MercoPress. South Atlantic News Agency

Credibility blow to Kirchner's price controls policy

Inflation data becomes an electoral liability for Pte. Kirchner

Argentine president Nestor Kirchner tried Thursday to disengage this week's rise in the country's risk rating and drop in sovereign bonds, from the controversy over the ousting of the head of the Statistics and Census Office (INDEC) responsible for calculating inflation.

"You must be well informed about financial markets; you must make your homework" said Kirchner accusing the press of having published "totally erroneous news" regarding an alleged link between country risk and interference with INDEC autonomy and data credibility. "From a country risk of 184 points we went to 202; this does not happen because of the removal of an official. You can't act so superficially", underlined Kirchner. However on Wednesday two international investment banks Merryl Lynch and Credit Suisse recommended investors to demand higher yields from Argentine bonds because of uncertainties following the removal last week of Graciela Bevacqua as head of INDEC and her replacement by an economist closely linked to the Ministry of Economy and the Secretary of Domestic Trade, the controversial Guillermo Moreno who has been instructed by Kirchner to keep annual inflation in one digit. The Argentine financial press reported that the drop in investors' confidence following the removal of Bevacqua was reflected in a higher country risk, --according to JP Morgan's rating--, interrupting the gentle month long positive slide that had reached a record low of 184 points. This also influenced the market for Argentine bonds with yields linked to the cost of living index. The influential Financial Times said that the surprise removal of the INDEC official in charge of calculating the consumer price index was followed by the release on Monday of inflation figures for January, which "registered a rise of just 1.1%. Some private sector economists estimate that real inflation for the month was closer to 1.8%". Inflation is considered one of the biggest risks in Argentina's economy, which has expanded rapidly since the 2002 debt default and devaluation. Inflation had roughly doubled annually since 2003, reaching 12.3% in 2005, but the introduction of a heterodox policy of price controls helped push inflation down to 9.8% last year. However price references and controls implemented by the controversial Guillermo Moreno have already caused analysts to question official inflation figures, with some estimating that the gap between measured and actual inflation is now from 3 to 5 percentage points. The INDEC incident is generating speculation that Moreno is interested in controlling indexes as well as prices. When the removal of Bevaqua INDEC staff took to the streets complaining of an "institutional coup" but Interior minister Anibal Fernandez branded the protesters as "a gang of outlaws" and a "mafia". Analysts highlighted the surprisingly low increases in the cost of health insurance, and in tourism, which increased just 3.7% compared with 16.7% last year. FT sums up the situation saying that the damage to the credibility of the INDEC data is expected to undermine the attractiveness of Argentine inflation-linked debt, and may also affect the annual round of wage bargaining that is under way. With perceptions that inflation is higher than officially measured and presidential elections next October, trade unions may demand bigger wage rises, further aggravating inflation. "The clumsy, sloppy and unnecessary handling of the situation makes numbers to be questioned and gives critics more ammunition".