Argentina, always playing on ‘hard mode’

It may sound counter-intuitive, but the best thing that could have happened to the Fernández-Fernández administration was the grounding and subsequent investigation into a suspicious Venezuelan-Iranian cargo aircraft manned by a crew with ties to both of those nations’ security forces. Feeding into the absurdly polarised Argentine political ecosystem, this aircraft and its crew became a battleground for supporters of the government run by Alberto Fernández alongside Cristina Fernández de Kirchner, and those opposing it. There are reasons to believe the situation is relatively serious, but not that serious in that there doesn’t seem to be any immediate risks to the physical and political integrity of the nation, yet it absolutely helped to partially cover the intensifying tensions in domestic financial markets. These market tremors are also connected to the global shift in market conditions that was precipitated by the Russian invasion of Ukraine and the coronavirus hangover, pushing the world’s most important central banks into different shades of contractionary monetary policy that will most definitely have a direct impact on the wellbeing of billions of people around the world. The inside story of the Argentine run, in part fuelled unintentionally — or not — by a government-owned company reveals once again that we are treading close to the precipice.

Just like during the Mauricio Macri days, a series of external shocks coupled with domestic weakness have made us aware of a troubling thunderstorm on the horizon. There has been a massive move out of CER or inflation-indexed bonds, causing a bloodbath in the City, as Argentine financiers refer to our (very small) version of Wall Street. It’s not clear what came first, but the psychological tipping point appeared to be the liquidation of a large position, some nine billion pesos, roughly equivalent to US$80 million, by the Pellegrini Investment Fund run by the state-run Banco Nación. The instruction to sell was ordered by another government-owned company, Energía Argentina, the entity in charge of buying and distributing energy and electricity formerly known as Enarsa and recently in the eye of the storm given the forced resignation of Productive Development minister Matías Kulfas.

In charge of the energy company is a young technocrat that goes by the name of Agustín Gerez, who many suggest is affiliated to the La Cámpora political organisation run by Máximo Kirchner, but who is really an “old-school Kirchnerite” who served under Julio de Vido. Accused of being too bold in his decision to invest the company’s short-term cash in variable-rate funds rather than money market funds (something Energía Argentina rejects), Gerez needed the dough to cancel an invoice for an LNG tanker, something we can expect to see for the rest of the winter. Whether due to a lack of coordination with the Economy Ministry and the Central Bank, their decision not to participate, or another set of motivations, Energía Argentina’s liquidation of that position injected further fear into a jittery market, sparking a massive sell-off in pesos-denominated bonds that according to economist Salvador Di Stefano roughly translates to the market telling the government: “It’s game over.”

While Di Stefano sounds a tad bit too dramatic, his reasoning is that Economy Minister Martín Guzmán is quickly running out of options. Locked out of international debt markets but having achieved restructurings with private bondholders and the International Monetary Fund, Guzmán and Central Bank Governor Miguel Ángel Pesce had committed to reducing the fiscal deficit and money printing. The creation, growth and consolidation of a domestic bond market where the government could finance itself in pesos was their response, but in order to attract any interest they were forced to raise rates aggressively and issue inflation-denominated paper. Investors were making 15 percentage points above inflation on these bonds, yet at some point confidence in the government’s ability to pay its debts has eroded aggressively. Part of this has to do with an uncontrollable inflation rate, coming in at 5.1 percent in May and aiming for 70 to 80 percent on an annual basis, as Guzmán and Pesce have accelerated the rate of money printing to 504.5 billion pesos in the first half of thear, a 52.9 percent increase over 2021. The risk for even higher inflation stems from the need to continue raising rates (which is part of the IMF deal) which makes debt servicing even more expensive, and more money printing, which makes its way into the “alternative” peso-dollar exchange rates including the blue and the contado con liquidación. A potential local-currency debt restructuring like the one carried on by Hernán Lacunza during the last year of Macri’s administration was rumoured to be in the works, causing further fear and forcing the government to accuse the opposition of “operating” against them.

Argentina, of course, will need more hard currency for everything from energy imports (remember that gas pipeline that still hasn’t been built?) and intermediate goods in order to keep the economy growing. Yet, despite record figures from the agro-exporting sector that should’ve helped the Central Bank fill its coffers, Pesce is running on fumes. Furthermore, global energy prices promise to remain elevated given the war in Eastern Europe, while the US Federal Reserve has engaged in an aggressive path of interest rate hikes that will hurt the value of risk assets across the globe, including some sort of impact on commodities.

There is a global rebalancing currently taking place, as the rich countries move out of their easy money policies adopted at least as far back as the 2007-2008 global financial crisis (if not earlier) in order to tackle inflation figures that have reached levels not seen in decades. It doesn’t matter what the risk of a recession in the United States is, just that its growth, along with most large Western economies, will slow substantially. That, along with global supply-chain shocks that became more entrenched as a consequence of the Covid-19 pandemic, and the ongoing war in Ukraine — and rising geopolitical tensions that include China — promises to make the future much more unstable and challenging.

Argentina, of course, has a big opportunity ahead of it. Record prices for agricultural exports along with high-energy prices play to our competitive advantage in natural resources, while a certain “decoupling” from the global financial markets has been in place since we’ve been locked out of them. There’s been a strong industrial and economic rebound that could continue if manufacturers are guaranteed intermediate goods, but also aggregate demand which seems to be lacking. Consumption is surging but in great part due to a fear of the loss of purchasing power, which requires lower inflation and higher wages to revert. It is possible, but it is looking more difficult by the minute.