Monday, March 30, 2020

OPINION AND ANALYSIS | 07-04-2018 10:52

"This time is different"

The rich businessman is the central node in Macri’s vision of the productive economy, generating jobs and growth by pursuing profit-making opportunities, progressively replacing the bloated state. And, if in order to achieve this goal one must relay on methods that stand at the boundaries of ethics, so be it.

Finance Minister Luis “Toto” Caputo has a tough job. In a country that despises financial markets, where hedge fund managers are considered “vultures” and the scars caused by the latest implosion of the economy — in part due to excessive indebtedness — are all too fresh, he’s responsible for selling tens of billions of dollars of Argentine sovereign bonds to yield-hungry investors. Caputo, a hedge fund manager with a history of working for top Wall Street banks, is giving the Mauricio Macri administration much needed external financing with which it is trying to tackle inflation, slash the deficit, and generate sustained economic growth. Caputo’s bonds are President Mauricio Macri’s only hope after the failure of his promised “downpour of dollars,” meaning Argentina is once again walking down the treacherous road of foreign indebtedness.

There’s more to Caputo, though. The Finance minister, who testified this week before Congress in a session that ended in scandal, is also the prototype “Macrista superman,” to borrow Friedrich Nietzsche’s concept of the übermensch, a superior group of human beings that, by virtue of their virtues, are allowed to surpass the moral boundaries of common folk. The rich businessman is the central node in Macri’s vision of the productive economy, generating jobs and growth by pursuing profit-making opportunities, progressively replacing the bloated state. And, if in order to achieve this goal one must rely on methods that stand at the boundaries of ethics, so be it. The ends ultimately justify the means, for the übermensch.

Like many in the ranks of Macri’s PRO party, Caputo comes with vast experience in the private sector. After stints at J.P Morgan Chase and Deutsche Bank, he decided to open his own shop, Noctua, where alongside his friend and partner Martín Guyot they raised hundreds of millions from friends and family to invest primarily in Argentine sovereign debt. Noctua, the fund manager, was in turn owned by Affinis Partners II, a Cayman Islands entity which owned 50 percent to 74 percent of the shares outstanding. As is common in the hedge -fund world, Affinis was in turn owned by Princess International, another company domiciled in the Caymans where Caputo held at least 75 percent of the stock. Caputo quit the funds and sold all of his shares before entering public office in December 2015, he claims, but he never declared his ownership to the Anti-Corruption Office (OA), as the ‘Paradise Papers’ investigation led by Perfil and La Nación (also published here in the Times) shows.

Furthermore, Caputo’s first job for the Macri administration was to settle the decade-long dispute with the holdout creditors, led by “vulture” billionaire Paul Singer and his Elliott Management. Caputo himself had held defaulted paper as Chief Investment Officer of Noctua. If the conflict of interest isn’t entirely clear yet, note that Noctua was one of the funds that loaded up with Caputo’s Bonar 2117, a controversial bond sold by the Fine Ministry with a duration of 100 years, last year.

Yet the issue here isn’t what Toto did as a private citizen, rather what he did as a public servant. According to the Public Ethics Law, he was supposed to report his assets in the two years previous to taking office, yet he never noted his ownership of Noctua, which he continues to deny. First, he told the Paradise Papers team he was a mere advisor, then that he was a “nominal shareholder” and a “trustee,” information which isn’t reflected in documents from the Securities and Exchange Commission (SEC), reviewed by Perfil. Caputo is being investigated by prosecutor Carlos Rívolo for “malicious omission” in his personal filings before the OA.

“The whole ordeal with the offshore [corporations] has nothing to do with crime,” Caputo nervously told members of Congress on Wednesday. “The issue is not having them declared,” he added, claiming he had properly declared all of his assets. They weren’t convinced, with Agustín Rossi, head of the Kirchnerite block in the Chamber of Deputies, blasting the Macri administration for being one of the only nations in the world that consistently defends the use of tax havens as it is “a government of the rich.” As the opposition grew more vociferous, and after some five hours of answering questions, the session was lifted amid controversy after Toto sent Kirchnerist deputy Gabriela Cerruti a note (the famous “papelito”) asking her to tone down her attacks on his young daughters, spiking generalised mayhem and a quick exit for the minister.

Beyond failing to respond to accusations of committing a crime by not declaring his ownership of the funds, Caputo was grilled on the state of nation’s finances. “This time, our indebtedness will be different,” he explained. Today, Argentina’s total debt stands at US$321 billion, a debt-to-GDP ratio of 38 percent. Taking only debt held by privates and multilateral organisms, it will jump from 25.2 percent of GDP in 2016 to 38.3 percent in 2021, according to Caputo’s own projections, after which it should begin to fall.

In This Time is different: Eight Centuries of Financial Folly, Harvard University economists Carmen Reinhart and Ken Rogoff conclude that financial crises are becoming all the more common as financial liberalisation breeds greater debt-taking, which can lead to the implosion of the financial system on the back of too much debt. “If there is one common theme to the vast range of crises we consider in [the] book, it is that excessive debt accumulation, whether it be by government, banks, corporations or consumers, often poses greater systemic risks than it seems during a boom.”

Several leading economists are worried about the Macri administration’s capacity to take on debt sustainably, as inflation remains high, the fiscal deficit is astronomical, and foreign direct investment isn’t raining in. Carlos Melconian, Macri’s first head of the Banco Nación, warned that the government needs at least US$30 billion in foreign financing a year. With tepid economic growth and stubbornly high inflation, its hard to see how debtfinancing will stabilise, he says.

Let us hope this time really is different.

Agustino Fontevecchia

Agustino Fontevecchia

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