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OPINION AND ANALYSIS | 25-08-2018 11:57

Destructive distractions

"In recent days there has been much talk of minimising the fallout by ensuring that businessmen rather than businesses are punished but the distinction cannot be so neatly made"

Memory lane for the New England economist Dr Hale as he recalls the financial cataclysm just around the corner a decade ago with Fannie Mae and Freddie Mac already seeking a bailout from their subprime mortgage woes:

“Too big to fail, they said a decade ago in denial that Lehman Brothers could collapse only three weeks later, not that Argentina has too many companies in the Lehman league – some pretty big egos but when they are too big, the question then becomes how they can avoid failure. Few enough companies have been spared the graft smears of recent weeks and I do not see them easily digging themselves out of that hole. But what I really cannot buy is the idea that all this is a distraction from other economic woes – far from changing the agenda, I cannot think of anything more calculated to make the ongoing financial crisis much worse.

“I’d just like to add here that I’ve decided to take a leaf out of the book (and perhaps also a leaf out of the forest) of my fellowNew Englander Henry David Thoreau and spend the rest of this month in the woods in exactly the same circumstances, which obviously means no computer. So not a squeak from me next week but I’ll be back with a vengeance in September.”

My reply:

“I entirely agree with you as to the presumed distraction being out of all proportion – it would be something akin to burning your house down in order to prevent the neighbours from seeing that nasty patch of rising damp in the living-room. In recent days there has been much talk of minimising the fallout by ensuring that businessmen rather than businesses are punished but the distinction cannot be so neatly made – all too often the bribery was very much a corporate decision to ensure that the company remained aboard the public works gravy train rather than a greedy individual executive going astray and it would strain credibility to argue otherwise.

“This so-called distraction has directly torpedoed both ends of the public-private partnerships (PPPs), which had been the government’s main hope of having it both ways in combining public works with austerity. The idea has been f loated of creating a trust fund to protect PPP credits from the legal vulnerability of many participants although care must be taken to avoid the evil memor y of t he equivalent mechanism under Kirchnerism.

“No Argentine company looks too big to fail, nor even the country itself, but that formula might just work for this year’s G20 host. The International Monetary Fund (IMF) monitoring team under Roberto Cardarelli is staying mum over the scandal as well as the various shortfalls from June’s IMF agreement with hardly a word of criticism apart from some mild reproof over inflation, already beyond target. With Greece now nominally out of trouble, keeping some wild talk of default at bay and the world’s newest emerging market for the upcoming G20 summits afloat is now surely the IMF’s priority.

“With the Kirchnerite corruption exposés so incessantly at the top of the news, the government seems to have been quiet enough on other fronts of the crisis in an abbreviated week. Since the escalated Lebac roll-back of the previous week (shortly followed by raising statutory reserve requirements yet again), the Central Bank has not varied its strategy much. Nor have there been new fiscal announcements after those reducing certain tax breaks for export sectors. Instead the focus seems to have shifted to squaring the 2019 budget with provincial governors (a political necessity to ensure its passage with government minorities in both Houses of Congress) – especially after the elimination of the Federal Solidarity Fund redistributing 30 percent of soy export duties to provincial and municipal governments.

“Despite the overt contradiction with the pledge to place Argentina on the path of export-led growth, the government is sticking to its guns in ‘recalibrating’ tax cuts – no less a person than Agriculture Minister (previously Rural Society president) Luis Miguel Etchevehere confirmed that on Tuesday. President Mauricio Macri had vowed not to budge over phasing out soy export duties but evidently could not keep his team behind him, at least where by-products are concerned – just as well he was in South Africa for the inauguration of the Rural Society’s Palermo farm show or he might have repeated a promise, only to break it almost immediately. Government economists argue that farm exports have benefitted so massively from devaluation (even if cost inflation is already making inroads) that the lost relief is minor but they are forgetting last summer’s extreme drought rather quickly. In any case vindicating this tax on production is always dangerous beyond gratuitously surrendering an argument to the opposition.

“Meanwhile industrial exporters have been hit by the loss of export reimbursements – the ailing auto industry (whose refunds were more than halved within Mercosur) alone stands to lose more than eight billion pesos. Some vulnerable sectors like textiles and toys were spared. The new Production Minister Dante Sica presents this as a necessary sacrifice toward the lower fiscal deficit, which is essential to economic health. Here too the export gains from devaluation can be argued but what about interest rates of 45 percent? Not to mention a highly adverse international trade context for the poor exporters with Donald Trump taking on China and Brexit messing up European commerce.

“Last week we were talking about Turkey – this week the external influence came from a far more familiar direction, namely neighbouring Brazil. It was the real’s turn to totter, thus feeding a trade gap, which had started to dwindle due to peso devaluation. This trend is all the more worrying because it is only likely to grow as uncertainty deepens with the countdown to Brazil’s presidential elections now entering into its last five weeks and a run-off without promarket candidates increasingly probable. Since Brazil opened its Pandora’s box more than four years ahead of Argentina, its companies have been offering Argentine businessmen a prolonged foretaste of what could lie ahead of them. Among all the things which have gone wrong this year, it might be recalled that at the start of 2018 Brazilian pick-up in an election year was given as one of the reasons for confidently expecting a second consecutive year of growth. As the first letter in the BRICS heavyweights, Brazil goes further toward giving all emerging markets a bad press than most. With all this no wonder the dollar keeps pushing beyond 30 pesos.

“Until next month then, Dr Hale, and good luck with your retreat.”

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