Thursday, July 18, 2024

ARGENTINA | 15-08-2020 09:49

Ricardo López Murphy: ‘Fernández inherited a much better situation than Macri did’

Veteran politician, former economy and defence minister and 2003 presidential candidate Ricardo López Murphy on reform, inheritance, the deficit and why the coronavirus pandemic will produce the most severe recession in economic history.

Ricardo López Murphy believes that we are now facing humanity's worst economic crisis to date and that it must be faced with liberal and republican optimism. 

The 69-year-old, a former economy and defence minister and presidential candidate in 2003, sees some faintly promising signs in the future panorama but also many difficulties.

From his perspective, facing up to the spectre of failure is the prelude to taking the concrete steps needed to adopt a more rational economic outlook. 


As Mauricio Macri’s first ally, you know his ideas perhaps better than anybody. Did he flop because his gradualism meant a lack of ideological conviction or because he lacked the political skill to incorporate part of the opposition and carry out the necessary reforms? 

The core of that question lies in the diagnosis of the 2015 measures. When you get the diagnosis wrong, it’s very difficult to apply the right therapy afterwards. 

In mid-2015 the evaluation was that the damage done by populism had not been that serious. Nor did they rate as extraordinarily serious the external shock suffered by South America in the second half of 2014. It was exactly the reverse. The drainage of capital from the economy between 2002 and 2015 and the harsh shock suffered by the region in the second half of 2014 from collapsing prices enforced some very complicated political options. That caused them to take an enormously long time. 

The problem is not so much gradualism versus shock therapy, both of which can be corrected if you have credibility, as that the magnitude of the risks was not evaluated. That analysis helps us to understand why the first two years were so favourable with the correction appearing dramatically in the second quarter of 2018 as the end of the presidential term approached.

The inheritances of Mauricio Macri and Alberto Fernández were different: the Frente de Todos kicked off with a tiny fiscal deficit but an infinitely bigger debt.

The inheritance received by Alberto Fernández was much the better. Firstly, the deficit had practically been eliminated and the expansion of the money supply reduced, not as much as they said but it was down. That gave this government scope to print money. Moreover, the growth of debt wasn’t that big. It always struck me that Cristina had US$45 billion in Leliq bonds in the last month of her presidency in 2015 whereas Macri had US$15 billion. Nevertheless, that was never a campaign argument. And that’s an area where Alberto Fernández hammers away without pause – the way the Leliqs are climbing now is beyond description. Macri’s term ended with more reserves and far less liabilities than in 2015. But that’s never argued.

Wasn’t there a contradiction between practically no money being printed and increased inflation? Doesn’t that prove the Kirchnerite model right when it argues that inflation is not essentially a monetary problem but a demand in excess of potential supply? 

That’s a very important question. Between 1970 and 2020 the money supply grew 85 percent annually while inflation was 83 percent. When you take long periods, the correlation cannot be otherwise. Nominal prices are what they are because the money is there. Those who do not identify inflation with the money supply haven’t studied the equations. 

When you say that the movie’s not over yet, you’re referring to corrections lacking? 

Clearly. Monetary policy always lags. If you slam on the brakes, that lag appears until it translates into less inflation. The same happens when you accelerate, there is also a lag until it reaches the inflation rate. Monetary policy acts with several quarters of lag. What the current expansion of the money supply is doing to the exchange rate is leaving it without reserves. For example, the Central Bank is losing reserves every day with a trade surplus.

Could you say of Mauricio Macri, paraphrasing Pablo Gerchunoff, that “never before did so much illusion lead to so much disappointment”? 

There were various moments. In the 1990s there were major institutional reforms. Whatever one might think of them, nobody can doubt the magnitude of creating a predictable monetary scheme. If you had to hunt up some historical reference, the most successful experience would be Carlos Pellegrini’s reform. Between 1890 and 1945 Argentina had less inflation than the United States and grew more. The fiscal and regulatory reforms of the 1990s, with the ambition of making the country more predictable, were very great. Perhaps there was a double component making them insufficient – when you have a rigid monetary standard, you need to make the rest more flexible. Labour legislation was probably made less flexible than required by such a rigid monetary standard. There were fiscal policies which constituted an enormous improvement with respect to the past but proved insufficient for that régime. 

