Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

A triumph for market orthodoxy

The short-lived success of these strong measures does not rule out a negative impact over the long term. They risk a return to the stagflation which made 2016 such a difficult year - interest rates are plainly recessive while the inhability to halt inflation clearly spills over into prices.

Today 09:29 AM
Presidente Mauricio Macri
Presidente Mauricio Macri Foto:JOAQUIN TEMES

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Apet cliché of contemporary pundits is that the Chinese have the same word for crisis and opportunity (something disputed by linguists – thus if “yuan” can be the currency, a Mongol dynasty, their five branches of government and who knows what else, the same word with changes of nuance can mean very different things in Chinese). But even if the cliché were semantically sounder, the opportunities are hard to see when right in the middle of a crisis like Argentina these days. From a distance of almost 9,000 kilometres New England economist Dr Hale writes:

“Since I make no secret of having Argentina constantly on the brain, I’ve had a minor bombardment in recent days, as you might well imagine, from people who read my obession as expertise and consult me as to whether this is not the time to get out of Argentina. To my mind this is an obvious but not very intelligent question. If the basic formula for business success is to buy cheap and sell dear, then moving out now does not seem much smarter than joining the dollar stampede at 23 pesos a buck instead of 20 as a short while ago – the current equation of crisis and opportunity is not especially new since over two centuries ago Baron Rothschild was saying: “Buy when there’s blood in the streets.” But I also find such consultations somewhat pointless when regardless of what I, Forbes magazine or anybody might advise, a flight to quality is always going to be a fact of life once interest rates go up Stateside – Lord knows that Donald Trump is running big enough deficits to need the consequences of other people’s deficits.

But the purpose of these emails is not to give my answers to the questions of others but to obtain your answers to my questions. Calling in the International Monetary Fund has obviously grabbed the headlines – this brings back to me uneasy memories of 2001 which began with that impressive IMF blindaje armour-plating of almost US$ 39 billion (far more than the stand-by likely to come Argentina’s way now) and ended with the corralito bank deposit freeze, followed by the corralón pesofication of dollar deposits (at a confiscatory 1.40 pesos per buck) early in 2002. We already have a new blindaje being negotiated in Washington – could reducing the percentage of bank dollar assets be seen as the seeds of a new corralón even more than corralito? Does this crisis run deep enough to spell the end of such basic premises of the Mauricio Macri presidency as gradualism and public works? All sorts of other questions but that’s probably enough for now.”

My reply:

“I’m writing in sand amid such volatility but at least we can update Iast week’s exchange a bit. No point in saying much about the IMF ahead of the conclusion of negotiations except perhaps to say that it represents a relatively rare triumph of market orthodoxy over electoral logic in the Macri administration – IMF loans carrying a few points less than others (especially with current trends) weighed more than the knee-jerk hostility of at least 70 percent of the electorate towards any mention of that acronym. “Going to the IMF was tried after various other extreme measures had failed to stop the dollar going up and the Bolsa stock exchange down. Just before the weekend the Central Bank jacked up interest rates to 40 percent and reduced bank assets in foreign currency from a maximum of 30 to 10 percent while Treasury Minister Nicolás Dujovne accelerated this year’s fiscal reduction target from 3.2 to 2.7 percent of gross domestic product (accompanied by the specific announcement of a 30-billion-peso cut in public works spending to make this pledge more than a vague promise).

I can see why you perceive Dujovne’s announcement as the end of gradualism, which does indeed become less sustainable with the increased cost of borrowing abroad – at the very least gradualism is being “recalibrated.” But in my view the reduction of bank dollar assets had more immediate impact even though it drew less comment than the rest of the package – precisely because it received less coverage because it was poorly explained. Many feared that this was the prelude to the forced conversion of most dollar deposits along the lines of the corralón of early 2002 and in my opinion this fed a panic which led to the success of these drastic measures being short-lived, achieving little more than a relatively calm Monday.

“The short-lived success of these strong measures does not rule out a negative impact over a longer term. They risk a return to the stagflation which made 2016 such a difficult year – interest rates of 40 percent are plainly recessive (modified only by the stunted size of the Argentine credit market) while the inability to halt devaluation clearly spills over into prices, not least in the case of imported goods. Your question as to whither growth and inflation is thus valid enough, to which might well be added collective bargaining – Dujovne may have ratified the 2018 inflation of 15 percent but it is hard to imagine the trade unions falling into line. In my view the harvest failure (fully a third lost) should not be underestimated as making gradualism unsustainable along with the newly unfavourable credit market. Not that the anti-crisis moves do much to improve growth prospects. The construction boom already badly hit by the mortgage chaos inflicted by the volatility on a stubbornly dollarised private housing market must now contend with the public works budget being slashed by around 15 percent – the government argues that the new PPP public-private partnerships will minimise the shortfall but this remains to be seen.

This is far from being the first currency upheaval of an administration which began with a major devaluation as an immediate consequence of lifting currency controls but this is beyond doubt the most serious crisis, irrespective of whether or not it has already run its course. No previous turbulence has challenged such fundamentals of the Macri administration as gradualism or public works or a fragmented economic team – the pundits almost universally trace this crisis back to Central Bank Independence being undermined by the “recalibration” of targets last December but perhaps it could be traced back to the previous December when an already diminished Treasury Ministry was further split by the creation of Luis Caputo’s Finance Ministry. Little point in saying more which could be overtaken by events within a few hours. I’ll just answer your many questions with another – is a G20 chair too big to fail?”



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