Sunday, July 12, 2020

OPINION AND ANALYSIS | 04-08-2018 10:14

Fear the walking dead

It’s impossible to speculate about next year’s elections with almost 15 months still to go.

The recent French kick of the eccentric New England academic Dr Hale is stretching into August because he has picked up today’s anniversary of the collapse of French feudalism in the wake of “La Grande Peur” (the great fear) of social unrest, leading him to speculate about the potential for panic today. He writes:

“All roads lead to Paris rather than Rome in my recent experience. Bastille Day three weeks ago – prompting my defence of Lexington as the true cradle of the modern world and followed the next day by the French World Cup triumph and then by Christine Lagarde’s presence in your city – started me reading up a bit on the French Revolution and I note that this coming Saturday, August 4, is the anniversary of the 1789 National Assembly session when three weeks of intense social turbulence nationwide following the fall of the Bastille (known in French as ‘La Grande Peur’) panicked the feudal classes into renouncing all their privileges more or less spontaneously.

“Not that I’m expecting anything dramatic this weekend (especially with the dollar closing out July so calmly) and it might be melodramatic to equate it with a ‘grande peur’ panic but I detect a growing apprehension about Argentina’s prospects among Wall Street investors. Concretely that the vicious circle of stagflation might persist long enough to swing next year’s vote, frustrating President Mauricio Macri’s re-election and returning an increasingly popular (and populist) Cristina Fernández de Kirchner to power. Does such alarmism reflect the current Argentine mood? And (a much longer shot) any chance of panic leading to a sacrifice of corporate privileges as in the climax of ‘La Grande Peur’?”

My reply:

“The answers to your questions are not all up to Argentina. Global investors are more inclined to look at regions rather than countries with Brazil and Mexico both much larger economies than Argentina. Mexico already opted for populism last month and were Brazil to follow suit in October, this might seem to confirm a trend along the lines of Oscar Wilde’s formula of once being a misfortune but twice looking like carelessness. This perception of a regional populist trend would not be easily changed even if Macri did manage to dig himself out of his current hole. Such an image would create a perfect storm for emerging markets in Latin America at least – the forces driving the ‘flight to quality’ are already strong enough without supplying every reason for the exodus from the other end.

“From the more local standpoint, it’s impossible to speculate about next year’s elections with almost 15 months still to go – if a week was a long time in politics for Britain’s Harold Wilson, 15 months in Argentina is more like 15 centuries. Just to give you a couple of examples at random, neither then-Santa Cruz governor Néstor Kirchner nor former Mendoza senator José Octavio Bordón were even mentioned half a year ahead of the 2003 and 1995 elections respectively, yet the former ended up as president while the latter was an impressive runner-up with five million votes or 30 percent. A CFK candidacy does indeed look increasingly inevitable but far less her victory – her opinion poll numbers of 30 percent in Buenos Aires province and around 20 percent in most other districts fall well short of guaranteeing a triumph. And if she became a real threat, the numerous corruption charges against her could always be accelerated – were that to happen, there would be fascinating parallels with Brazil, where a jailed Lula remains the frontrunner.

“But this weekly economic report is straying into politics. The vicious circle of stagflation is indeed in place with no certainty as to how many quarters it will last but no cause for panic from either of the most immediate symptoms of the crisis – the dollar and inflation. The greenback actually finished July five percent below its start (the first fall since last November), thus nominally terminating the devaluation crisis for now. The US$50 billion in reserve from the International Monetary Fund (IMF) stand-by deal obviously helps to tame the dollar but such relief will not be eternal (at the start of this century almost US$40 billion in early 2001 from a combo of IMF money and a megaswap of bonds did not even last out that year) and nor can statutory reserve requirements be raised indefinitely.

“As for inflation, it could hardly be worse than June’s terrifying peak of 3.7 percent and indeed most experts are expecting last month’s figure to be perhaps a full one percent lower, despite the usual upward pressures of winter holidays (with the Macri government claiming a new record of five million tourists, even if the CFK presidency posted 13 million in 2015 by including daytrippers). Depleted purchasingpower blunts price increases while recessive interest rates also play their part yet the progress against inflation is limited – nobody is really expecting anything less than two percent in any of the remaining months of the year, thus ensuring inflation well above 30 percent for 2018. Furthermore, the inflationary surge from devaluation has knocked the bottom out of the correction of relative prices which earlier steep increases in utility billing was supposed to achieve (with transport still pending in the best of cases). Since food and other basic items have the highest inelasticity of demand, these go up the most. With both the wholesale (6.5 percent) and core (4.1 percent) inflation of June substantially higher than the retail figure, this leaves plenty of damage in the pipeline, especially if the urgency of defusing the Lebac time-bomb is to be respected.

“Looking beyond these immediate indicators, the balance of payments is registering improvement (as it usually does after IMF agreements) and with both the twin fiscal and trade deficits. Primary deficit reduction is staying ahead of target with the overall figure including debt service coming home to roost further down the road. The trade gap is also narrowing – but more because of falling imports from peso devaluation (which has also reduced the drainage from tourism abroad) rather than exports being more competitive in the face of Asian and other alternatives.

“What is the translation of ‘La Grande Peur’ into modern English? Be afraid, be very afraid. But perhaps the outlook for Argentina is even worse – that unlike France there is no revolution, no renunciation of quasi-feudal privileges and nothing to break out of the cycle of the last seven decades.”

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Michael Soltys

Michael Soltys

Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.

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