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Argentine leader's new style doesn't fit economic reality

BUENOS AIRES--President Cristina Fernandez has tried to reinvent her image since her return from skull surgery. She's put aside the all-black wardrobe she wore for three years mourning her late husband Nestor Kirchner, and reshuffled her Cabinet. This week, her economy minister announced a new stimulus program.

Analysts, however, say what she really needs to do, and quickly, is take politically painful steps to contain inflation by dialing back government spending.

Restoring Argentina's sense of pride and sovereignty after its 2001 economic collapse has been the central goal of the Kirchners' “victorious decade” in the presidency. They renegotiated or paid off nearly all of Argentina's defaulted debt in ways that removed the supervision of international lending organizations, nationalized the pension system, retook control of the national airline and oil company, and dug deep into the treasury to redirect revenue to the poor.

But the years of 7-percent growth are over. Fernandez now “faces a rapidly deteriorating economy that demands profound and urgent measures, and there are no pleasant alternatives in sight,” said Ignacio Fidanza, who directs, a website focused on Argentine politics.

Inflation has been at least 26 percent this year, more than twice the widely discredited official rate, private economists say. This forces rounds and rounds of wage and price negotiations that scare off investors and spark social unrest, like the provincial police strikes that set off looting across the country this month.

Governors promised pay raises that reached nearly 60 percent in some provinces to get officers back in the streets after the mob violence killed 13 people.

A 50 percent average raise for police would cost about US$2.3 billion in 2014, but the officers represent just 15 percent of Argentina's 2 million provincial government employees, and with at least 28 percent inflation expected in the coming year, the rest won't be satisfied with less. If all 2 million get 30 percent raises on average, it would cost the equivalent of US$10 billion in today's pesos, estimates Diego Giacomini, chief economist with the Economia y Regiones consultancy.

Printing more pesos isn't a sustainable alternative: JP Morgan estimates the peso will be worth 45 percent less by this time next year.

Economists figure Argentina's primary fiscal deficit, before making debt payments, grew to 2.6 percent of GDP this year. That's better than the U.S deficit of 4.1 percent of GDP, but Argentina can't attract international loans at market rates. Instead, it uses Central Bank reserves to buy fuel overseas, meet foreign debt payments and finance economic stimulus programs, reducing the reserves by nearly US$13 billion this year, to US$31 billion.

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