The conflict in Europe fueled rising food and fuel prices. The euro is worth again today, less than the dollar. The Catalans say that the monthly supermarket purchases of a humble family-before the war-were 400 euros, and now it is 600 euros. Spanish taxi drivers explain to our special envoys that filling the fuel tank costs twice as much. Everyone is very angry. Despite the increase in inflation and the recovery of GDP, rates have been flaccid. Consequently, global inflation and that of each country at this time, reaches maximum levels in decades. The cost of living has shaken the purchasing power of the world’s citizens. Together, the outbreaks of COVID implied limitations on mobility in China, hampering production and trade. Now comes monetarism with manual cash for the US, which could have waited 14 years. Today with the speed of inflation brought the need to overcome the very low interest rates.
In the US, inflation in May was 1% per month, if we project it like certain Argentine macroeconomists it would be “2 digits in 2022.” From food, fuel, to services. The Federal Reserve had stated that it would raise the rate by 50 basis points (equivalent to 0.50%) in June and July 2022, and another 25 points in September; but after the shock in May, it decided to climb to 75bp in June and the expectation is for another 75bp hike in July (double the forecast). In addition, the entity revised its perspectives and programs a rate of 3.4% in December 2022, almost double what it estimated in March 2022. In this context, growth forecasts deteriorated and the suspicion of a recession is growing.
A natural gas crisis is currently unfolding in Europe, determined by a growing balance of payments current account and a modest fiscal deficit in Russia, which is restricting the flow of gas destined for the European Union-50% less than before the war -. And while Russia doesn’t want to hamper its crude exports, the G7’s decision to put up a snag could lead to an additional retaliatory cut, pushing oil prices higher. Although the German foreign minister said today: “If we ban Russian oil exports, in a couple of days we won’t be able to move.
RATE RAISES AS WEAPONS OF DESTRUCTION
Interest rates put pressure on primary spending (education, health, security, public works), the stock market and public securities, the dollar appreciates, and financial conditions worsen for emerging countries, they reach our countries with reversal of flows of capital and devaluations. The Federal Reserve kept rates low for 14 years, despite Donald Trump’s GDP recovery and full employment. As inflation accelerated and certainty has been affected, the interest rate doubled in three months.
With credibility eaten away, no one knows what will happen when the global economy slows. The European Central Bank (ECB) faces a new dilemma: fighting inflation while propping up heavily indebted countries. Acquiring Italian bonds that pay 2% more than Germany over 10 years – double the spread at the beginning of 2021 -. The financing costs of Spain, Portugal and France have also risen considerably. Between 2010 and 2020, the ECB could justify the purchase of bonds because they were economic stimulus. Now, on the contrary, they are trying to cool down the economy by increasing interest rates, consequently, the alibi for buying Portuguese or Italian bonds with monetary issue is based on the fight against the financial disintegration that threatened 2010 with the PIIGS.
ARGENTINA
The resignation of Martín Guzmán took place within the framework of a long and fussy fight within the FDT, which had Estela de Carlotto as peacemaker. Guzmán resigned, in principle because in order to put the macroeconomic and financial situation in order – as Silvina Batakis now claims – it was necessary to have political support. In this context, after a year of tedious bullying, Cristina’s excessive allusion on Saturday, July 2, triggered the “Zen minister’s” calm. Increase the delay in the implementation of the repeated segmented tariff adjustment to contain the fiscal overflow. Likewise, the fact that Miguel Pesce did not stop placing Leliqs, competing for the banks’ pesos with the Treasury, had an influence.
Silvina Batakis minister of fiscal and monetary balance?
The appointment externalized that the announcements would lean towards the claims of the vice president: more pen, a more lax fiscal and monetary stance, job creation, anti-oligopolistic struggle and price agreement, leaving aside the macroeconomic dangers and the relationship with the IMF .
Today that would not be happening.
Neither greater fiscal expansion, nor dispute with the IMF, nor answers to Cristina’s claims. Amalaya surprises, or someone is going to accuse her of being a neoliberal, like Guzmán.
