Former finance minister Hernán Lacunza on Argentina’s debt restructuring efforts, the impact of the coronavirus pandemic, inflation and more.
Former finance minister Hernán Lacunza, the man responsible for the economic transition between the Mauricio Macri and Alberto Fernández governments, backs Argentina’s debt restructuring proposal to creditors but says more acceptance is needed.
The economist, a member of Macri's PRO party, assures that the exit from the coronavirus crisis has private support. Self-critical of the former government’s time in office, Lacunza asks for slogans to be kept out of governance and is critical of the Fernández administration’s handling of the Covid-19 pandemic.
Let me dig into the debt issue. What would you have done differently in renegotiating the debt, where would we be now if Macri had been re-elected and you stayed on as finance minister?
Talking of hypotheses is no way of analysing reality. Everything looks easier from where I am now.
But theoretical analysis is only possible in “what if?” terms.
Yes, but it’s always easier to talk on television or the radio than being in the hot seat and taking decisions. Having said that, it may be supposed that a hypothetical second Macri term would have enjoyed more international credit, making for easier conditions when renegotiating the debt.
Argentina’s problem is liquidity rather than solvency. It’s not the size of the debt but the concentration of debt payments into a short period. That became manifest last August – a high concentration of payments, especially in the remainder of last year.
Independently of the PASO primary results being adverse for the government, was there malpractice in concentrating such an enormous quantity of debt into the last four or five months of the year? Any election is unpredictable, perhaps less concentration would have been more prudent?
Let me call it imprudent rather than malpractice. You cannot define economic or financial policy on the basis of winning an election because an adverse result can always come along. You have to include the less favourable scenarios in your analysis, especially when managing a ship with 45 million passengers, and not bet on success.
That last part might have been imprudent, extensive to the whole Cambiemos government. That’s one possible self-criticism. You make plans thinking you’re going to govern for eight or 12 years and in reality you have to take into account that democratic alternation in politics.
You were saying that the problem was not solvency but liquidity and the concentration of payments. Would Macri have been able to decompress that concentration?
Properly measured, the debt is around 70 percent of gross domestic product. Measured by the average exchange rate last year, which is how it should be measured, gives about 72 percent. That’s not a high debt in international or even regional terms, nor for Argentina. And if we take away debt owed within the public sector, around 40 percent, it’s even less. And if we then also take away the International Monetary Fund, we get it down to 30 percent. That’s not too heavy a burden.
The payments are the problem. When your credit is zero, you cannot renew – no nation on earth, no provincial or municipal jurisdiction can nor meet almost all payments. That’s where the problem appears, nobody has what’s owed in their coffers.
Economy Minister Martín Guzmán kicked off by offering 39 cents for every dollar of debt and now it’s up to 53 cents, while creditors are asking for 59. In a hypothetical second Macri term, could you have succeeded easily in reprofiling the deadlines while the sums remained the same?
There would have been credit for a more voluntary negotiation, for market operations which could be reprofiled, what’s known as liability management, as well as stretching out deadlines. But it’s all hypothetical with relative validity.
What you’re saying is that you would have been able to reprogramme payments without stress, without arriving at an open default, while maintaining the nominal value of debt without any haircuts.
I wish to God that they reach an agreement and I think they will soon. The government’s latest proposal seems very sensible to me, within the zone of agreement. I’m not seated at the negotiating table but I think that’s so. We can always discuss how we got there, whether we took the shortest route or tortured ourselves unduly, but there’s practically no haircut on capital although there is on interest. Going into the fine points of what the exit yield would have been with another government renegotiating the debt does not make much sense.
If we are intellectually honest, we can say that this government is going to reduce the real value of the debt, even if not on capital, since a compulsory modification of the interest rates implies a final reduction of the total. In exchange for that, you’re paying the price of a loss of credibility on international financial markets. In contrast, that hypothetical second Macri term would have succeeded in reprogramming with less of a haircut, issuing bonds with progressively less interest, but without the stress of a loss of market confidence. One finds the solution in the present, the other in the future.