We had a lot of bad luck in the 1990s. The external shock at the end of that decade was brutal. It complicated us that Bill Clinton was the most orderly president in fiscal and monetary terms. He passed from a giant deficit to a huge surplus and the dollar revalued strongly.

A bit of the “It’s the economy, stupid,” wouldn’t you say? 

Sure. But that sequence of the currency board was an immense economic reform effort which made itself felt throughout the entire Argentine economic structure. It moved in the direction of the reforms applied in all Latin American countries.

According to this interpretation, it would be unfair to compare Mauricio Macri with Domingo Cavallo. In this analysis, Cavallo would be much better. 

The reforms of the 1990s were moving in the right direction. Proof of that is that they were backed by the whole political spectrum. If you read the draft budget of the Raúl Alfonsín administration for September, 1988, there’s an annex which explains all the reforms needed by Argentina. If you look at the campaign manifestoes of the 1989 candidates, they all knew that reform was needed. Throughout the 1980s, per capita income had fallen 25 percent and per capita investment 70 percent and we had had 10 years of three-digit inflation with two periods of hyperinflation. It was not about ideology or prejudice. There was reform because the previous economy had collapsed. 

Wrapping up Gerchunoff, he says: “Macri is not the opposite of populism, he’s part of the dilemma of the two recurrent shortcuts in Argentina: protectionism and debt.” Does that seem to you a correct definition? 

Pablo is diagnosing the errors we have committed, trying to close the economy to live off our natural resources or running up debt. Both failed. If we are aware of that, it will probably light up our future path. The way out is more exports, more investments and more domestic savings. They’re not going to lend us money from outside so we’d better export – if we don’t, the external restrictions will be painful.

Was Mauricio Macri irresponsible in running up debt? 

He was very imprudent. It was born out of a bad diagnosis – that they were going to be able to pay it back. This was also contradicting the zeal for investment inflow. If you run up debt to finance public spending, you’re substituting dollars for production for dollars for debt. That revaluation hurt employment, production, exports and investment. You don’t invest in a country which is very expensive. 

The deficit, which is an expression I try not to use because I prefer to talk of “public anti-savings,” kills investment. The day we Argentines discover that these public anti-savings are the cause of our low investment and high inflation by destroying our working capital is the day we might start veering in the right direction.

How do you explain the effusive congratulations for the debt negotiations lavished on Alberto Fernández and Martín Guzmán by the former Finance minister and Central Bank governor Luis Caputo, author of the 100-year bond and all the private debt generated by the Macri presidency? Is that a symptom? 

Hard to say. 

The symptom would be none other than the author of the debt applauding its renegotiation. 

I don’t want to interpret another person’s attitudes but I suspect that Luis Caputo knew that this debt was over the top and that he shouldn’t have done it. Once in the government he tried to get more than was within his means. 

The renegotiation was not to my liking. It took a long time. Ecuador took three months, we took nine. I wouldn’t have taken that path. We ended up more or less as calculated but the first proposal was embarrassing. Once in that mess, it’s very good that we found a way out. 

In general, it made us all very enthusiastic that the problem did not get much worse. I disagree with everything done but reaching an agreement was much healthier for the country than continuing to aggravate the situation. That should not be taken as praise. There are going to be 25-30 countries with the same problems as ours. Do you think a deal different from the others was going to be reached? There’s no tailor-made suit here, just one size – it’ll be more or less the same for everybody. Do you imagine that Argentina is going to modify the global financial architecture? Whoever could think that? 

The level of discount could have been finally achieved making that proposal in March, as was the central objective originally. Could the delay be related to coronavirus? 

