Friday, July 3, 2020

OPINION AND ANALYSIS | 05-05-2018 10:35

Editorial: The buck stops here but when?

Why should there not be a capital exodus from Argentina if there is a “flight to quality” from far more solid economies?

If former British prime minister Harold Wilson said over half a century ago that a week is a long time in politics, a week almost halved by an extra-long weekend is no shorter.

These first few days of May have seen the run on the currency of late April mushroom from a spate of market turbulence, common enough to Argentine experience, into a far more generalised crisis in which political and institutional fundamentals have been called into question. “The buck stops here,” said United States president Harry Truman a couple of decades before Wilson’s time and the phrase applies very literally to Argentina today – the rampant dollar falls squarely into President Mauricio Macri’s lap, as could not be otherwise given Argentina’s hyperpresidential democracy.

It is widely being asked why authority is so diffuse in the economic sphere with the general conclusion being that the gratuitous multiplication of ministries is a deliberate strategy permitting Macri to be his own economy minister. The fact that a figure with such minimal economic expertise as the maverick government deputy Elisa Carrió should be given such huge importance in government huddles alone attests to the political dimensions of the crisis.

Returning to the economic sphere, volatility is by definition short-lived (if a week is a long time in politics, a day can be an eternity on the markets) and will end soon if it did not end yesterday with a savage rise of interest rates to 40 percent pulling back the dollar to just over 22 pesos. Against such optimism it should be recalled that the previous Friday’s three-percent hike in interest rates also restored a temporary calm which failed to survive the long weekend – more generally Argentina still has a vulnerability which last week led to the world’s sharpest devaluation being suffered by the country most resisting it with multi-billion sales of Central Bank reserves. This vulnerability in the form of a desperate shortage of dollars – here the balance of payments is even more decisive than the fiscal deficit with lagging exports (not helped by a static exchange rate) – made this crisis an accident waiting to happen. Beyond any local context it became inevitable with the rise in US interest rates from which the rest of the world is not immune – regardless of what Forbes magazine might or might not say, why should there not be a capital exodus from Argentina if there is a “flight to quality” from far more solid economies?

Last but not least, intriguing questions arise from what was almost an afterthought to Treasury Minister Nicolás Dujovne’s press conference yesterday to assure everybody that everything was going to plan and under control – the anticipation of multi-billion-peso cuts in public works. Theoretically these cuts are completely unnecessary – thanks to strong revenue figures from a growing economy and major subsidy savings from steep public service increases, the government is poised to overshoot this year’s fiscal deficit target (always primary deficit, of course, because debt service takes it beyond five percent of gross domestic product). If major cuts are now contemplated, two possibilities spring to the fore. One is that the government is expecting defeat in advance over the steep increases in gas and other household bills in the face of public dismay and rollback bills in Congress with far less savings in subsidies. And the other is that the end of quantitative easing might well spell the end of gradualism as well with the higher cost of borrowing abroad. Not only public works stand to lose but also the private housing boom – where will the dollar surge leave mortgages with UVA credits already soaring? There will be more interest in even more basic questions such as the effect of this devaluation on prices but the answers will have to wait until we see exactly how this crisis pans out.

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