That’s a good way of putting it. Something which should be highlighted: in the final analysis it is the debt of a country, of we Argentines, not of Mauricio Macri nor Cristina [Fernández de] Kirchner, nor Alberto Fernández, nor Martín Guzmán, nor mine. From that perspective, it is we Argentines who are creditworthy or not. Sometimes the analysis looks at periods of government when in reality the economic cycle and the electoral calendar are not things which go together but are continuous. The country on December 11 is similar to December 9 although with another helmsman. And the debt crystallising in one term, Macri’s for example, in reality was incubated by the spending and deficit of the previous term, evolving from there. In mid-2018 the Cambiemos government lost the credit which it had with the world and which had been generous until then.
Now we can discuss whether it was prudent or not to take it. This situation arose when the world began to ask in mid-2018 if Argentina would be undertaking, for once and for all, the necessary reforms since, when the 2017 midterms were over, it had not been possible to gain Congress approval for a package of laws including tax reform (the federal fiscal consensus) and a fairly modest pension reform, a question the Argentines resolved with stones. In the world they were asking who would be paying the future bonds, those of 2025, not 2019, how the Argentines would be generating the funds to honour their debts with their creditors.
At that point Argentina’s credit was cut off so we went to the IMF as a form of softening the austerity which otherwise would have been more abrupt. Softening it does not mean avoiding it but stretching it out in time and we surely paid an electoral price for that delayed austerity. But in the final analysis it is we Argentines who are creditworthy or not. Whoever is in charge can modify some things but not everything.
You were saying that you saw the renegotiation as within a zone of agreement. Would that agreement take the form of sequential bond swaps on the basis of an initial acceptance of 50 percent or would there be a more complete settlement?
Agreement means no holdouts, no litigation or litigation contingencies lying ahead. That would be a complete agreement, really resolving the problem, and for that you need to arrive at the necessary majorities.
Wouldn’t sequential agreement beginning at 50 percent do?
It would be a first step, not ideal but better than nothing – 50 percent is better than zero but it’s not 100 percent. You need to arrive at an acceptance of 65 percent for new bonds and 85 percent for the old bonds from a decade ago. That will shoot up automatically to 100 percent via the class action clauses.
Regarding why “I’m optimistic” within the fragmented information we all have, I’d say there are various reasons. The first is that regulation time, to use a football metaphor, ended a few months ago on April 22. Extra time, to continue on the same lines, ended on May 22, that 30-day grace period. So it’s been game over for almost two months now and yet none of the players has gone to the dressing-room – neither the government nor the creditors, which indicates a willingness to agree. They’re all there, still on the pitch, marking time to see if an agreement emerges. That’s a first sign. The government knows that, unlike its predecessors with different sources of financing (like the privatisations of the 1990s, soy export duties in this century, the Central Bank and the AFJP private pension funds in the first half of this decade and overseas credit in the second), it now has none of these nor, with three-and-a-half years still lying ahead, can it live off the Central Bank because this would trigger instability, inflation and a collapsing exchange rate. It knows that’s not an option.
But the bondholders do not want a default either. They’re not vultures but genuine creditors.
We went to ask for voluntary credit where it says 100 on paper while the market says 40 and now Argentina is offering to pay 55. That’s a reasonable agreement and the bondholders are saying so too. I don’t think an agreement is going to fall through for a difference of two or three cents.
Having said this, was it the best way possible? A negotiation is a film, not a photograph and its outcome depends on how it unfolds. If you look at the first offer, you see two photos, of one side and the other, but what happens in the middle is what matters. It’s important to register the messages during the negotiation, that’s what defines the epilogue. Perhaps it was a long period, probably a bit longer than necessary.
Was that extra time also constructed by the pandemic?
The pandemic shocked everybody, obliging everyone to reset their heads – both debtors and creditors.
Will there be reciprocal concessions? Argentina also says this is the last offer.
