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OPINION AND ANALYSIS | 12-05-2018 08:17

In Monetary Flux

The faulty reflexes began with mismanagement of that firepower – you cannot hurl hundreds of millions at demand at a time without magnifying a relatively tiny market and feeding speculators with cheap dollars sure to rise in value while the stampede lasts.

“Action and reaction are equal and opposite,” reads Newton’s third law of motion but somehow that has failed to apply to Argentina in recent days – almost every step of the way the government has been overreacting to what is an extremely serious but far from terminal crisis. The crowning moment of that overreaction was obviously turning to the International Monetary Fund (IMF) – a step normally taken by countries on the brink of default, not facing a run on the currency with a firepower of Central Bank reserves initially topping 10 percent of gross domestic product. The faulty reflexes began with mismanagement of that firepower – you cannot hurl hundreds of millions at demand at a time without magnifying a relatively tiny market and feeding speculators with cheap dollars sure to rise in value while the stampede lasts. Squandering billions was totally counterproductive, as it took the government over a week to learn. Then came the panic reaction of raising interest rates to 40 percent (at least 15 percent ahead of the direst inflation forecast until now) – obviously disastrous for the productive sector but even dysfunctional for the financial world. This inflated the crisis to dimensions which had many voices making dark comparisons with the 2001 meltdown (not least its protagonist, Domingo Cavallo) with nothing like the debt overhang of those default days.

Mismanaged almost every step of the way because accelerating this year’s fiscal reduction target from 3.2 to 2.7 percent (the beginning of the end for gradualism?) does not deserve to be included among the errors – a positive signal to the markets which is ambitious but not unrealistic since the government was comfortably overshooting the original target with growth and strong revenue figures. The first positive example of “recalibrating”? Yet even here a structural flaw of the Mauricio Macri administration is exposed. To lend substance to the new target, Treasury Minister Nicolás Dujovne specifically announced cuts of 30 billion pesos in public works (about 15 percent of its budget) but six days later President Macri reassured provincial governors that all public works projects would be maintained. This contradiction is entirely typical of a fragmented decision-making inevitable with a multi-ministerial economic team.

That structure is clearly designed to make Macri his own economy minister but under him are several other voices, not none, so these contradictions will come. The rash decision to resort to the IMF might well stem from this structure. Accustomed to soft interest rates in the last two years, Finance Minister Luis Caputo now finds them nowhere in today’s tightening global credit market (which is indeed a central cause of this crisis) except with the IMF and thus has apparently steered Macri down this path, oblivious of all Argentina’s negative history and political baggage with the IMF. A tunnel vision which comes from no minister having the big picture.

The crisis is not over (the extreme move of resorting to the IMF seems to have done more to reassure the stock exchange than the money markets) and the negotiations in Washington are only just beginning – until we know the final terms (when the World Cup might well have begun), this editorial sees little point in airing old prejudices for or against the IMF. The government has no monopoly of contradictory reactions – numerous economists are deploring the austerity likely to be imposed by the IMF while insisting that the root of the problem is the fiscal deficit which must be slashed. While the crisis remains open-ended, we must remain openminded.

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