Public debt debate: chronicle of an announced default (Part II)

Chronicle of an announced default: part two

The index Merval sank in the first week of April 2016, the country risk prepared by the former employer of Prat Gay and Caputo he moved up to 453 basis points.

As it was obvious that there would be another rise in inflation in April due to adjustments in transport, gas and water tariffs, tempers were heating up. At some point it would be necessary to think of a strategy to stop the inflationary escalation, without the interest rates that the government was paying BCRA will be perpetuated at 38% annual nominal (45.24%, effective), with the dollar ironed. If an alternative to that madness was not achieved (you could earn more than 40% annually in dollars). The sum of measures would make that well-known economic policy plunge us into a major recession in the second quarter of 2016.

At that moment the affair was uncovered “Macri, offshore companies”, with members of his entire family, including his father, who was supposedly unrelated to the president, and the Mayor of Lanús (Grindetti). “Macri’s former Secretary of the Treasury in the City, who had an international arrest warrant in force until elm earlier. He had other causes for evasion in Brazil while serving as an executive at Iecsa (Socma)-(Page 12, April 26, 2016).

It was premature to assess the reaction of public opinion that had believed in the “transparency” that enshrined Cambiemos, despite the more than 200 legal conflicts that Macri was involved in taking office.

110 days into the government and before announcing the simultaneous rate increases, Management & Fit indicated that the approval to Macri’s management was located at 50% and not at 70% as when assuming. Together for Change had already lost 20 points. Under normal conditions – without shielding from the media – the percentages could have been catastrophic, after knowing the impact it would have on inflation in April and the coming months.

Not the slightest idea of ​​social management

The UCA Social Observatory reported that poverty had increased from 29% to more than 32% in the first three months of government. If this growth in poverty was projected, by the end of 2017 we would be surpassing the figures for the first quarter of 2002 -the maximum confusion-. Surely it was thinking about this that Espinoza, president of the Buenos Aires PJ, warned that “if the suburbs exploded, the president would fall.” The Buenos Aires police had already summoned a car quartering through social networks with “task retention” that the governor Vidal managed to stifle by granting a sudden salary increasewhich the economic team insulted.

The teachers’ unions carried out the first national strike in the first quarter of 2016, to demand that the legal case for the death of the teacher Fuentealba not expire, but also to ask for better working conditions. The dock workers announced a “Friday strike for layoffs” and the Banking Association, strike for April 14, completing the camp in front of the BCRA.

To this would be added the united CGT, which called a march to Plaza de Mayo for April 29 demanding an update of the scales of the “Labor Tax” or Earnings and the declaration of an “occupational emergency” to stop layoffs. These signs, prior to parity, anticipated that the authorities were approaching to face a social conflict, rapidly.

In another order of things, the dizzying progress in the federal jurisdiction of the complaints and judicial cases against the former president was perfected in order to strengthen the image of Macri before public opinion. The “ad” of the president, champion of the fight against corruption and impunity, failed. He The New York Times and the Washington Post shredded Losteau’s work and Obama’s visit to Argentina, wanting to build a leading president for Latin America, who was now being investigated by a prosecutor, for an irrefutable and resonant case throughout the world. The crime under investigation was nothing less than “malicious omission”. The penalty for committing this crime could reach two years and lifelong special disqualification from holding public office, just when the loans had to be obtained to pay the vulture funds.

There were priority issues that the Macri government established

Devalue, lower withholdings, extravagantly increase rates and agree with vulture funds. But the macroeconomic situation seemed complex. Prat Gay’s shock measures generated collateral damage. The level of activity and employment went into recession, social discontent increased, inflation generated a new delay in the exchange rate, inflation It did not show clear signs of slowdown, the demand for pesos fell and the LEBAC stock continued to rise.

While the government tried to get around so much bad news with marketing and good offices from the media, it realized that it was going to have to improve governance and mitigate union demands with measures that implied more public spending and waivers of tax revenue, with which the primary fiscal deficit was going to increase and the financing of the Treasury would require increasing indebtedness. The risk was that in the attempt to mitigate collateral damage, the brutal fiscal adjustment would end up being postponed, which would remain until after the midterm elections (October 2017). Without lowering the fiscal deficit, it would be difficult to lower the inflation rate that had shot up, well above that of the previous government.

Prat Gay made water everywhere

Prat Gay lowered the withholdings, adjusted ferocious rates and suddenly arranged with the vulture funds what the funds wanted. Sturzenegger’s BCRA sterilized pesos through an extraordinary rise in interest rates via LEBAC. The macroeconomic and social situation was extremely delicate, the challenges in terms of governability were growing. The measures caused phenomenal damage in terms of the level of activity and unemployment and, already in the second quarter of decline, validated the recession.

