For many months now President Mauricio Macri has been playing with fire – restricting the electoral alternatives to the populism incarnated by his predecessor Senator Cristina Fernández de Kirchner, in order to ensure that continuity is at the very least the lesser evil, while running the calculated risk of spooking the markets (supposedly covered by the insurance policy of the biggest International Monetary Fund loan in history). This strategy somehow managed to survive all last year’s crises, but in the anniversary week of that first run on the currency its basic premises now risk collapsing all along the line, thus making the current turbulence potentially more dangerous.
Perhaps the immediate catalyst of this latest crisis of confidence was something bound to happen sooner or later – a stagflation persisting too long is finally resulting in the first serious opinion polls showing Fernández de Kirchner winning a run-off against Macri beyond the margin of error, thus wrong-footing the spin doctors who took the economic setbacks in their stride while re-election remained in sight.
In theory monetary problems are fixed by monetary solutions but this only works when the causes are also monetary – a purely monetarist policy thus becomes almost worse than useless when the political and psychological factors are so dominant. Throwing money at the problem becomes akin to using water against an oil fire – it should not be forgotten that the 2018 crisis began exactly a year ago last Wednesday, when then-Central Bank governor Federico Sturzenegger deployed over US$1.4 billion to defend the 20-peso mark. The massive IMF package seemed to stop the rot (just like the blindaje mega-swap of some US$40 billion in early 2001) but this becomes relative when these huge sums only serve to magnify a relatively tiny market out of all proportion, feeding fuel to the flames. Ditto for absurdly high interest rates topping 70 percent to defend the currency – in the long term these serve to liberate an economy from dependence on the dollar (at least based on the precedent of Brazil) but in the short they swell both ends of stagflation by feeding obscene financial bicycles while strangling a credit already at rock-bottom levels (18 percent of the economy as against a regional average of 45 percent).
Meanwhile, we have the supreme paradox of a market-friendly government being torpedoed by the markets with international financial dailies muttering about the “brink of default.” The official explanation of this paradox is fear of a populist comeback – a fear which is fast becoming both a vicious circle and a self-fulfilling prophesy because the more these market panics at the prospect of a Fernández de Kirchner victory derail the economy, the likelier that triumph becomes. Macri could thus be forgiven were he to conclude bitterly about the markets: With friends like that, who needs enemies?
And yet the government badly needs to introduce some self-criticism into its approach alongside self-pity. The market reaction is not as counterproductively irrational as it might seem. There is not only a “Cristina factor” but also a “Macri factor” – whatever the dangers of populism, Macri’s economic record in three of his four years has not been so dazzling as to inspire much confidence. Among the globe’s 38 emerging markets, why should investors be obliged to give preference to a country with negative growth and the world’s third-highest inflation rate?
At the political level the government needs to take on board that their campaign rhetoric – pitting the future against the past and the long term against the short – is no longer working. Instead of denying that things were better (or at least not so bad) under Kirchnerism, they need to explain it. When a government virtually doubles public spending, defaults on the debt and resorts to deficit financing among other tricks like the Kirchners, then of course there will be more money to go round for rich and poor alike – people living beyond their means invariably have more enjoyable lives while they can get away with it. Macri has removed many obstacles to growth – progress with both the fiscal and trade deficits, improving exports (even including energy), healing provincial finances, lowering labour costs and making the economy generally more competitive – but until growth actually arrives, this will not bring him votes and he must look elsewhere.
With no end in sight to the uncertainty, enough said for now. To be continued.