In a media interview in late 2016, when that was his main job, Javier Milei criticised the Mauricio Macri government’s intervention in the labour market.
“They should decree the suspension of the Law of Gravity and jump off the tallest building of Buenos Aires to see what happens,” he said.
Now, the President seems to be the one fighting gravity. Inflation in the first half of the year has been almost 80 percent but the official exchange rate has only increased by 2% per month, moving from 830 pesos per dollar in January to 940 now. Had it followed inflation, it would now stand at around 1,450 per dollar, which is the approximate value of the parallel exchange rates in recent days.
Milei told Argentines not to panic, even as his government exhibited panic through a series of clumsy announcements ultimately boiling down to the most anti-libertarian measure of all: selling some of the few US dollars the Central Bank has in its coffers to try to contain the price of the greenback on the unofficial market.
Three weeks after the government managed to push its first two bills through Congress, there is a growing sensation that President Milei is at a crossroads. He needs to decide whether to seek short-term gains and delay the pain or endure the pain now for sustainable gains. At first glance, he has picked the former.
Milei has two economic jobs: lowering inflation and getting the economy going. So far, he is halfway through the first goal and nowhere with the second. All eyes are on Economy Minister Luis Caputo, whose job will be on the line if this latest scheme fails.
Caputo posted another month of budget surplus in June, wrapping up six straight months of positive fiscal numbers, something unseen in 16 years. However, in both reaching that result and planning the way forward, Caputo is too much of a trader to have a vision beyond the next day’s market close. He applied a similar recipe when he was the top economic staffer during Macri’s administration: he quit as Central Bank governor in September, 2018 after only three months on the job amid a run on the peso – and after dilapidating a bunch of reserves.
This week, Milei presided over the first Cabinet meeting to include Federico Sturzenegger, the new Deregulation and Government Transformation Minister. Sturzenegger is the obvious competitor for Caputo’s job. After the meeting, the President walked to the Casa Rosada balcony to wave to some passers-by, with Caputo next to him. In a recent speech, the President said that Caputo was the best economy minister in the history of Argentina.
This wholehearted endorsement is difficult to understand, given that Caputo was not part of his campaign and he barely knew Milei before he landed the job. By flooding Caputo with praise, the President is painting himself into a difficult corner in which his minister is now a very costly buffer, at least from a reputational point of view.
Besides the initial market reaction to the reserves-for-peso-appreciation tactic, the resignation of two members of Milei’s team of ad honorem economic advisors over the last fortnight adds to the feeling that Caputo is increasingly on his own. Consultant Fausto Spotorno was shown the door in early July when he said the market “expected more” from the economic team. This week, textile mogul Teddy Karagozian was fired because he said in a TV interview that the peso was appreciated and that the private sector would have no other alternative than to fire people.
Argentines became used to the expression “country risk” in the run-up to the massive default crisis in late 2001. The phrase refers to the Emerging Markets Bond Index (EMBI) put together by JP Morgan. In August, 2001, four months before the peak of the crisis, that index stood at 1,500 basis points. This week, after Milei announced the new measures, it climbed to over 1,600 points. The index simply tries to measure how unlikely it is that a country will be able to service its debt, given the market price of its sovereign bonds, which in turn are the result of many (free) individual decisions.
Domingo Cavallo was the economy minister then. Milei once said that Cavallo was the best minister the country had ever had – like Caputo now. Cavallo is now critical of Milei’s short-term management. Cavallo became very angry with markets and critics in 2001. Just like the law of gravity, he learned the hard way how useless it is to fight against them.
* Marcelo J. García is a political analyst and Director for the Americas for the risk consultancy Horizon Engage.
--TIMES
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