Argentina has said that several times. If we take what I said about a film, that doesn’t seem to me something to criticise. An immovable proposal dies at that very instant. When you make an offer far removed from the value of the presumed agreement, you run the risk of what happens when you go to buy a car worth 55 and offer 40. It does not make much sense to start so wide of the mark. If you begin within a zone of agreement, there is less wear and tear. When you are negotiating with 45 million passengers aboard and you aim for the crossbar, you are committing an imprudence. If you hit the crossbar and the ball goes in, everybody applauds but if it’s an inch out, it’s a disaster. This is not like buying a car, where it is a private concern whether it is beneficial or not, you’re in charge of public assets.
It’s often said that the debt was used for negative aims like capital flight, for example. Explain to us your view on that.
If there hadn’t been a deficit, there would be no debt. A state has tax revenues and expenses: the salaries of teachers, doctors, the police, deputies and their advisors and also ñoquis (“parasites”). The expenses of governors, provinces and municipalities.
Would that be financed by debt, taxation or inflation?
Yes, I hadn’t got round to inflation yet. But to pay all that jumble of expenses, you have to organise yourself. If you’re religious, you have to place the Bible next to the furnace. If agnostic, you can order things any way you like.
Vicentin [the agro soy-crushing firm] would also be an expense. Out of all this what is financed by debt? The answer is the superfluous, what could be avoided when the taxes don’t suffice. The debt went to finance that spending, we contracted debt because there were more expenses than revenues. It’s like in a household. In a month a family can spend beyond its salary, that’s genuine – the function of credit is to facilitate consumer spending. It happens in every country.
If I cannot increase taxes nor lower spending, the ways I have of financing myself are debt or inflation. But during Macri’s government, there was the same inflation as under the previous government, which did not need to run up debt, in a context where the Argentine standard of living did not improve, so that debt would seem spurious.
Now we’re reaching the topic of inflation. The question is who causes it? The person signing the IOU, who when the bill arrives, uses the credit card and and signs for something they are not going to pay? Did spending increase in Macri’s government or beforehand? Because spending carries its own momentum – it rises fast and drops slowly.
There was capital flight in the governments of Cristina Fernández de Kirchner and Carlos Menem. It has always existed in Argentina, according to that line of reasoning.
Capital flight occurs because we do not trust in the peso as an instrument of value or for reserves and we do not trust in savings or in a financial system which has already proved confiscatory twice in the last 30 years with the Bonex Plan and the corralito bank deposit freeze. We do not deposit our savings in pesos, instead we hide dollars under the mattress or stash them abroad. This happens because of mistrust.
It could be answered that with capital controls there would have been less flight.
That is something else. But for less debt there must be more adjustments in spending. You have to pick one of the two critiques – you cannot criticise debt and austerity at the same time. Less debt means less spending or more taxes.
Thinking of those who voted for Alberto Fernández, another form of financing was inflation and the government prior to Macri did not run up debt but had the same inflation. In contrast, Macri’s government sought to lower inflation by not printing money so it went into debt instead but it increased debt without lowering inflation. There was a Gordian knot there.
It’s because cause and effect are not contemporaneous. The inflation under the Macri government exploded in the last year due to inconsistency in economic policy and because of the exchange rate, not printing money.
In the first year inflation topped 40 percent.
That was momentum coming from repressed inflation. In 2015 it was 25 percent but with cepo capital controls, an overvalued currency (nine pesos per dollar) and frozen utility rates.
What you would say to people is that had [Peronist candidate Daniel] Scioli won [the election in 2015], inflation would have risen just the same. Without comparing the governments of Macri and Cristina, another “what if” – what would have happened with a Peronist triumph [in 2015]?
I’d like to depersonalise this. It’s not Macri’s inflation or Cristina’s debt but the inconsistency of the programme. Yes, as you said, we should have placed more controls, the answer is yes. This probably has to do with our first reflection: whether Argentina can, with its history of instability in the last 50 years, have perfect capital mobility. The answer is probably no.
And as to whether that would have lowered the debt and capital flight, the reply is yes. The same goes for spending. It was all imprudence or inconsistency, which ended as a lack of wellbeing. We did not grow or we did not grow end-to-end in our four years, ending up with high inflation. I recognise that.