Sustaining a greater fiscal imbalance, without financing, without arranging subsidies, coping with increases in energy costs, is hardly feasible, and “the kids” are attentive. A run against the debt in pesos has already been insinuated. It failed, but it could have been fatal. Without fiscal self-discipline and without net reserves, the rethinking of the program with the IMF can only be a traditional recessive adjustment, instead of a recalibration of goals.
We have already explained it other times, -we must not even insinuate it-, if one day it cannot be fulfilled, it is very different from shouting epic speeches that can generate social catastrophes. Néstor Kirchner knew it, that’s why he demanded: “let us breathe because the dead don’t pay”. Meanwhile he paid for and increased reserves at the same time, until he paid off almost 10 billion (2005 dollars) in advance.
Investors began to fear the agitation of the stable cast, “The great Dujovne-Lacunza”: wild devaluation and re-profiling of debt in pesos, for which the titles began the downward path. As a consequence, doubts grew about the treasury’s powers to meet financial needs in pesos.
The inconvenience with the buyers of bonds led to mediation by the BCRA to support the price and prevent interest rates from continuing to rise. During June and these days of July, the BCRA issued more than $800 billion to maintain bond parities, without being effective in repairing the securities market.
So, to the issue to finance the Treasury deficit was added the issue to repurchase debt. This led to a formidable absorption of pesos in June through the placement of Leliqs and passes, increasing the stock of remunerated liabilities. The drawback is that the BCRA has been dragging since 2019 a formidable quasi-fiscal deficit left by Macri, who at the time was able to produce an avalanche when the Leliqs divided by pesos reached the sum of 60,000 million dollars. Macri in 17 months quadrupled the Leliqs of 2015, with the ironed dollar.
Last month ended with low reserves, expectations of devaluation, runs against bonds in pesos and amputation of fiscal financing in the local debt market. We add, financial rescue of the BCRA to the Treasury, greater issuance and energetic increase of the remunerated liabilities of the Central to absorb pesos-taking into account that the BCRA, as was said, already has a significant quasi-fiscal deficit-.
The Government opted to maintain the parity of Treasury bonds through BCRA purchases and deepening exchange controls, and restricting imports. A system was established belatedly and for 90 days that reduces the annual BCRA foreign exchange quotas available for imports, which encourages companies to fund on their own. The initiative to access foreign currency from 180 days after dispatch to the market, intends that companies and/or their suppliers from abroad provide financing to maintain their purchases and there are no tricks to use $120 dollars. Therefore, the private sector has to substitute imports, obtain terms from suppliers or “use their own”. They can also get foreign currency in alternative segments to the official dollar.
In short, the accumulation of reserves pushed the decision to restrict official dollars. Inflation in recent months, annualized, comes at a floor rate of 5% per month. Alternative dollars hit $280 and inflation suffers. Salary adjustments are shorter and with larger increases; while inflation expectations are corrected upwards. The drop in demand for pesos also contributed as a whiplash on local currency debt.
Batakis said he will follow the president’s economic program. He was in favor of the order of the fiscal accounts and of maintaining the agreement with the IMF. It was explicit “you cannot live in permanent deficit. We are going to do the path to reach the balance, but with the people inside”-as has been happening with the pandemic and everything- Right now it is going through the segmentation that Guzmán longed for. Both believe that those who have the ability to pay should take full charge. She indicated that she is comfortable with the current level of the official exchange rate, despite the gaps. Namely, will not devalue. He added: “Orderly accounts will collaborate in the fight against inflation” -orthodoxy-, “price agreements are important” -heterodoxy-, without specifying. He expressed: “We need the working class to recover wages.” Another good wish that coincides with Guzmán’s. He finished: “In September there is a very big due date. We are going to work side by side with the Central Bank. We are going to be able to renew it for sure, but we have to be very much on top of it. Interest rates have to be positive and we need financial instruments in pesos”. That is called monetary orthodoxy, in this case the heterodox was Guzmán with negative rates.
In conclusion, until now most fiscal and monetary orthodoxy reminds us of Garrincha. Considered the best right winger in history, famous for his continuous virtuoso zigzag, he feinted to the left and came out to the right. Will Batakis be like Garrincha? – We do not know.
Professor of Postgraduate UBA and Masters in private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books. @PabloTigani
Source: Ambito
