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ECONOMY | 10-03-2022 15:50

Federico Sturzenegger: ‘Once the Central Bank is independent, the planets align’

Economist Federico Sturzenegger on his time leading the Central Bank, Economy Minister Martín Guzmán and Argentina’s IMF debt deals in 2018 and 2022.

Economist and ex-Central Bank governor Federico Sturzenegger considers that President Alberto Fernández has missed an opportunity to resolve the debt issue by not opting for a “Uruguayan” exit strategy. 

Sturzenegger, who defends his record as Central Bank governor during the Macri administration, takes aim at Economy Minister Martín Guzmán’s role in “only tackling the debt issue.” 

Although the 56-year-old believes that an agreement with the IMF will be finalised and that it will be advantageous for Argentina, he assures that if he were a deputy, he would vote against it.

 

What do you think will end up happening with the agreement with the International Monetary Fund? If you were a deputy today as you have been, would you vote in favour?

No, but not because I think that Argentina won’t be better off with an agreement. What I would do is to oblige Kirchnerism to assume its government responsibilities, to accept in the face of society the convenience of this. It’s a programme which implies going into debt with the IMF and what a coalition like Juntos por el Cambio cannot permit is that part of the Frente de Todos caucus does not vote for it. Therefore, since there is no guarantee that they will not press the ‘no’ button when it comes time to vote, what I would do – over and above understanding that an agreement is good for Argentina – I would say that Juntos por el Cambio should vote against in order to oblige them all to assume their responsibility to vote in favour. I would not leave any loophole for some wise guy ducking his responsibility to transmit to society that there are circumstances in which default is not good or that this kind of agreement is convenient. In the final analysis, this was Mauricio Macri’s motivation in 2018. That would be my proposal, which is more political, obviously. But Argentina is better off with an agreement.

 

In an article published in Perfil, you said: “Alberto’s Macri-style plan has just been born” as from the proposal of an IMF agreement.

When Martín Guzmán presented some of the basic lines of that programme, I thought: “This is the same thing we did in 2015, which is a gradual convergence of the deficit instead of its abrupt reduction, cutting the Central Bank transfers to the Treasury, which will eventually permit inflation to be reduced.” And the fiscal numbers are almost the same. At the monetary level Guzmán’s numbers were more aggressive, which means a debt which will have to be assumed by the government in the interim, according to this programme. It seems to me that along general lines, that was exactly the same as proposed by the Macri administration – hence that description of Alberto’s Macri-style plan beginning. It remains to be seen if that is carried through.

 

How do you evaluate Guzmán’s performance?

Not well for two central reasons. Firstly, because he has taken up a very limited role, he looks more like a finance secretary, throwing his total energy into the debt issue. Meanwhile there have been errors in the way the economy functions – in macro-economic regulation, in the tax structure, in the management of the pandemic, etc., areas where I believe that the Economy Ministry had something to say. So I see an Economy minister extremely absent from the economic debate in everything, except the debt.

Secondly, because what he did with the debt was not all that great either. He took a debt of approximately US$100 billion with private creditors and achieved a 50 percent haircut. Then I suppose he goes to sleep saying to himself: “I saved Argentina US$50 billion.” That’s true but that kind of thing doesn’t come free. If we think that Greece’s debt was 180 percent of its Gross Domestic Product when it was rescheduled, Guzmán was rescheduling US$100 billion which was only 25 percent of GDP. Thus you have to measure the costs of rescheduling against a gain which is limited from the start, unlike the Greeks, whose debt was much higher. Now the question becomes: Was the Argentine debt payable? And to answer that question, economists look at two variables, the economic growth rate and the interest rates paid on the debt. For example, if the economy grows 10 percent and the interest rate is one percent, nothing happens because the economy is growing much faster while that debt becomes diluted in relation to the size of the economy, according to the official Economy Ministry data. Macri also issued debt at relatively low interest rates of five percent while our economy historically grew at an annual four percent. 

