Weathering the storm

The “Still waters run shallow” headline given to last Saturday’s editorial proved sadly prophetic with each week the total opposite of the previous in the helter-skelter month ending so turbulently today. The first week saw pre-electoral calm trusting in an indecisive PASO primary; the second was convulsed by market frenzy in reaction to a huge Kirchnerite triumph which was a complete shock and yet predictable at the same time; the third gave the new Finance Minister Hernán Lacunza a honeymoon of eerie calm with the exchange rate at the start and end of the week almost identical, only for the storms normally accompanying Santa Rosa yesterday to be far more economic and political than meteorological.

Political and economic but also psychological. In other times such breathtakingly obvious comments as President Mauricio Macri linking the market madness since August 12 to the previous day’s electoral result, or PASO victor Alberto Fernández saying “He must be counting the days,” just after Macri had enumerated 59 days to go for the elections, would produce a yawn, but in this climate they trigger an almost unbearable tension. On the economic front such cold mathematical facts as Central Bank reserves being able to repeat this week’s sales for several months or the almost unprecedented solidity of the financial system offer no guarantees against a run on the banks.

Returning to real events, the main recent development has been Lacunza’s emergency “reprofiling” of debt under the nose of the International Monetary Fund (IMF) mission, in town this week with all eyes on the IMF tranche of US$5.4 billion due in mid-September. Desperate measures tagged as a “selective default” by Wall Street and contradicting the Macri government’s most basic premises but nevertheless accepted on a “needs must” logic of the end justifying the means in keeping a pro-market administration afloat.

Lacunza’s initiative – rolling over some US$16 billion of short-term local bonds (holding back 60 percent for six months and only paying 15 percent on schedule) while opening up voluntary debt-bond swaps for the medium-term – has at least two virtues, one financial and one political. On the monetary front, by taking the pressure off Treasury obligations it enables the Central Bank to concentrate almost all of an impressive firepower still comfortably topping US$50 billion on defending the exchange rate at the 60-peso mark, a figure enshrined by both Lacunza and Alberto Fernández at different times.

And politically it places the ball in the opposition’s court for almost the first time, since a minority government will be submitting the measures to Congress for approval. An opposition so quick to blast its own proposals such as food tax cuts and renegotiating the debt (even if “reprofiling” is Lacunza’s verbal invention) once they come from government lips will now be under more pressure to either come on board or start presenting some constructive alternatives.

Yet with every sympathy for the urgency to improvise something in the face of this crisis, there are both pragmatic and conceptual objections to these measures which should not be ignored. For all the good intentions, the “selective default” is still an unprecedented slap in the face of the markets – even in Argentina no government has ever failed to honour its own debt – but at the same time exchange markets remain totally free (even for tourism abroad), which seems to be asking for trouble. An unsatisfactory halfway house between a government being true to itself and going all the way down the road of populist electioneering. There are no easy answers – free markets seem to open the door to capital flight (as Alberto Fernández has been all too quick to point out) but at least money previously came in, whereas the Kirchnerite capital controls of 2011-2015 destroyed a third of trade and blocked foreign investment more effectively than capital flight.

The government is trying to neutralise populism with populism but history teaches us that fighting fire with fire is playing a dangerous game. The French Revolution overthrew royal tyranny only to end in the Reign of Terror, while in Britain Boris Johnson’s suspension of the Parliament whose majority is supposedly the basis of his authority might remind us that Oliver Cromwell led the parliamentary cause to victory against a King Charles I expelling five members, only to abolish Parliament altogether and establish a military dictatorship. Perhaps most discouraging of all is yet another confirmation of the impossibility of saving and creating capital markets in Argentina.