Every possible mistake was made. The BCRA, in Sturzenegger obsessed with inflation or the cheapness of the bicycle,anchored the exchange rate as Caputo did in the last 6 months, increasing expectations of future devaluation. Predictably, investors were getting rid of their Lebacs to migrate to dollars. Right now they want to get out, after having made fortunes in pesos and consolidated their position in dollars, but the dollars are not there.
From this column we have been insisting on the social and exchange rate fragility projected by the economic policy of the Milei administration. A monetary policy of setting a negative interest rate in inflationary terms and a super positive one in dollars, with base control, combined with an anti-inflationary recessionary strategy, was going to become blurred sooner rather than later.
The monthly crawling peg policy (2%) was no different from Sturzenegger’s free floating exchange rate from 2015 to 2018, which was based on the false belief that “flattening the dollar” and carrying out “carry trade” would allow him to ensure macroeconomic stability behind an inflationary flash that ate up the 118% devaluation. In Sturzenegger’s case, things were worse, as he did so with twin deficits, monetary expansion and very costly sterilization.
Investors and financiers are aware of the exchange rate vulnerability of the crawling peg at 2% per month, and they smell when they should take the profits from the overnight repos, which started at 100% nominal (TEA 174%) and get out. The cordiality that the president apparently generated no longer seems so useful and the industrious arguments of the BCRA were not enough for Bausili, just as they had not been enough for the inveterate Sturzenegger. Sturzenegger-Caputo changes the collar, but the dog is the same.
The precarious conditions that hung in the balance explain the end of the “honeymoon”. The “Rockstar concert” season has come to an endMilei’s government has not been able to take advantage of the confidence and patience shown by the markets.
The markets are not willing to limit themselves to the chainsaw and the blender forever. The current inconsistent economic program needs to be replaced by a plan that will bring annual inflation to single digits. To continue listening to Caputo and Bausili, they want to know how they will get the 15 billion dollars that this monstrosity needs, six months in the making. The level of incompetence with which everything was done has the hallmark of the Sturzenegger-Caputo Macri experience.
With Sturzenegger and Caputo it was likely that the “best team of the last 50 years” would decide overact, and implement extravagant tariff increases. The next step is, as in 2018, a combination of interest rate hikes, forcing banks to accept, with Treasury guarantees, opaque and inadequate measures that will not dispel the implausible self-inflicted uncertainty.
As on that day in May 2018 when $647 billion in Lebacs (about US$35 billion) were due, the situation could worsen. Today, too, changes are needed in the cabinet.In this context, with the loss of confidence in the markets and pressure from the IMF, they will have to further adjust the fiscal deficit, then they will have to lift the restrictions and remove the Pais tax, trying to maintain a more devalued peso, not a more appreciated one as Caputo promised these days.
Now, a positive real interest rate is coming to generate a recession that will try to prevent the rise of the dollar from being passed on to prices. So we can expect a very low level of economic growth, there is no need to be a fortune teller. We are in stagflation, but we are going to deepen it, so the fiscal adjustment will have to be greater, add to that more unemployment and falling wages.
FROM NOW ON: ATTENTION
Let’s keep an eye on CDS (Credit Default Swap) – bets against Argentine bonds, anticipating and betting on a new default at some point. The CDS opens the business of default., as the lending base erodes, with those who bet against the country profiting extraordinarily.
The historic result of the madness of those who now manage the economy was a record stock of LEBACs that reached $1.3 billion. (US$ 85,526 million, at the exchange rate in effect at that time)Suddenly, investors began to unwind their positions in Lebacs. In 2024, Leliq will be dismantled, moving to “one-day passes” and other extravaganzas, and thus debt and demand for foreign currency will begin to increase.
It was too Hollywood-like to seem viable. The policy of brutally reducing the fiscal deficit and managing a low inflation rate cannot even be supported by its idols.
In the theoretical framework chosen by Milei-Caputooperates with free floating based on the belief that a floating exchange rate contributes to the correction of macroeconomic imbalances, when the floating exchange rate is the result of fiscal and monetary policies that are well applied. Therefore, the supposedly controlled fiscal deficit and a high real interest rate policy must accompany the dismantling of the exchange rate trap.The result, if they fail to do so, is a formidable slowdown in export settlements and growing demand for alternative dollars.
THE STORY OF THE MACRI BOYS’ FAVOR
The Treasury sold US$2.2 billion from Banco Nación in 15 days in May 2018, announced a fiscal adjustment of 20 billion pesos, and arranged a placement of bonds in pesos for US$3 billion at 5 and 8 years at 20% and 21% with the purpose of sending a message that it still had access to the voluntary debt market. Today they look like figures and resources from the United States of North America.