What you can see is that both these variables are very close. With that difference the primary fiscal surplus needed to stabilise the debt is very small. This implies that when they say: “The debt was unpayable,” that had no basis because you had a debt which was sustainable with a tiny primary surplus and Macri practically left that surplus. So the market says: “This guy is rescheduling a debt to us which he can pay,” which is very different from “He’s rescheduling an unpayable debt.” And the market wonders: “Why don’t you want to pay a debt which you can pay? Might that be because you want to place this group of bondholders, Argentina’s creditors, in the role of enemies?” Populism always needs to have an enemy against whom to battle. But thinking like that is a failure of that restructuring. That is an important failure because it ups the cost of capital in Argentina and that higher cost of capital permeates all the rest of the economy. In a cost-benefit analysis of this rescheduling, the destruction of confidence in the Argentine government for having rescheduled a debt which it could pay is much greater. 

Point number one: How much of the savings achieved were paid by Argentines? More or less a half. If what concerns us is the welfare of Argentines, in reality US$25 billion were saved. What is the impact of the heavier cost of financing on the value of private capital, i.e. the rest of the economy? I find here that the cost is US$120 billion. We have seen that all the Argentine assets have plunged in value, thus making the costs comfortably superior to the benefits because Argentina had no problems in being able to pay. At most there was a problem of liquidity.

 

And also with respect to the IMF, the fact that US$20 billion a year was falling due.

The logic in 2018 was basically that you had a liquidity problem. You were heading towards fiscal convergence, straightening out the budget, you were recovering confidence and in two years you could issue private debt to pay off the IMF. You borrowed from the IMF to pay off the bondholders to avoid default, bearing in mind that the current government also says that having a default is not good. Argentina was ordering its fiscal situation and then did the reverse.

 

In the midst of the pandemic, do you think that Argentina would have been able to follow up the private market and take US$20 billion to pay off the IMF?

I don’t think there would have been any problem. When the market sees an event very much out of the ordinary, it acts in a very different way to when it can find no justification for that event. Even the IMF itself would have understood. That was [IMF chief Kristalina] Georgieva’s position.

 

Do you think that those deadlines would have been renegotiated?

They would have been renegotiated, yes. For example, having a situation like Covid-19 perhaps made it not so feasible to return to the private sector. I don’t think there would have been any problem with the IMF or perhaps even with the private sector. Covid-19 has not caused any important financing problems. Even the debt situation is greatly improved worldwide. You’re coming out of 20 years with very low inflation in the United States, hence the manner in which countries began to finance their debts over a very long term at a fixed interest rate in dollars. In that way inflation liquidates the value of all your debt.

 

We were talking beforehand about the non-IMF debt which was renegotiated by Guzmán. How do you judge the renegotiation with the IMF?

The renegotiation with the IMF is not all that important. Argentina’s problem is the government imposing capital controls which destroy economic activity with an inflationary tax of 50 percent. Say we reach agreement with the IMF, then the next day we’re still going to wake up with everything much the same. Expectations about Argentina will not be changed by the agreement with the IMF if it does not face up to changing the way things are being done now. If not, the IMF agreement will not last – the next day the problems will still be there.

 

Now independently of the general framework, does the agreement with the IMF seem to you to be positive for Argentina by stretching out the debt and not paying anything for four and a half years ?

Between having it and not having it, it is positive, it gives a framework. It means that the government is not totally insane and maintains some rational approach to what it wants to do. But if that is not accompanied by concrete things, nothing will happen.

 

Concretely the plan implies certain premises, do those premises seem correct to you?

The premises seem correct to me since they consist of reducing the fiscal deficit and Central Bank transfers to the Treasury. Yes, both things seem perfect to me.

 

Federico Sturzenegger

 

Would you say the same about utility billing and the subsidy cuts?

