All Hail the Queen

Few leaders would relish the frosty reception that appears to await Argentine President Cristina Fernández de Kirchner at the G-20 summit in Los Cabos, Mexico, on June 18 and 19. At least half a dozen of the world's major economies are peeved at her — starting with Spain, whose Prime Minister Mariano Rajoy called Argentina's global reputation "seriously damaged" in April after Fernández abruptly expropriated the $10 billion controlling stake in Argentina's largest oil company, YPF, that was held by Spanish petro giant Repsol.

Then there's Britain, which Fernández regularly harangues for what she calls its "ridiculous and absurd" refusal to hand over the Falkland Islands, or Las Malvinas, which she insists belong to Argentina even though their residents prefer they stay in British hands. Meanwhile, nations from Japan to Brazil to the whole of the E.U., vexed by tightening import restrictions in Argentina, accuse Fernández of illegal protectionism, a charge she denies. And don't forget the U.S.: the Senate Foreign Relations Committee may vote soon on a resolution to censure Argentina's "outlaw behavior" — including its evasion of more than 100 U.S. court orders to honor obligations to U.S. creditors — and call for the South American country's outright expulsion from the G-20.

Yet Fernández seems to thrive on the criticism, as if it affirms the defiant nationalist path she's set for Argentina in her second term, which began in December. During a May visit to Angola, she derided her "colonialist" detractors and declared that economically booming Argentina is in the right while the recession-racked U.S. and Europe are in real trouble. "The modern, developed countries told us they were the model to follow," she said, "and they've collapsed resoundingly."

Up to now, that Cristina-against-the-world stance has been a big hit in Argentina, where polls show 70% approval for the YPF nationalization. The reason is obvious. Economic growth hit 8.9% last year, and it has averaged more than 7% ever since Fernández and her late husband Néstor Kirchner, who was President from 2003 to '07, began their Kirchnerist rule nine years ago amid the worst financial catastrophe in Argentine history. That surge from basket case to showcase — fueled by domestic consumption, high prices for commodity exports like soy and ramped-up social spending — has cut the poverty rate by more than half since the 1999 — 2002 crisis and made Argentina the richest nation per capita in South America.

The success of Kirchnerism — a bold strategy that's included a return to fiscal sobriety but also a refusal to repay much of the $100 billion in mostly foreign debt on which Argentina defaulted in 2002 — has some analysts hoping it could be a model for Greece and the world's other indebted disaster zones. "Argentina proves a country doesn't have to accept austerity policies that make your economy worse," says Mark Weisbrot, a co-director of the liberal Center for Economic and Policy Research in Washington, D.C. And it has Fernández supporters, galvanized by her landslide re-election victory last October and her center-left party's control of Congress, pushing to amend the constitution to let her run for a third four-year term in 2015, if not beyond. As Argentine Congresswoman Diana Conti, an ardent Kirchnerist, said in February, "We would like an eternal Cristina."

Royal Fantasies
But those queen Cristina dreams may be premature. The global recession — and certain Kirchnerist policies — appear to have finally caught up with Argentina. Economists now estimate the country's growth will plunge to 2.5% this year, a sobering forecast that follows reports that Argentina ran a budget deficit last year for the first time in almost a decade, totaling 1.6% of GDP. Inflation may climb as high as 25% in 2012 — a specter that helped trigger a record $21.5 billion in capital flight last year. Argentina can ill afford those lost funds since it still can't access international credit markets because of its massive 2002 debt default. (After that default — brought on by excessive borrowing in the go-go 1990s, the collapse of the Argentine peso and draconian austerity demands from the International Monetary Fund — Argentina defiantly restructured its debt to some 30% of its value, but it has still failed to reach agreements with all its creditors.) That has led to onerous state currency controls this year — and to a shortage of safety-deposit boxes as Argentines hoard U.S. dollars as a defense against inflation or a possible devaluation of the Argentine peso. Even Fernández has conceded that "a very difficult world is coming."

Critics argue that much of that world, though, is of her own making. Fernández insists that the controversial YPF confiscation is justified because Repsol hasn't invested enough to extract Argentina's prodigious energy reserves, including billions of barrels of recently located shale gas. But firms like Repsol argue that lavish and politically motivated Kirchnerist subsidies and controls have kept domestic energy prices so artificially low that it's not worth their while to be more aggressive. Either way, Argentina has gone from being a net energy exporter as recently as 2008 to an importer, with an energy deficit that could top $5 billion this year.

Nationalization may or may not help fill that hole. But the reality is that Fernández took the YPF action not just because "oil sovereignty" strikes a politically popular chord in resource-rich Argentina but also because her cash-strapped government needs the money that state ownership of the company will bring in. "This is a government that relies inordinately on social spending for its popularity," says Ariel Armony, an Argentina native and director of the University of Miami's Center for Latin American Studies, "and it's starving for cash right now."

Yet if that's true, is amping up nationalist fervor the best long-term agenda for South America's second largest economy? Fernández also said recently that "to survive what's coming ... we have to focus on investment." That's ironic, say analysts like Armony, considering private, and especially foreign, investment feels less than bienvenido in Argentina in the wake of the YPF expropriation. Or even before it: foreign direct investment grew 37% across South America last year, but only 3% in Argentina. "Our good friend Cristina Fernández has taken a step that's not going to do anyone any good," Mexican President Felipe Calderón said of the YPF grab. "Nobody in his right mind invests in a country that expropriates investments."