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Leliq-land, the Oscar that never was

The unforced error with the gas surcharge is but the latest episode in a continuing process of trying to come to grips with this problem, unsuccessfully until now.

Saturday 13 October, 2018
President Macri and Letras de Liquidez (Leliqs).
President Macri and Letras de Liquidez (Leliqs). Foto:JOAQUIN TEMES

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Not even a Brazilian reincarnation of Donald Trump in the making can fully distract the New England economist Dr Hale’s attention within the Southern Cone from Argentina. He writes:

“Brazil might be more Big Brother than ever in the news but I have my own business sources in São Paulo (Guedes?) so I won’t be picking your brains on that subject, no matter how fascinating the parallels between Planalto’s future occupant and our own White House squatter might be. But I must admit that in recent days I haven’t been following Argentina as closely as usual (still fighting my disbelief and disappointment over not winning the Nobel Prize in Economics) so this week I’ll just ask you to fill me in on some basic questions instead of exploring subtleties between the lines, as I prefer. Firstly, last week closed with the B20 summit in Buenos Aires – what did that business brainstorming bring to the table? Secondly, the name of the game on the money markets seems currently to be the Leliqs – are these simply recycled Lebacs, only now restricted to the banks, and just how recessive are current interest rates? Thirdly, the big noise in the first half of the week seems to have been this retroactive gas surcharge – could you explain that? And also anything else which I might so easily have missed.”

My reply:

“Since you’re not inviting me to compare Jair Bolsonaro with Donald Trump, I will refrain – except to comment that one difference would be only four of the 81 Brazilian senators elected last Sunday belonging to Bolsonaro’s party, whereas The Donald is ever so slightly stronger in Washington’s Senate so that the man with the messianic middle name might have no choice but to be authoritarian (alternatively, this parliamentary scenario could facilitate impeachment, not unknown to Brazilian history).

“The B20 was a mega-event (the climax of seven months’ work by eight task forces, attended by some 1,200 of the world’s top CEOs and addressed by Cabinet Chief Marcos Peña and various ministers) but also a B-movie as far as news prominence was concerned. Its agenda struck a pretty fair balance between issues of global and local concern. The future challenges of technology – the robot threat to traditional employment and adaptation to the digital era – span the globe, while your pal Trump’s assaults on multilateralism and growing protectionism probably worry most countries more than Argentina with its stunted trade volume. The question of whether the World Trade Organisation (WTO) would be overhauled or scrapped was asked without being answered. On the other hand, updating infrastructure responds to a top priority of the Mauricio Macri administration (at least until the run on the currency and the return of the International Monetary Fund caused the fiscal deficit to take over from the infrastructural) while the importance given to transparency was a concession to the recent local news prominence of the Kirchnerite graft exposés – B20 participants underlined that corruption was the antithesis of fair economic competition which must be completely eliminated, no matter what the short-term disruption. Sustainable development combined local and international perspectives, pointing to Argentina’s capacity to feed 400 million consumers but insisting on respect for the environment. To learn more you would need to consult somebody who attended the forum.

“The Leliqs (Letras de Liquidez) are indeed an acceleration of the pre-crisis plans for a phased restriction of the Lebacs (Letras del Banco Central) to banks. The aim of Leliqs is quite unabashedly to hold the dollar down by offering high enough interest rates (never below 60 percent for the rest of this year) to attract liquidity to the peso. They also differ from the Lebacs in having a daily (with weekly redemption) rather than monthly rhythm to prevent the accumulation of huge sums leading to new explosions of volatility. I should not need to spell out to as professional an economist as yourself the recessive dangers of interest rates topping 70 percent, alongside freezing the money supply until mid-2019 and raising statutory reserve requirements (which may include Leliqs) to 44 percent – a policy so ultra-orthodox that it has been questioned by some of the best-known local champions of the free market (although it could also turn out to be the shape of things to come in Brazil). Former Banco Nación president Carlos Melconian forecasts a full year of recession at least while the IMF predicts negative growth of -1.6 percent for 2019.

”This ultra-orthodox policy is premised on a monetarist solution to inflation (to which the IMF is historically prone) but this fails to address the inherited disarray of relative prices – the unforced error with the gas surcharge is but the latest episode in a continuing process of trying to come to grips with this problem, unsuccessfully until now (you solve it, Dr Hale, and you might just win that Nobel Prize). Indeed, this problem has only become more general during the crisis with huge price differences for the same product spreading since some sectors have more margin to mark up than others but the core issue here remains the utility bills and transport fares frozen during the Kirchnerite years. That freeze ended the country’s energy self-sufficiency by discouraging the sector, thus creating a dependence on imports which has been hit by a double whammy this year – a devaluation halving the value of the peso while oil prices have risen to around US$85 per barrel.

“I won’t go into too much detail over the gas surcharge because the government is backtracking as fast as it can. At the end of last week (trying to hide the bad news in a weekend including the Brazilian election) the government announced that the companies would be retroactively compensated for their devaluation losses via a surcharge averaging 90 pesos in the next 24 gas bills as from New Year (the state will now be compensating devaluation in 30 quotas leaving the utilities to pick up the tab thereafter). The attempt at stealth was to no avail – there was a general uproar with many people still regarding free energy as an acquired right, echoed in opposition threats to block the budget. With the general elections now only a year away the spin doctors (perhaps mindful of the ferocity of the backlash in Brazil last weekend) rapidly took over from the economic team in calling the shots – or rather in calling them back.

“Finally, regarding your request for anything else, there is always something else but who wants more doom and gloom here with a long weekend lying ahead?”

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