceli, head of Banco Nacion, was appointed to replace Lavagna, becoming the first woman to hold this position in Argentina. The way she tackles domestic inflation will be the first evidence of her economic views.

Despite Lavagna's role in the Argentinean recovery after its worst recession during 2002, the president found few reasons to keep him in his cabinet. The debt restructuring process—which the minister of finance designed, negotiated, and implemented—was concluded successfully last July. This process was, without any doubt, the main link between Kirchner and Lavagna. Once it ended, their differences became more evident, and conditions grew ripe for the minister's dismissal.

A main source of conflict came from the evolution of domestic prices. Lacking the policy instruments to contain inflation—which should ultimately be the responsibility of the monetary authorities, not the minister of finance—Lavagna failed in his attempt to keep prices low by signing price agreements with domestic producers. Although this approach restrained inflation for a while, it could not be used as a permanent measure because of the complexity of negotiating with every single union and association in Argentina. Reducing the political cost to the president by finding somebody else to blame for this problem could also have been a reason to force the minister out.

It appears that Lavagna's latest declaration on public contracting annoyed President Kirchner and ignited the chain of events that led to his dismissal. In it, the minister of finance attacked private companies that had won contracts for public infrastructure development, alleging they were setting prices like a cartel, thus inflating the treasury's costs. The declaration implied the involvement of Julio de Vido, the minister of planning and a close ally of Kirchner, and with whom Lavagna had had previous disputes.

The results of the October elections required some changes in the cabinet to incorporate elected senators and congressmen, and Kirchner tried unsuccessfully to take advantage of this opportunity and reduce the impact of Lavagna's departure. As part of this cabinet reshuffling, Jorge Tajana replaced Rafael Bielsa as the new minister of foreign affairs, Nilda Garré replaced José Pampuro as the minister of defense, and Juan Carlos Nadalich replaced President Kirchner's sister, Alicia Kirchner, as the minister of social affairs.

The foreign exchange market and the Argentinean stock exchange each suffered losses after the announcement of Lavagna's departure. The peso retreated 1% yesterday, although it also suffered selling pressures last week (again, with a loss of 1%) because of the rumors about Lavagna's tenuous position. The stock market lost 5.8% immediately after the announcement, but rallied a bit later in the day, finishing 4.5% below its Friday (25 November) close.

In the past, Felisa Miceli was director of the Buenos Aires Provincial Bank, has worked in the Ministry of Finance at different times, and was involved in consulting projects at the provincial and national levels, both in public and private practice. Before her appointment as director of Banco Nacion, a public bank, she represented the Ministry of Finance on the central bank's board of directors. We do not expect her to depart radically from Lavagna's economic policies, although her approach will be strictly aligned with President Kirchner's economic ideology—which, by the way, is unclear.

The administration has lost an excellent economist who is respected both domestically and internationally. Although President Kirchner has removed a political obstacle, threats to Argentina's strong economic recovery remain. The challenge comes not only from rising inflation, but also from shrinking current-account and public-account surpluses, public utility tariffs that have been frozen following the devaluation of the currency, capacity constraints in different industries, deep poverty, and widespread inequality.