None of your assumptions seem wrong to me. As you know, I lay stress on the psychological question and that seems to me also to be related to the construction of the narrative. The ruling coalition had to accept that. They could have entered into a fifth round of negotiations. 

Necessary for digestion. 

Digestion and to insert it into the narrative. The human species requires a narrative – it happens to all of us. To you, as the director of a press company, to me as an economist. 

Friedrich Nietzsche said that human beings can stand any vicissitude except the lack of an explanation. How will the narrative continue in the renegotiation needed with the International Monetary Fund? 

Throughout the negotiation you heard the Fund described as “accompanying,” “advising” or “very co-operative.” Some truth in that, yes. But it was also true in the past. In general, multilateral organisms were blamed for issues which had to do with our domestic reality. 

You don’t see a new IMF, more social and sensitive? 

After a pandemic we face a Fund under different systemic pressures. A lot of people, myself included, believe that the capital stock of the multilateral organisations should have been expanded to deal with the post-pandemic disaster, corresponding to the terms in which these institutions originated during the post-war period. That was a much better way out than we had in the interwar period. Capitalising these multilateral organisms would give scope for putting those countries most affected by the pandemic back on track. And here I’m also referring to my own land, which will be affected. 

If the multilateral organisms have any margin, they will give it to us. That would be the most rational. But that does not take away from the complexity of the negotiations with the IMF. We’re going to enter into these negotiations with a huge deficit and an enormous quasi-fiscal deficit. The question is how are we going to finance all these problems in a country with no access to credit. In the history of the last two centuries, debt has been reserved for catastrophes. If you like, to be anti-cyclical. We’ve used it without any of those references. 

Being disciplined pays off because when you have a very adverse contingency, you can count on an instrument, as do Uruguay, Peru, Chile and Brazil but not us. We’ve introduced debt into everything. Our entire financial system is a loan to the Treasury. Behind the deposits lies the public debt of the Central Bank and of the Central Bank with the Treasury.

So it’s not a credit which will go to production? 

The argument of Alberto Fernández was to lower the Leliqs so that there would be private credit, expanding from there. It wasn’t a bad idea but now there’s no scope for it. What it did was to finance this emergency by placing debt in local banks. A while ago we were saying that Macri at the end of his term had heavily lowered the liabilities in Leliqs, thus leaving this government room to place it but there’s no more room to continue placing it. It is in this context that the Fund comes in. It’s like when you go to the doctor with an illness, you cannot disregard his orders very much – like it or not, we have to prepare mentally to cope with them.

The collapse of world trade does not seem to affect a food-producing country like Argentina so much. This country could sustain a trade surplus because its imports are reduced by recession but its exports are holding up. 

The composition of our exports makes us less vulnerable than other countries. I’m referring to our formidable agricultural output. We have the best farmers in the world – elsewhere they are helped out by their treasuries while ours carry the burden of the domestic Treasury and even then are capable of generating an extraordinary supply. That’s one advantage. Another is that we don’t depend much on remittances or tourism like some other economies. That’s an advantage in a relative sense. But it’s true that our room for manoeuvre is different from Spain, Italy or Greece, which depend a great deal on a revival of tourism. Relative to that question, the pandemic affects us less. But our problem is how we entered into the pandemic.

Alberto Fernández is not going to have the twin surpluses of Néstor Kirchner but isn’t he going to have a trade surplus throughout his term? 

There’s no room for anything else. If they wanted to delay devaluation, they wouldn’t have the means to finance it. To hold up the currency you need very high commodity prices or to go into debt. Neither of these two options is available, no room for that because we have  practically no reserves. 


Between May and June the 2.5 million Argentines buying their US$200 even with a tax surcharge passed to four million. That alone consumed half the fiscal surplus, something unsustainable over time. What will exchange markets be like in the medium term? 

As designed, the cepo capital controls are not viable. I’m not saying that they can drop these controls quickly but they should progress towards something more reasonable. Some time ago I proposed a kind of free exchange rate. I wouldn’t have blocked contado con liquidación [changing money via shares], I would leave it completely free. And if they’re going to control the commercial market, as they’ve done so many times, for example, during the Alejandro Agustín Lanusse presidency, they could do it a bit more sensibly without absurd restrictions and without selling US$200 to four million people. It doesn’t make sense to give away dollars which cost the country so much to make. That’s very populist.