Society elects authorities to decide on public spending. People say they want to spend on pensions, public-sector salaries, Aerolíneas [Argentinas], Previaje [holiday financing], energy subsidies, etc. OK. The economist has not much to say about that, it’s society’s decision. But what we spend on has to be financed, it does not come free. And as an economist I can say that it seems to me very bad to finance all that with inflation because it is a highly regressive tax which distorts everything. It is also bad if fiscal balance is achieved by increasing certain taxes to subsidise public service billing. The proposal to lower the fiscal deficit to zero commits you to saying that what I spend is going to be genuinely financed. The government will have to interpret the mandate given to it by the people. Defining this is a political decision, about which I as an economist have no binding opinion to give. What I do believe to be binding is that everything be financed with genuine taxes, that we face society and do not go on collecting the inflationary tax so that nobody realises what we are taking away from people. That does not seem correct to me. What is important is to show your face so that society understands that all public spending is financed with genuine resources. Having said that, it makes sense to segment public service pricing so that people in lower income groups have access to more comfortable bills, always within reason.

 

If we roll back the clock, was it necessary to go into debt with the IMF in 2018? Today, in hindsight, when you look at that situation, was there another alternative?

The truth is not many at that point. The government had taken a gradualist approach towards reducing the deficit. For various reasons it suffered a crisis of confidence and the Treasury had problems financing itself. And when you have financing but not solvency problems, making it a problem of liquidity, or rollover, you make a decision: you either default or you seek somebody else to finance you. But not just in hindsight, a default is the worst of decisions, above all in a context of totally sustainable debt.

 

In perspective, given that you finally did default, renegotiation became necessary. Would it finally have been better to renegotiate the private debt in 2018, given the loss of private credit you had?

As I have already explained, I believe the rescheduling of private debt as renegotiated by Guzman to have been an error. If Alberto Fernández, in his first day of government, had taken the Uruguayan route, which was completely available to him since an offer was made to bondholders, the debt issue would not have occupied a minute of his agenda. Resolving that in the first day of government would have been an absolute success, it would have improved confidence in the country, producing a change of expectations. It would have been an absolutely different outcome for him.

 

Owing US$50 billion more?

It is not convenient being a country which does not respect its contracts and which does not command confidence because afterwards there is a collapse of financing and the value of assets, which means less wealth and less jobs, as we have already discussed.

 

It was the Macri government itself which defaulted the debt in pesos.

That was a very particular situation at a time of much uncertainty. After the PASO primaries, it was a very cyclical thing for the uncertainty which lay ahead. [Then-economy minister) Hernán Lacunza managed it pretty responsibly because he could perfectly well have printed the pesos to pay off that debt. As we know, monetary policy has its lags, it would have left a huge mess for the government in 2020. So it seems to me that he acted correctly, always understanding that what happened was not good. 

 

So do you judge what was done to be good?

It was done simply not to leave so heavy a monetary inheritance for the incoming government. Afterwards the government upon its arrival could have reverted the expectations and thus rapidly normalised the situation. The new government could have done it and decided not to.

 

Do you have any self-criticism to make, not on your account, but on behalf of the government of which you formed part?

It seems to me that the evaluation would have to be multi-dimensional. It was a success and it was a failure. We would have to ask ourselves that. I see many things which were a success, over and above completing its term, something which had not happened [in the case of a non-Peronist government] in Argentina in almost a century. Argentina achieved integration with the European Union, which was a success. It left the government without a fiscal deficit, ordering public service billing and the exchange rate, left without lag. [Then-transport minister]Guillermo Dietrich achieved success with great effort by tendering highways at half the price of Kirchnerism, as well as low cost airlines, more successes. Evaluating a government seems to me to have many dimensions.

 

Doctors use a phrase which sometimes makes them seem like economists. The operation was a success, the patient died but the operation worked. If you have two years running of falling GDP, can you speak of success?

Neither were the elections won. You can also say that that objective was not achieved.

 

Federico Sturzenegger

 

You would have to be able to explain to people that the over US$40 billion coming from the IMF and the alleged capital flight “came from Argentines,” as you say. Argentines who had bought bonds?

No, what happened with the IMF was that certain Treasury creditors who did not want to hold that debt any longer were in a sense replaced by the IMF. If you look at Argentina’s data throughout the Macri presidency, you will see that there was net capital inflow every year. You can see the balance of payments data in the website page audited by [INDEC statistics bureau chief] Marco Lavagna.

