Tuesday, May 21, 2024

OPINION AND ANALYSIS | 24-10-2020 08:08

The peso's got a fever and the only prescription is more dollars

Whereas classical economic theory suggests that markets create efficient prices through a cumulative aggregation of information, thus allowing market players to accede to perfect information, the current situation in the City Porteña is one of absolute price opacity.

Argentina has entered total crisis mode for the second time in 14 months, with the black market premium — the spread between the official peso-dollar exchange rate and the blue chip or “dólar blue” — well above 130 percent, causing all sorts of distortions that are gradually grinding the economy to a halt. The last time we found ourselves in this pickle was in the aftermath of the 2019 PASO primaries last August, when Alberto Fernández delivered an electoral beatdown to then-president Mauricio Macri, stocking fears of the return to populist Kirchnerismo, with Cristina Fernández de Kirchner lurking in the background.

This time around we are not only facing an economy that has been locked in stagflation and recession nearly for a decade now, but also a global pandemic with the novel coronavirus staging a comeback across the Northern Hemisphere and an intensification throughout the Argentine provinces. President Alberto Fernández and his Cabinet appear unable to tame the virus nor the wild greenback, which in turn is feeding a vicious circle of growing uncertainty that immediately turns any economic policy on its head, further fuelling the black market premium. With the market now firmly in control of this negative feedback loop, it is difficult to visualise how Alberto and his well-educated Economy Minister, Martín Guzmán, will do good on their promise to avert a devaluation, meaning an uncontrolled and large jump in the official exchange rate that will effectively wipeout some 20 to 30 percent of our wealth from one second to the next.

The faceless and nameless market can be a dangerous creature, particularly in Argentina. Whereas classical economic theory suggests that markets create efficient prices through a cumulative aggregation of information, thus allowing market players to accede to perfect information, the current situation in the City Porteña is one of absolute price opacity. No-one knows what a dollar is worth, which in turns makes it impossible to form prices in pesos. This is fuelling the opposite of a “dash for cash,” where anyone who can get their hands on a physical product is protecting the value of their savings. Demand for luxury products – from watches to automobiles – has spiked. The higher the value of an imported kitchen appliance, the higher its demand. People are stockpiling anything that contains steel or copper. As noted by my colleague Jairo Straccia in a column in Perfil last weekend, one importer brought into the country a container filled to the brim with 28 four-door luxury refrigerators priced at US$500,000 a piece. They sold out before he could take possession from the customs agency. Anyone with pesos is scrambling to get rid of them, exchanging them for whatever is at hand.

Argentina’s chronic dollar-insufficiency has been intensified by a growing fiscal deficit at the hands of its Covid-19 lockdowns, but also the previous economic disaster overseen by Macri, who in turn received a ticking time bomb from Fernández de Kirchner, now the sitting vice-president, lest you forget. Yet the market considers the problem to be “political” rather than “technical,” whatever that means. According to Mr. Market, in this case personified by the “Ad Hoc Group of Argentina Exchange Bondholders” who agreed to a deal with Minister Guzmán over the sovereign’s private debt, “Argentina’s economic authorities have not only failed to restore confidence, but policy actions taken in the immediate aftermath of the debt restructuring have dramatically worsened the country’s economic crisis.” In their release that was published Thursday, the bondholders blamed Guzmán for failing to produce “a detailed economic plan” and to conclude negotiations with the International Monetary Fund (which are ongoing). They note that rather than allow the market to achieve “equilibrium,” the Central Bank led by Miguel Ángel Pesce had reinforced currency controls colloquially known as the “cepo”, effectively bastardising economic incentives to the point where reserves have all but depleted.

Apart from asking Guzmán and Alberto for a “plan,” the other major complaint heard in the market is the presence of Cristina and her diehard fans preaching “anachronic” economic statism that mimics Cuba and Venezuela. “Who is really calling the shots?” they ask, after the Executive unsealed policies including a judicial reform bill  (which they believe is designed to grant Fernández de Kirchner impunity from corruption charges), the failed expropriation of agribusiness giant Vicentin, a “fake news” observatory to supervise the media (Nodio), and the refusal to condemn the “usurpation” of lands that undermines private property, to name a few. Accordingly, not only does President Fernández have to get rid of his VP — note she’s been the quietest vice-president ever — and deliver a “plan,” he also needs to shake up his Cabinet, the market urges. 

The rumours have been circulating for months. First, everyone was calling for Guzmán’s head (“he’s taking too long to close the restructuring”), then for Pesce’s (“he’s failed to control the dollar”), in tandem they want Cabinet Chief Santiago Cafiero out too. “Bring in [Sergio] Massa,” the market says, asking for the return of Fernández de Kirchner’s second Cabinet Chief, the Renewal Front leader who currently serves as speaker in the lower house Chamber of Deputies. He replaced a certain Alberto Fernández back in 2008 when Kirchnerismo suffered its break with the agricultural sector, leading to the radicalisation of Cristina and her detractors.

The word of the day is “confidence.” Somehow, magically, President Alberto and his team need to deliver a series of announcements, policies, interviews, vide conferences, and whatever else is in their hands to help “The Market” regain trust, and stop selling pesos at all costs. It is unclear whether the disappearance from view of the vice-president, the sacking of the whole Economic Cabinet, and an immediate deal with the IMF that purports to slash the deficit and create “sustainable economic growth” would be enough to push investors into believing in Argentina again. Probably not. Without containing the value of the peso, though, all of this will only get worse.


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Agustino Fontevecchia

Agustino Fontevecchia


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