What would you have done where the state is necessary in the face of the pandemic?
The pandemic is leaving us naked. We have 35 percent poverty, and not just from now, with a health system costing 10 percent of GDP which we do not trust. The state lacks funds because we did not save in periods like the previous decade with soy prices so high. You encounter five million informally employed who work who knows where, three million pensioners who do not use their credit cards, 70 percent of PyMES small and medium-sized firms who do not know how to put together a credit folder.
It would be an error to transform the pandemic into an excuse to confirm our prejudices. Ditto for slogans such as affirming that we have to find the way out with “more state,” which is one thing in a country where the state is 23 percent of GDP like Chile and another where the state is 42 percent like Argentina. We’re going to have a primary deficit of seven percent of GDP, which is something we’re going to finance with debt, taxation or inflation. Taxes are cash down while debt and inflation are post-dated taxes.
We must do what the whole world is doing – sustain incomes and preserve jobs via ATP wage assistance with surgically acute reflexes so that when we turn the corner, we can rapidly undo everything we have done during the crisis, stimulating the reallocation of resources from the most damaged sectors which will find it hard to recover towards the most promising while creating labour laws which permit that reallocation of resources such as working from home – an issue which is now the subject of legislation, I don’t know if in the correct direction. The banks will have pockets of liquidity and capital to use, which will lead to the habitual credit norms being relaxed. That’s the time to use this liquidity. They want to make the EFE emergency family benefit universal. I understand because we’re going to come out of this poorer but I’ve read that the state extends benefits to 19 million people. Are we heading for 22 million? We cannot have 22 million people on monthly social benefits out of 45 million inhabitants.
You have to calibrate very well, not just with slogans. You need an open economy. We face more opportunities than risks with the new patterns of world trade. We sell food and we sell minerals and that’s not going to fall away. If the global value chains are interrupted, regional ones could appear. We need to befriend Brazil...
An enormous number of businesses and shops have gone broke or will do so. What is your prognosis?
That’s why we have to talk about the quarantine, it’s an extreme solution. It plants a dilemma, which is what combination of infected and unemployed people we want to have. The president has formulated it dramatically – there’s no coming back from death whereas there is from unemployment. But that’s something very short-term.
Unemployment can turn into death in the future.
Would we accept 100 percent poverty in exchange for zero percent death? No. With that criterion we would ban cars because of the accidents. We tolerate a certain level of accidents in order to move around. It’s the same thing. You can have a blanket solution for one month but no more because it’s going to lead us to 100 percent poverty. Here it’s lasted over three months. If you tell the corner bar that they have to close down for two months, they might say yes but if you tell them four and then six, they’re going to say no for sure. We may have locked down prematurely from not knowing what was going to happen in two months without contingency plans for different scenarios.
Having said this, what the government is doing is chasing an optimal goal of zero contagion and to attenuate unemployment, they’re financing the IFE and ATP benefits by printing money. But we may be adding a third photo, that of inflation. Many leaders celebrated having a further month of IFE. But it’s a problem which matures at different times because if you achieve zero contagion at some point, the unemployment appears in the second month and the inflation makes itself felt in the sixth. But you don’t design public policy thinking of next Monday but about next month and the next half of the year. The government is unclear. Its fiscal, monetary and financial plans are all unknown.
What closing message would you like to leave?
In these times we leaders have the responsibility to be prudent and I say that also regarding the way we communicated about the 9 de Julio march or the death of Fabián Gutiérrez. I’m referring to action and reaction. There are no excuses for imprudence.
In the economic sphere, we need to think in terms of consensus – we cannot reset the economy every four years as we have been doing since 1945 with these two antagonistic models, as signalled by Pablo Gerchunoff, whereby one comes along and does the complete opposite of its predecessor. These two models yearn for the past and dream of the future.
One thinks more of the progress offered by the future, sacrificing something in the present, and the other thinks that the future will never arrive, mortgaging it on the altar of the present.