Economic questions

Does this headline ring any bells with any longstanding readers? It was the slug for my column in the very first Buenos Aires Times exactly 250 editions ago (2 September, 2017) in a series running until late 2018. The “questions” were not only issues but actual inquiries about Argentina’s economic conundrums put to me by the reclusive New England academic Dr Hale. By an amazing coincidence Dr Hale today stages a comeback exactly 250 editions after his debut, emailing:

“In what might seem a parable of the prodigal father, having dumped you 42 months ago, I now find myself dumped in turn by your successor as consultant who now caters to what he considers a more exclusive clientele. Don’t fret, this is a one-off consultation at most because I have already contracted a new source of information but for the second half of this year onwards. I had been hoping to sit out the few days until then but in today’s wild world (Wall Street’s bear market with our 8.6 percent annual inflation driving the Fed’s Jay Powell to slam on the brakes too hard to permit a soft landing, Bitcoin going down the tubes with a cryptowinter in our summer, etc. etc.) things have simply got too hot in Argentina with people insistently telling me that this latest crisis is too serious to ignore, even terminal. So, assuming that I am both remembered and forgiven, could you please fill me in (but don’t think I’ll pay you a single cent – your free advice was always your unique selling-point)?”

My reply:

 “Today might be the 207th anniversary of Waterloo but that snowballing quasi-fiscal deficit makes the current debacle more akin to a retreat from Moscow – long-term disaster rather than a decisive defeat in any single D-day in the near future. Your points about elsewhere could usefully be taken on board here to place the panic attacks here in a wider context – there is a massive sale of risk financial assets on a global scale, not just Argentine bonds (even if more unattractive than most). Seasonal factors are at play as well as international – that tremendous June 9 run on CER index-linked bonds may have reflected fears of ‘reprofiling’ (or whatever word Frente de Todos might coin to replace that semantic invention of the previous government) with runaway inflation spinning out of control but it also responded to the need for pesos to pay midyear bonuses.

In any case the ‘reprofiling’ fears were premature because last Tuesday’s debt renewal challenge set an extremely low bar – barely into 11 digits (of pesos, of course) with the intake effortlessly doubling that sum, even if at the cost of higher interest rates which keep that snowball rolling. But compare the 21.6 billion pesos netted last Tuesday with the almost 600 billion falling due within the next fortnight (even if the state owes half of it to its own agencies) or 2.7 trillion pesos within the next quarter (with over 70 percent in CER bonds, i.e. linked to an inflation which is the government’s weakest flank).

Economy Minister Martín Guzmán seems to have the fixed idea that some debts are more dangerous than others – dollar debt more than peso debt while what the state owes itself barely counts. Yet the contrast between a stable dollar and a volatile peso is deceptive. Dollar debts shrink by themselves since the greenback has lost a quarter of its value in the last decade with the couple of trillions pumped by Joe Biden into the economy last year only accelerating the slippage. On the other hand, with peso debt now reaching a quarter of Gross Domestic Product, the steep interest rates carried by the Leliqs etc. are a prime reason for the printing of ever more pesos which then need even more bonds to ‘sterilise’ in a vicious circle. Yet this month Guzmán chose to keep this vicious circle going by depleting scarce reserves to the tune of almost US$3 billion to pay off transitory advances and thus reopen the possibility of printing money.

Anyway you are consulting me because of the panic and pessimism all too visibly gripping jumpy markets in the form of parallel exchange rates gaining several pesos a day and country risk shooting well beyond 2,000 points to the highest levels since the period preceding the rescheduling of the debt with private bondholders. I cannot forecast how far this will go – for all I know, our 250th edition today could see the blue dollar at 250 pesos or country risk at 2,500 points. It is largely the least professional investors who are shedding index-linked bonds and abandoning mutual funds in a frantic pursuit of dollars and I would not set too much store by them but nor should they be underestimated.

Finally, if you’re worried about annual inflation of 8.6 percent, what can be said about the inflation of 5.1 percent for one month posted here last Tuesday (the lowest since February!)? Inflation so far this year has thus reached 29.3 percent, already overtaking the 29.12 percent granted pensioners (among whom I number) for the entire first half of the year. Explaining all this is a mission impossible – dump me any time you like, Dr Hale.”