 

You were saying that the capital came from Argentines.

Of course, there are always people going out and coming in.

 

But more going out than coming in.

That’s not even true of 2018 and 2019 although it is true that the IMF funds entered then.

 

That means that the IMF financed the exit of those people.

Yes but the Argentine debt with the bondholders was substituted with IMF debt. For example, if we look at Argentina’s total debt numbers for 2018, they do not change.

 

So private debt was swapped for IMF debt?

There has been no increase of Argentina’s indebtedness as a result of the IMF loan.

 

Do you think gradualism was a mistake?

Gradualism has been heavily blasted and it is true that maintaining a fiscal deficit for a while generates a vulnerability which, if you extrapolate it to 2018, was relevant. When Macri arrived, he said that he needed time to consolidate himself politically and explain to society where we wanted to go, lowering the deficit gradually and in so doing generating more debt. But in reality gradualism achieved what it set out to do because two years later Macri won the [midterm] elections. By the end of 2017 country risk was minimal. The market had no doubts that we were heading towards fiscal convergence and that there would be no problem. I believe that the problems started after the midterm elections with the surprise government U-turn. Personally I thought that was the time to consolidate and shore up.

 

You cannot omit mentioning that countries turning to the IMF are those in very serious trouble. There must be some responsibility for what happened in 2018 from the mere fact of resorting to the IMF.

I’m not going to deny that more deficit generates more debt and hence more risk ahead. If, despite gradualism, more advantage had been taken from the enhanced political power after the elections to consolidate the course, I don’t think 2018 would have happened.

 

The candidates emerging from the last midterm elections include the economist Martín Tetaz, who is proposing a plan for the Central Bank. What is your own vision?

If they had told me that in exchange for the Juntos por el Cambio vote for the agreement with the IMF they would approve the bill of Martín Tetaz for an independent Central Bank, I would have dived in head-first because that would be a trascendental change. I would even suggest that the first independent governor of the Central Bank for six years should be Miguel Pesce, which would be optimal because if there is a change of government, he would not be aligned, which is exactly what you want. Once the Central Bank is independent, the planets align, the institutions know what they have to do and end of story. The most relevant clause of a bill to make the Central Bank independent is that the president cannot chuck out its governor. If Pesce from this government is proposed for the next six years, that would be fantastic, and look that we are talking about a Central Bank governor who passively responds to the Treasury with inflation of 50 percent so that his track record cannot be evaluated as good.

 

How has your experience of having been in government changed you both as a person and your stock of knowledge? Has it made you more of a relativist in some aspects?

What I tell my students, above all those doing masters, is that they lack nothing on the technical side. The economy is like a household – you need to have your accounts neat and tidy. Once that’s done, you have almost everything on the technical side. 

But what is very important when in public office is communication, the power to communicate and convince, not only the population at large but also within your own team. For example, I put on the shirt of an independent Central Bank governor without being one because within the reality of Argentina legality I was not. I thought that the more aloof I remained from the rest there, the better I would be performing my role. Afterwards I realised that this was an error, that I should have invested much more time in what we have been discussing now, which is understanding the cost-benefit analysis of what we were doing. That’s why I send my students to the theatre to stage plays because those skills of communication and team leadership are absolutely central for the success and performance of a technical career. Now I have more awareness of the relevance of this.

 

Would you like to occupy such a demanding post again?

I believe that a major change would be very good, now that there is new blood in Juntos por el Cambio. Some of the new faces please me greatly, such as Luciano Laspina and Martín Tetaz and even Javier Milei. Argentina has a conservative rearguard which must be vanquished, that atavistic conservatism of Peronism. Juntos por el Cambio must have that agenda. We who have public office under our belt have plenty of experience and being able to share that experience with them would leave more than satisfied. 

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Jorge Fontevecchia

Jorge Fontevecchia

Cofundador de Editorial Perfil - CEO de Perfil Network.

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