The devaluation was consumed in less than five months, inflation showed no signs of slowing down, the demand for pesos was falling and the LEBAC stock was reaching extravagant limits. It was spending on interest, more than was being saved on layoffs. Paradoxically, the primary deficit was attacked and the financial and quasi-fiscal deficit accelerated, to a greater extent. The government tried to improve governance by relinquishing its ideological convictions to mitigate the unionists’ cash claims by increasing public spending and renouncing the collection of tax revenue, with which the primary fiscal deficit even increased.

The Executive Branch then granted the governors the return of 9 points of the co-participation. At the same time, $28,000 million in items were transferred to the provinces. At the meeting of the Vital and Mobile Minimum Wage Council, the unions were given the increase in the minimum wage from $6,000 to $8,000 (+33.33%), and the increase in unemployment insurance from $400 to $3,000 (+650 %). The agreement to begin to return the $29,000 million retained to the union social works was verified, delivering the first installment of 10%. The items for social assistance were increased in the province of Buenos Aires and the president made a commitment to the head of the Peronist state union, that there would be no more layoffs in the public sector. It was not an attempt to get right with God and the devil to mitigate the elaborate earthquake. It was throwing the ball outside while they did their thing at full speed. The brutal fiscal adjustment was postponed, but at the same time “anti-Peronist” approval fell.

In terms of economic activity, in the first quarter domestic demand fell, the lower consumption was palpable, which also exhibited a significant year-on-year drop. Public consumption slowed, while investment fell 5% year-on-year, construction collapsed 7.5%, the fall in investment in equipment sank around 2%, production of goods fell 1.2% year-on-year.

By lowering withholdings, without further fiscal adjustment, it was impossible to lower the inflation rate of 2.5% per month. With more fiscal adjustment, social discontent would grow to unsuspected limits. The anger of the popular currents could appear, silencing the insipid speeches far from reality.

“Making clothes” (slang)

• It was devalued 50%, so that in April 2016 exports fell 8% (ABECEB).
• The stocks were lifted, so that it could not be freely imported.
• Withholdings were lowered (income fell), so that the fiscal deficit would increase.
• It was devalued and the withholdings were lowered, so that the genuine dollars would not increase.
• Rates were sharply adjusted; to go into recession and the recession caused a drop in tax collection.
• He suddenly settled with the vulture funds, placing titles, increasing the indebtedness.
• The BCRA sterilized pesos through an extraordinary rise in interest rates via LEBAC up to 38% with ironed dollars and free entry and exit of capital (perfect trilemma). Incredible dollar return: for whom?
• The measures caused brutal damage in terms of a drop in the level of activity and an increase in unemployment (UCA).
• Already entering the second quarter of fall, the recession was validated.
• The devaluation had been consumed in less than five months.
• Inflation showed no signs of a reasonable slowdown.
• The demand for pesos was falling.
• The LEBAC stock was reaching outlandish limits.
• More was being spent on interest than was being saved on layoffs.
• The primary deficit was attacked and the financial and quasi-fiscal deficit accelerated.
• The cash claims of the trade unionists were attended to by increasing public spending and renouncing the collection of tax revenue, with which even the primary fiscal deficit grew incessantly. What did they buy time for?
• The Executive Power granted the governors the return of 9 points of the co-participation, to increase the deficit.
• Items for $28,000 million were transferred to the provinces to increase the deficit.
• At the meeting of the Vital and Mobile Minimum Wage Council, union members were granted an increase in the minimum wage from $6,000 to $8,000, and an increase in unemployment insurance from $400 to $3,000.
• The agreement with trade unionists to return $29,000 million to union social works was verified, delivering the first installment of 10%.
• The items for social assistance were strongly increased in the province of Buenos Aires by Governor Vidal.
• The president made a commitment to the head of the Peronist state union, that there would be no more layoffs in the public sector.

Result

The vaunted and necessary fiscal hyper-adjustment was postponed according to the vision of the economic team- and was financed with increasing indebtedness, to allow unspeakable actions to be committed.

In terms of economic activity, in the first quarter domestic demand collapsed. The lower consumption was palpable, which also exhibited a significant year-on-year drop. Public consumption slowed down, investment fell 5% year-on-year. Construction fell 7.5%. The fall in investment in equipment sank around 2%. The production of goods fell 1.2% year-on-year.

The new Government with Prat Gay and Sturzenegger in charge, began the first quarter of 2016 failing, before reaching bankruptcy in August 2019.