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OPINION AND ANALYSIS | 14-11-2020 09:16

On the verge of another nervous breakdown?

More of the usual will generate similar outcomes as we’ve seen in the past: stagflation, polarisation, and a growing bureaucracy. It’s time for our political class to take charge of the situation to avert another disaster.

The past few weeks have been the best for the Alberto Fernández administration in quite some time, giving the embattled president and his Cabinet a little breathing room. They better not pat themselves on the back just yet though, as this relative calm is not destined to last. As usual in Argentina, the value of the dollar-peso exchange rate acts as a thermometer that helps gauge the level of socio-political anxiety. While we’ve seen a resurgence in the value of the black market rate (or “dólar blue”), the retreat from record levels nearing the psychologically significant barrier of 200 pesos per greenback helped stabilise short-term expectations that had absolutely paralysed the economy, while external issues such as elections in the United States drew attention away from the dire situation left behind by the explosive combination of the coronavirus pandemic, a deep recession and a social situation on the verge of collapse.

The past several months had seen an in crescendo of rancour that had Argentines on the verge of a nervous breakdown. Since the coronavirus pandemic slid into second and even third place in society’s main concerns, political bridges that had generated a false sense of enduring unity began collapsing one by one. It began metaphorically when President Alberto picked a fight with Buenos Aires City Mayor Horacio Rodríguez Larreta, announcing a reduction in the distribution of funds to the federal capital while breaking with the custom of announcing the coming phase of Covid-19 restrictions together with him and Buenos Aires Province Governor Axel Kicillof.

For sectors opposed to the government it was clear that Vice-President Cristina Fernández de Kirchner had taken over, while for those in favour there were clear attempts at destabilisation by the opposition and “mainstream media.” Polarisation, in the form of “la grieta,” was once again central to all political discussions, as the government was forced to battle the Juntos por el Cambio coalition externally, along with the growing tensions within the ruling Frente de Todos pan-Peronist front.

Land grabs by scores of extremely poor families, organised groups taking advantage of them, and Mapuche indigenous groups in Patagonia brought to the fore internal differences in the government, with Security Minister Sabina Frederic initially claiming these issues weren’t for her ministry to solve (“we have a housing deficit,” she said), forcing the president to make it clear that his administration respects private property. Whether or not Argentina was aligned with Venezuelan President Nicolás Maduro or against his regime was once again an issue, as a group of Kirchnerites questioned the official stance of condemning human rights violations perpetrated by the Bolivarian regime. Former president Mauricio Macri even made a comeback, going on a media raid to criticise the government as groups tied to his political sector organised a series of massive rallies against the Fernández-Fernández binomial. The Republic was at stake, as Mrs. Fernández de Kirchner was encroaching on the Judiciary, looking to guarantee her impunity in corruption cases by displacing judges.

Argentines’ voracious appetite for US dollars was exacerbated by political disunion but also for underlying friction in the team responsible for economic and monetary policy. Economy Minister Martín Guzmán wasn’t able to take his victory lap after restructuring the nation’s sovereign debt, and for presenting what he believed to be an excellent 2021 Budget as the rising value of the black market dollar rate pushed Central Bank President Miguel Ángel Pesce to announce even more stringent currency restrictions, dubbed the “super cepo.” This sparked a battle for control of macroeconomic policy between Alberto’s close friend, Pesce, and Guzmán, Nobel Laureate Joseph Stiglitz’s protégé. Just four weeks after announcing measures to contain the value of the US dollar, the black market rate surged some 50 percent to around 195  by the end of October while the Central Bank continued its haemorrhage of reserves and dollar-denominated deposits in the banking system fell.

 

“Pax Cambiaria”

To a certain extent, Guzmán and Fernández de Kirchner helped put a lid on both the dólar blue and the internal bickering, creating a sense of stability that was aided by the week-long electoral bout between US President Donald Trump and Joe Biden. Guzmán’s interventions in the bond market, coupled with dollar-linked bond issuance, and Cristina’s letter asking for unity to defeat Argentina’s “bi-monetarism” succeeded in realigning expectations, shock therapy style. The Trump show in foreign news channels, gripped by suspense and a certain curiosity about Biden grabbed the media’s attention, dragging the social conversation with it and away from the economic crisis and the pandemic.

Yet while the fragile stability in the black market rate for US dollars seems to be dissipating, and the political rhetoric is heating up again. These are dangerous forces at work. The debate over the provisional formula — used to calculate payments to pensioners and retirees — ranks of the usual political hypocrisy, with both government and opposition accusing each other of relying on our grandparents to “tighten the belt” of public finances. It must be said that when Macri updated the formula, he reduced payments in the short-term, generating an all-out battle in the park outside Congress that ultimately broke his relationship with the opposition and marked the beginning of the end of his plans to revolutionise the country. The former president’s plan ended up blowing up in his face, as he linked the formula to inflation — which he expected to tame — putting further pressure on the government purse. President Alberto suspended his formula and opted for adjustments by decree during the pandemic, effectively diluting the real value of their disbursements. The new formula , tied to wage growth and tax income, will continue to erode the value of their income.

Rather than analysing the underlying issue — Argentina’s pension system is absolutely unsustainable — the government and the opposition both accuse each other of doing exactly what both of them have done in the past: implement austerity on our retirees. The same level of hypocrisy was exhibited during the debate over the 2021 Budget: Guzmán’s plan is based on 5.5 percent GDP growth next year (from double digit decreases this year), a reduction of the fiscal deficit to 4.5 percent (from and expected seven to eight percent in 2020), and a fall in inflation from a projected 53.8 percent this year to 32 percent the following. Yet as they announced the budget, Guzmán’s team is negotiating debt payment restructuring with the International Monetary Fund, so as a sign they announced a reduction in assistance plans including the ATP plan that pays private sector wages and the IFE emergency income for the unemployed. As both sides accuse the other of applying an orthodox recipe of austerity, unions and social movements are mobilising day after day to request more funding. No-one seems to be asking the hard questions, such as whether it's worse to have high inflation or substantially higher unemployment (as the private sector goes bust).

More of the usual will generate similar outcomes as we’ve seen in the past: stagflation, polarisation, and a growing bureaucracy. It’s time for our political class to take charge of the situation to avert another disaster. It’s not entirely clear they have what it takes to do that.

 

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Agustino Fontevecchia

Agustino Fontevecchia

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