Breaking the bank

Exactly 190 years ago today Juan Manuel de Rosas closed down the National Bank. Far from being the most striking episode in a dictatorship spanning almost two decades, this event would be lost in the mists of time if it did not overlap with one of the current President’s central 2023 campaign promises – to dynamite the Central Bank. This has yet to happen, of course, and it is widely assumed that it could never happen but this impossibility has been disproved by Rosas – it can be done because he did it.

Possible, then, but desirable? The actions of a man calling himself in all seriousness a “tyrant anointed by God” might not seem the best role model. Apart from sharing the traditional rural mistrust of credit institutions, the chief motive for Rosas gutting the National Bank was its creation by Bernadino Rivadavia in 1822, leading him to suspect it of being a unitarian slush fund. Its functions passed to the Bank of the Province of Buenos Aires (today’s Bapro), also created in 1822.

Today the widespread acceptance of the inevitability of central banks is based on the belief that every nation has one. This is not quite true since micro-states like Andorra along with dollarised and euro countries are exceptions to the rule but around 85 percent of the world’s nations and an even higher percentage of global population do have central banks.

Almost inevitable, then, but desirable? If hauling country risk below 500 points is an uphill task, the Central Bank has much to answer for – and not just because of the sluggish accumulation of reserves so often uppermost in the negotiations with the International Monetary Fund (IMF). For a start nobody can be expected to believe in the Independence of the Central Bank if its governor Santiago Bausili is Economy Minister Luis ‘Toto’ Caputo’s  business partner – this already gives overseas investors pause.

The ‘cepo’ currency and capital controls may have been lifted for individuals just over a year ago (although not for those dabbling in financial dollars like contado con liquidación or MEP, forfeiting the official market for the following three months) but it still dogs businesses, which may not buy dollars on the official market for saving or remittance abroad. Companies thus have to fund their imports out of their reserves since denied access to the official market.  While overseas companies have been allowed to send dividends to their home offices as from the start of 2025 (although not without plenty of red tape), all previous dividends remain trapped in local currency. At a May 18 press conference, Bausili said: “It is not among our priorities to eliminate the restrictions on the currency exchange transactions of companies.” But several economists including ex-minister Domingo Cavallo believe that the cepo must be completely eliminated to bring country risk down.

Nor can the Central Bank duck blame for the sluggish start to the economic year underlying slumping government approval ratings (of which Cabinet Chief Manuel Adorni is a symptom rather than a cause).  The slump can largely be attributed to the absurdly high interest rates reaching an annual three digits imposed to head off a run on the currency from the pre-midterm panic climaxing after September’s Buenos Aires Province electoral debacle, taking effect with that famous six-month lag of which monetarists like to speak. The government thus showed it had more faith in Central Bank regulation than in its own libertarian theories of allowing the peso to find its own level on the market – a very Kirchnerite strategy of using the currency to anchor inflation by pegging devaluation at a lower rate (it took last year’s agreement with the IMF to discontinue the “crawling peg”).

If Rosas dumped the National Bank in 1836, when did its current incarnation return? Almost a century later – in 1935, marking its 91st anniversary tomorrow. It was a response to half a century of capital influx into Argentina being cut short by the Great Depression and to the gold standard being abandoned in 1929 (and in 1931 by the key British trading partner). The Central Bank was the brainchild of the economist Raúl Prebisch and the then-economy minister Federico Pinedo (not to be confused with the living Federico Pinedo, president for 12 hours in late 2015, his great-grandson). It arose in the same Great Depression period as import substitution, which might account for President Javier Milei considering both equally aberrant (in theory, at least).

The Central Bank was born as a public-private partnership with half its capital coming from the national government and half from the banking sector but even ahead of taking power himself in 1946, Juan Domingo Perón induced his predecessor Edelmiro Farrell to nationalise it. The Peronist government thus acquired power over bank deposits and the freedom to print money, subordinating the accumulation of reserves to job creation and economic development. Post-Peronist governments considered themselves corrective but the Central Bank still lacked any independence from government economic policies. The Central Bank under the 1976-1983 military dictatorship was most noted for the ‘tablita’ programmed devaluation and for the audacious 1982 initiative of Cavallo (governor at the age of 35) in nationalising some US$15 billion of private-sector debt.

The last two decades of the past century contrasted strongly in monetary terms – acute instability in the 1980s with the 1985 creation of the austral disintegrating in the 1989 hyperinflation, followed by Carlos Menem running through no less than six Central Bank governors in his first two years, after which the convertibility corset limited options throughout the 1990s.

More than half of the first quarter-century of the third millennium were Kirchnerite years. Scant Central Bank independence with president Cristina Fernández de Kirchner firing Martín Redrado for resisting her Bicentennial Fund to use the reserves for foreign debt interest payment guarantees – he was eventually replaced by the subservient Mercedes Marcó del Pont who helped impose the cepo. Two of the three Central Bank governors of the 2015-2019 Mauricio Macri presidency are Milei ministers today – Caputo (Economy) and Federico Sturzenegger (Deregulation & State Transformation), who resented the government interference to move the goal-posts on his inflation-pegging. The Alberto Fernández presidency (2015-2019) escalated the currency restrictions, finding the cepo highly compatible with pandemic lockdown.

In 2023, Milei became president with a promise to dollarise the economy which has yet to come to pass, not to mention dynamiting the Central Bank.