It was bound to happen. After appearing to walk on water for months on end after the cataclysmic exit of his predecessor at the Economy Ministry, Sergio Massa has begun to seriously feel the heat of an economy that remains up in flames. When the going gets tough, the tough get going says the phrase, which could be adapted for the current situation to, “when the going gets tough, the tough get pushed to the edge.” The man from Tigre has pulled out an unorthodox and pragmatic playbook aimed at complying with the International Monetary Fund while trying to absorb as many dollars as possible in order to bulk up reserves, yet the Central Bank’s coffers are always running on empty. The size of the fiscal hole coupled with voracious dollar appetite given a flight to quality away from the peso means that it’s never enough. Add exogenous factors like an unforgiving drought and you have an explosive cocktail. His latest move, a compulsory bond swap with state entities that trades dollar-denominated debt for peso-backed paper sparked the ire of multiple sectors, from the anti-Peronist opposition to hardcore Kirchnerites, something that assimilates the tensions felt by Martín Guzmán during his days occupying the hottest seat in the house. The political pressure is mounting, a situation probably tied to the electoral calendar but also the fact that inflation seems to be going up rather than down. As things stand, the horizon for projections and expectation-setting has become reduced to a minimum.
Massa and his team are expert communicators, which is why it is surprising that the compulsory bond swap announcement was rushed on a late Tuesday afternoon when information of an early morning breakfast with bankers came through the wires, sparking all sorts of rumours. Earlier that day the talk of the town was an “off the record” battle between Massa and President Alberto Fernández’s people. Putting aside the Argentine incapacity to understand what “off the record” actually means, Massa’s spokespeople accused the president, his press team, and arch-nemesis Daniel Scioli of giving no credence to rumours of a further exchange rate splitting, which in a certain way is a de facto devaluation of the currency. Ultimately his wife, Malena Galmarini, pointed the finger directly at the Casa Rosada, claiming in the same conversation that she would “love” for her hubby to be president. Those close to Alberto denied the accusation and orchestrated a public appearance with Massa, hug included, for the following day.
The market jitters were felt immediately as Massa announced the debt swap in an operation to shore up some US$4 billion in firepower for the Economy Ministry to intervene in currency markets. State entities sitting on dollar-denominated bonds under both foreign and local law would sell or hand over said paper and receive freshly minted Argentine bonds due in 2036. These are protected for inflation and devaluation, but the payout is in pesos. For several weeks now the parallel exchange rates had gone on a troubling rally as investors flocked to the dollar through the CCL and MEP exchange rate mechanisms, which are both legal.
The latest inflation reading coming in at 6.6 percent for February on a monthly basis and at 102.5 percent annually added a fateful brick to the wall. Fears over the government’s capacity to service a snowballing peso-denominated debt-fuelled talk of a forced restructuring or default. An economic slowdown that could tip the economy into recession was confirmed by the INDEC national statistics bureau figures that showed a 1.5 percent contraction of GDP in the fourth quarter. And a report by the Rosario Board of Trade indicated the drought would erase US$20 billion from Argentina’s economic output in 2023, approximately three percent of expected GDP. At the same time the primary deficit in January and February hit its worst figure in 30 years, forcing the Economy Ministry to essentially cut all spending in March in order to comply with limits stipulated by the IMF. Massa had already managed to renegotiate some of the terms of the IMF agreement yet deficit reduction stipulations have been, up until now, the most stringent. The more the Fund concedes to Massa, the greater the reduction in market confidence in that the agreement serves as an expectations-setting anchor, one of its main objectives aimed at restoring credibility in the Argentine economy.
Not only is the economic situation troubling, but Massa’s bond-swap agreement forced the ANSES social security agency to fork over its dollar-denominated assets, leading to a swarm of criticism from both sides of the aisle. The Economy Minister was accused by the opposition of financing the deficit “with our grandparents’ money,” while Kirchnerites claimed this operation favoured “his friends in the financial sector.” Both claims have a percentage of truth. The bond swap did take the dollarised portion of the portfolio held by ANSES’ FGS fund and swap it for peso-denominated paper. And while it is protected by its dual nature (“hedged” for inflation or devaluation, whichever is worse), it is backed by the limited faith and credit of the Argentine government. Regarding the financial sector “buddies,” they will be buying deeply discounted dollar-denominated debt while restrictions will be eased in the bond market, giving greater financial access. The Kirchnerites are accusing Massa of going “full Menem,” referring to the Peronist leader who was president during the 1990s in which Argentina was the poster child of neoliberalism. They forget Néstor Kirchner called him the “best president since Perón,” as the then-governor of Santa Cruz and his wife Cristina supported the privatisation of YPF state energy company leading to a billionaire payout for their province.
It’s been clear for some time now that Massa’s plan to resist through Peronist gradualism could reach a limit in terms of how many sources of fresh funds he’ll be able to conjure up. Cristina Fernández de Kirchner and her troupe gave him free rein as long as he didn’t overstep the boundary of enacting a shock plan to attack inflation, which included a sudden devaluation. Their support seems to be drying up as the economy continues to deteriorate and inflation fails to fall. An implicit electoral deal with the president, mentioned previously in these columns, could be coming to an end as Alberto senses the weakness of Massa’s current position, beginning to lose control of the economy. And the opposition, happy to see the ruling Frente de Todos coalition tear itself apart, continues to add fuel to the fire. We’ll see how long he’ll be able to quench those flames with dollar bills, and if that’s enough to make it safely to the election.