Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

A wilder shade of pale

Perceiving Caputo’s removal as an IMF imposition would not be completely far-fetched – he and the IMF were at loggerheads over Central Bank intervention.

Saturday 29 September, 2018
The IMF and Dujovne.
The IMF and Dujovne. Foto:JOAQUIN TEMES

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If Lady Bracknell said: “To lose one parent, Mr Worthing, may be regarded as a misfortune; to lose both looks like carelessness” (Oscar Wilde’s The Importance of Being Earnest), President Mauricio Macri seems to be falling heavily into this “once might be an accident but twice looks like carelessness” syndrome by shedding two Central Bank governors in less than 15 weeks. True to Wilde’s observation that “the Americans and the British are identical in all respects except, of course, their language” (later more succinctly rendered as “two nations divided by a common language” by George Bernard Shaw), the New England economist Dr Hale raises the same issue in slightly different words:

“If the CGT wanted a smoking gun for the IMF calling the shots, they could hardly have asked for a bigger bonus to top up their general strike than Central Bank Governor Luis Caputo quitting that same day on the eve of a new agreement with the International Monetary Fund. All of which looked like self-destructive timing for President Macri’s big day in the Big Apple – unless, of course, he has plenty to hide from ‘the five worst months of my life.’ My main question for you would be that if one Central Bank governor quitting plus US$50 billion from the IMF failed to stop the rot last June, why should another Central Bank governor quitting plus several billion more give the markets any more confidence? Also, who is this Guido Sandleris? I have enough acquired knowledge of Argentina to have recognised every incoming Central Bank governor in the past but I know nothing at all about this guy except that he’s actually called Guy (or at least the Spanish equivalent).”

My reply:

“The competition for Wednesday’s headlines was indeed something fierce – a Ruby Tuesday for journalists with the CGT general strike, President Macri’s address to the United Nations General Assembly in New York and the Caputo exit. Since the first two items were preannounced well in advance, Caputo grabbed most headlines. Macri’s speech was decidedly modest for a G20 chair – keener on blasting Venezuela than banging his own drum as if to underline that things are even worse somewhere else.

“Although not so pre-announced as the general strike or Macri’s UN appearance, Caputo’s departure fell well short of being a total surprise. The imminence of the IMF deal probably did more to hasten than delay his departure since it was generally preferred that he leave beforehand (rather than afterwards like his predecessor Federico Sturzenegger) in order to avoid the impression of Macri’s economic team not being entirely on the same page over the agreement. Yet perceiving Caputo’s removal as an IMF imposition would not be completely far-fetched – he and the IMF were at loggerheads over Central Bank intervention. The former resented the IMF curbs on the sale of Central Bank reserves to defend the peso while the latter thought that its dollars had better uses than feeding speculation and permitting Argentina to compete with Russia as a greenback hoarder – the ‘cultural change’ preached by Macri should include ending this perverse psychology in IMF eyes. Caputo’s Central Bank has clearly failed to end the currency crisis because under his watch the dollar has risen from 28 pesos to the 40-peso mark despite hurling billions at the market (US$4.5 billion last month alone) but the cause is disputed – Caputo would blame the limits and the IMF the policy itself.

“Yet perhaps it is not so much a question of Caputo having the wrong policy as no policy at all. While not a newcomer to banking (with 14 years at JP Morgan and Deutsche Bank under this belt), his qualifications basically came from elsewhere – as a Cardinal Newman schoolmate of Macri and the cousin of his closest business associate Nicolás Caputo (enough to ensure him the newly created Finance Ministry in early 2017) but his antecedents for the Central Bank helm were much more immediate. Caputo was the hero of the hour at the May renewal of a record 680 billion pesos worth of Lebac bonds with strong fears that most of this money would end up chasing the dollar in the then incipient run on the currency. But finance minister Caputo used his international links to persuade such global investment mega-funds as BlackRock and Templeton to inject US$3 billion as the prelude to total renewal. This made him the hastily improvised choice when the crisis proved too much for Sturzenegger the following month. Yet once at the Central Bank helm, Caputo made a rapid U-turn from saving to dismantling the Lebacs (from which Sturzenegger had seen no exit despite being aware of the dangers) without finding any credible new alternative to the dollar or anchor against inflation beyond unviable 60 percent interest rates. Caputo then sold as many of the newly boosted Central Bank reserves as he could to defend the peso at such a rate that this week’s negotiations to advance tranches were needed. As a result 2020 and 2021 loom as dangerously exposed years (which could make next October what the pundits call ‘a good election to lose’).

“While I was writing this email, the details of the IMF agreement came through but I’d need a lot more reading to give you a proper briefing. A breathless summary would be: US$13.4 billion this year and US$22.8 billion next in return for zero expansion of money supply on top of zero deficit and a new float to avoid the previous extremes of a frozen and exploding dollar (a 33-44-peso range, rising three percent monthly for a more gradual devaluation with Central Bank intervention only permitted beyond this range). Calling in the IMF is too often confused with being the cause of problems rather than their effect but this does not make the built-in recession of this plan any less grim. To be continued.

“To address your other question, to be quite honest with you, Dr Hale, I don’t know all that much more about Sandleris myself. A good education at Columbia University and the London School of Economics followed by an academic career at Di Tella University but his main qualification is his proximity to Economy Minister Nicolás Dujovne. For now the move should be read in political rather than economic code. Ever since his entry into government upon the resignation of Treasury ministry Alfonso Prat-Gay (whose one stint in Congress had been alongside Civic Coalition deputy Elisa Carrió) in late 2016, Dujovne has been shadowed by Caputo representing the inner core of Macri’s centre-right PRO party within the economic team – first in the newly created Finance Ministry and then at the Central Bank in the last three months. That shadow is now gone. Dujovne himself has no such PRO links – or political weight of any kind, which makes his rise something of a mystery. His work for Radical presidential candidate Ricardo Alfonsín in the 2013 campaign identifies him with that wing of the ruling coalition but he is no leftist – on the contrary, both his father and his wife’s family have had business dealings with Donald Trump (your favourite politician, Dr Hale). The paradox is that the less PRO Macri’s economic team, the more pro-market it seems to become. But who knows what lies ahead?”

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