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

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

“It is not that we are so good, but that the others are worse” (Perón). They had carried out the best possible campaign to restore Peronism to power. In just 2 years, January 2018, Argentina was expelled from the markets. At that time, the internal and external financial state presented various imbalances. Abnormalities of magnitude such as fiscal deficit of 7% of GDP, current account deficit of 6 points; in the BCRA balance sheet, remunerated liabilities item -Lebacs, repos and Leliqs- the capital far exceeded the monetary base, creating risks of greater pressure on the exchange market, by weakening the interest rate, as the instrument chosen to lower the rate of inflation.

The macro fundamentals were so weak that the first whisper that came from outside accompanied the justification for the sudden stoppage of external capital flows (sudden stop, bald), when in fact we had already fallen from the world upon the return of Minister Luis Caputo’s trip to the US. Of course, the low demand for domestic bonds and other local assets accelerated with the news from Turkey. Remember dates, external financing for the country was cut off abruptly in January 2018 when there was no noise in the world.

The lack of external financing after the expulsion of Caputo forced the adjustment. Higher interest rate, higher real exchange rate and lower level of activity, in a context of greater country risk. The supply of dollars falls, the exchange rate climbs from $20.25 on April 24 to more than $40. It devalued almost 90% in just five months despite the government gave away US$24 billion in the exchange market, so that Caputo’s friends could leave. The jump in the nominal exchange rate brought about an acceleration in the inflation rate. Annualized inflation in the third quarter surged from 29% in March to 66% in September. while the inflation expectation for the end of 2018 increased 120%, going from 20.3% in March to 44.8% in August.

Given the lack of dollars, the Macrista government had to resort and ask for help from “intensive care” to the IMF. A new agreement with the IMF, because it did not achieve anything. The first agreement with the IMF fell just two months after its signing in the month of June 2018. There were simultaneous setbacks. The IMF assumed that with a generous US$50 billion loan, a strong initial disbursement of US$15 billion, and an economic program, the country risk would subside and Argentina would re-issue debt. But it didn’t happen. The IMF lent fast, a lot and badly.

The country risk continued to rise until reaching 783 basis points in the first days of September 2018. Meanwhile, all the doubts about the financing of the public sector in 2019 arose, and rumors of an eventual debt default grew.. Fears of a spiraling of inflation in a context of increasing nominality increased. With increasing uncertainty and the first agreement with the IMF fallen, we had to patch up with a set of forced economic policies that could ensure the stand-by approved on June 20, 2018.

The new agreement expanded the loan to $57.1 billion. They granted 7,100 million more, and specifically improved the profile of disbursements. They were ahead from now to 2018 and 2019, US$19 billion of the disbursements originally planned for 2019 and 2020. Metaphorically, the helicopter was on the terrace and a legislative Assembly would take place, as in 2001. The problem would remain for the next president, who was the one who, just 3 months after the heavy inheritance, would receive the blow of the global pandemic.

The new economic program was based on a “zero” primary fiscal deficit. “Zero” increase in the monetary base and, in a new scheme of free exchange rate float, where the BCRA could only intervene in case of excessive fluctuations, for which BCRA non-intervention zones were established, where the Treasury would sell IMF dollars for budgetary purposes. It was an emergency economic program, to avoid the fall of a government that had reached the limit of its own incompetence (Peter).

Peter’s principle: all employment at a point, tends to be occupied by someone unable to perform it. “In any organization where expertise is eligibility for promotion and incompetence a handicap, those rules apply”, Laurence J. Peter, Raymond Hull launched (The Peter Principle, 1969).

It was not a comprehensive macroeconomic plan that will last beyond December 10, it was only for the purpose of getting Macri’s chestnuts out of the fire, because if not, everything he would go through the toilet latrine. It was a program with exaggerated measures to mitigate the crisis. The program was intended relegate doubts about the default, which in the end it was produced in 2019settle the inflationary acceleration and the expectation of increasing nominality of the Argentine economy.

They wanted to calm the foreign exchange market by managing a more serene dollar through the energetic monetary squeeze and a Treasury that would continue to giving away dollars in the exchange market.

The “Save Willy” program would have consequences (ceteris paribus) for the next 20 years. What was tremendously desired was to obtain the 2019 financing, cut the growing nominal value of the economy and appease the exchange market, even if it caused a deepening of the economic recession.

That’s how it was for Macri in 2019. “You can fool all the people part of the time and some people all the time, but you can’t fool all the people all the time” (Lincoln)

The strong monetary squeeze pushed up the already very high interest rates and would lead to a sharp decline in credit, to aggravate the recessive picture. The recession would deepen with rising inflation, a devilish cocktail.

The big question set by Macri’s friends was whether he would be able to stop the upward trend in the inflation rate. Well no. I wouldn’t get it.

On the other hand, with a deeper recession it was much more difficult to meet the “zero primary fiscal deficit” target and stick to the strict “zero target” growth of the monetary base. Although strictly speaking, the goal was not zero, the base would grow 8% until June 2019 and 1% monthly thereafter. All of the above, knowing that the proposed scheme united all the points of the fiscal, monetary and exchange program.

In a context of recessive adjustment, the distributive struggle and social conflict were going to grow. “Hard” times would come for ordinary citizens, pressures and claims almost daily for a government incapable of giving answers. Macri had squandered his political capital with this new program. Duran Barba had warned him.

Executive Director of Fundación Esperanza. Graduate Professor UBA and Masters in private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books.

Source: Ambito

Leave a Reply

Your email address will not be published. Required fields are marked *

Latest Posts