We are still paying the costs, paradoxically from the same administrators who caused the tragedy.But there was a difference, they had an extravagant progression of the loan and disbursements, which extended the original amount of the IMF loan, up to US$ 57.1 billion. You They brought forward to 2018 and 2019 the disbursements planned for 2020 and 2021. Some US$ 19 billionIn the remainder of 2018, instead of $6 billion, they would receive $13.4 billion; in 2019, instead of $11.4 billion, they would receive $22.8 billion. It was Disneyland, a magical world of colors.
Milei, “not a dollar to you” they told her, along with Caputo, from the first day in DC.
Milei’s luck has not been the same as Macri’s with the same economists. Imagine that the advance of the IMF’s disbursements to Macri in May 2018 left the Treasury’s financial needs fully covered until December 2019.
Even if the objective is achieved, the problem with this harsh monetary policy is that it will cause collateral damage of magnitude. So far, they do not care a fig. But the monetary squeeze and the shortage of pesos, and the rise in interest rates will lead to a violent fall in credit, which will strengthen the already unbearable recession.
It is not known why they were thinking of asking for more loans, ignoring the fact that to reach debt levels compatible with an IMF rating of “sustainable debt” for an emerging country – less than 70% of GDP, although it is higher – in 2025, a primary surplus of 1 or 2 points of GDP will be required. Imagine, with more demanding assumptions, with lower growth and deep devaluation, a primary surplus of 5% of GDP will be required to make the debt/GDP ratio sustainable.
It is true that today, the situation of the business community is not what it was in 2018. It has a cushion to lose, but not a bed base. They will end up suffocating the private sector, deepening the recession, with the consequent increase in social conflict. A very dangerous game, the common people have already begun to tire. With a recession, it becomes more difficult to meet the goals agreed with the IMF, and the drop in tax collection compromises the goal of equilibrium.
Fiscal austerity and monetary squeeze announce a further fall in GDP according to the IMF, but they may fall short with (-3.5%). In this context, after the devaluation, the downward growth outlook for 2024 and 2025 will be revised. For 2024, with a dollar at $1,500, a GDP fall of (-7%) can be projected, which would leave a statistical drag negative for 2025 in the order of (-2%). A calamity.
The signs of population exhaustion will become more and more evident. The joy of Luna Park may turn into a festival of “blues”. The Macri-Sturzenegger-Caputo-Dujovne Agreement with the IMF was destined to be breached.
LLA-PRO, the new anti-Peronist franchise that won more than 50% of the vote in the runoff, with neoliberals and libertarians, plus the opposite hybrids of the UCR, which claims to combine moral superiority with amoral and disrespectful behavior, is displaying unprecedented public social disinhibition and aggression. It will cost them dearly to act like they are crazy.
If the raid begins, it could be six months of uninterrupted financial and currency crisis, which, with further fiscal adjustment, will be unbearable.
History repeats itself twice, first as a tragedy and then as a farce. What happens is that sometimes, as Slavoj Iek suggests, the farce can be even more terrifying than the original tragedy. The IMF knows the actors, and in order to increase transparency and avoid the scams, it had to eject Caputo from the BCRA in 2018.
In an average currency crisis, at the end of August, the currency was devalued by 15% in one day.. At the same time, Credit Default Swap (CDS) or default insurance soared. With the rise in country risk, Argentina was among the riskiest countries for investors, as it has already surpassed 1,500 basis points. Argentine bank stocks on Wall Street plummeted in 2018 due to fears of a new corralito. Today there are rumors, even on social mediaIn 2018, the Moody’s agency questionedthe increase of the rate to 60%, causing financial uncertainty and fears of default on payments, causing more than 19% of Argentine stocks to plummet in one day.
The currency crisis sparked protests in various parts of Argentina against the government’s economic measures. There were demonstrations in various neighbourhoods of CABA, as well as in districts of Greater Buenos Aires. At the same time, looting was reported in Mendoza, Chubut and Jujuy; the collapse of the Argentine peso had international implications, dragging down other currencies. Luis Caputo “resigned” to the BCRA on September 25, 2018. Any similarity with reality is purely coincidental.
Director of the Esperanza Foundation. https://fundacionesperanza.com.ar/ Professor of Postgraduate Studies at UBA and Masters in private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books
Source: Ambito
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