We live in times without strong economy ministers. Mauricio Macri did not want to have a single economy minister and neither does Alberto Fernández. 

In that respect they greatly resemble each other and negatively so. It was a bad decision of President Macri to fragment control of the economy and a bad decision of President Fernández to fragment the ministries. 

The famous interview with President Fernández in the Financial Times created a lot of controversy, especially when he said that he did not believe in plans. Perhaps symptomatic? Perhaps he associates an economy minister with austerity just as he does plans.

It’s as if you said to me: “I’m gravely ill,” and instead of going to a surgeon and doing what he says, you pick a witchdoctor.

What would be the cause of that attitude? 

A state with four million public employees, 10 million pensioners and eight million social plans cannot be run without a budget or a financial plan.

The thrust of my questions aims at understanding whether in the final analysis the same thing is not happening as it did to Macri – that the diagnosis is so dreadful that the patient prefers not to be treated. In that sense the ex-president, as Gerchunoff said, wouldn’t be different from populism.

Leadership consists of facing up to problems as they are and plucking out of adversity the energy to find the way out. Here nobody is invoking the “blood, sweat and tears” or “we will fight on the beaches … we shall fight in the hills … we shall never surrender” of Winston Churchill. It was not a pleasant speech to make but against a terrible adversity he tried to unify all the energies of his nation. Denying reality does not help to solve problems, it aggravates them. Refusing to listen to the reality of the problems we have does not eliminate them but makes them more acute.

Ricardo Arriazu said at the beginning of the pandemic that “this situation is an  economic implosion never seen before. The economic basics for thousands of years, the specialisation of trade have disappeared – this is a neutron bomb which destroys capital, companies and people,” also remarking: “You cannot recover something which does not exist.” Do we face such a grave situation? 

Arriazu is an intelligent man. In that affirmation he synthesises a key point of Adam Smith, which is that wealth depends on the division of labour, specialisation and the multiplication of interchange. Coronavirus has sent us back to the caves to take refuge, making it impossible for us to complement each other. It’s the gravest crisis experienced by humanity, not because the virus is lethal but for the panic it has caused. The mortality rate continues to be low but in economics expectations are more important than facts. Since the expectations are so dreadful, it has generated a formidable shrinkage of economic activity worldwide. 

So are we heading towards a recession superior even to 1929?

Yes, of course. This crisis is going to be the most serious we have ever experienced.

And how would you imagine that dystopian world? 

The recession of the 1930s was due to problems in designing monetary systems. Not like this virus which has our backs to the wall. The way out is linked to humanity prevailing over the virus, whether therapeutically or with a vaccine. Liberal convictions make us see the best in the future and in progress.

A form of optimism. 

A born optimism. I think a vaccine and an effective therapy will be discovered. Finally, humanity will vanquish the virus and gradually rebuild the capacity for the division of labour, production and specialisation which lies at the heart of modern life. We have learnt much in this confinement – we have become more prudent and there has been an explosion of the digital economy. All this will transform our social lives, the ways we interact. We’ve learned that we must not underestimate the problems. 

So this will be more serious than 1929 but also shorter? 

Without a doubt due to the magnitude of the crisis now including all the world. Today’s world is very interconnected. Reality is less intense than in 1929. The panic generated has produced reactions which are not the most intelligent, for example, the interminable quarantines, which do not seem a very smart or reasonable policy to me at all. 

I think such reactions were the product of this crazed atmosphere. And it is true that after this crisis when there is a vaccine, neither human nor physical capital will remain destroyed. We have not had the destruction of a war because this confrontation was not between human beings.

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Jorge Fontevecchia

Jorge Fontevecchia

Cofundador de Editorial Perfil - CEO de Perfil Network.


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