Argentina retaining the Copa América in Miami Messiland (with messy the word for that final’s organisation)? Donald Trump’s ear as the latest shot heard around the world? Thursday’s 30th anniversary of the bomb horror at the AMIA Jewish community centre? The latest on Loan? These would be most people’s headlines from the past few days but President Javier Milei and his economic team probably think otherwise – they would take pride in having kicked off the second half of the year by ending the quasi-fiscal deficit just as they turned fiscal deficit into surplus at the start of the first, presenting that as the week’s biggest headline.
Speaking from an Idaho summer camp for billionaires, Milei and his Economy Minister Luis Caputo announced the demise of the quasi-fiscal deficit via a mechanism which could very simplistically be described as buying dollars at the official rate and selling them at the parallel rate while absorbing the peso difference to shrink the money supply. Economists have raised doubts as to whether foreign currency reserves can be maintained amid a faltering inflow at sufficient levels to reassure bondholders of their money back with country risk moving beyond 1,600 points and precluding any credit abroad. Without the latter there is a vicious circle because the cepo capital and currency controls cannot be lifted without investment into Argentine growth and the investors are not going to come until the cepo is lifted.
But assuming that Milei and Caputo are right and that the quasi-fiscal deficit has now been consigned to history, what is that history? As it happens, Britain had a Kwasi fiscal deficit just two years ago – Kwasi Kwarteng, the hapless and short-lived Chancellor of the Exchequer of the equally hapless and short-lived Liz Truss (the ex-PM who also became an ex-MP earlier this month), whose major income tax cuts and soaring interest rates unbalanced the budget, triggering financial chaos – but the history of the quasi-fiscal deficit is rather older than that.
How old? The 1976-1983 military dictatorship has such a multitude of sins to answer for – the disappearances, a lost war and quadrupled foreign debt, among others – that the quasi-fiscal deficit is rarely included in that list but economic historians generally date its origins to 1977 in Argentina’s case. Ronald Reagan, who entered the White House at the tail end of José Martínez de Hoz’s stint at the Economy Ministry, famously defended his supply-side Reaganomics by saying: “I never worry about the deficit, it’s big enough to take care of itself” but Dr Joe was not so brazen – his deficit topping six percent of Gross Domestic Product needed a place to hide and found it in the quasi-fiscal deficit. If previous governments this century have generally resorted to printing money to cover their deficits for lack of any credit abroad in the years following the 2001 default, Martínez de Hoz had no such problem in the decade of petrodollars but the military junta he served was a high maintenance partner along with the costs of propping up an overvalued currency so after quadrupling the foreign debt and doubling the fiscal deficit, he needed a further receptacle for all the red ink.
So what is the quasi-fiscal deficit in its Argentine incarnation during the past half-century? That deficit corresponds to the Central Bank created in 1935, not the Treasury. A backed currency in theory implies the Central Bank’s assets (like international currency reserves and dollar bonds) being equal to the money supply and bank deposits (liabilities in accountancy terms) so when the Central Bank starts incurring other liabilities, you have a quasi-fiscal deficit. And those liabilities have come to infest the Central Bank via all those bonds issued over the years to shunt the Treasury’s fiscal deficit their way – the Lebacs, Letes, Lecaps, Leliqs, puts and all the rest of them.
Even if these bond markets have been increasingly dominated by state entities, all other takers amount to a transfer from the public to the private sector although neither has won. The private sector has been relentlessly crowded out of the credit market by these bonds, whose renewal until this year has forced the state into ever higher interest rates in a vicious circle snowballing the deficit – when Milei quantified the latter at 17 percent of GDP in his state-of-the-nation speech to open this year’s parliamentary sessions last March, he went on to explain that fully 10 percent was quasi-fiscal, doubling the fiscal deficit of five percent of GDP (with the remaining two percent the trade gap). Since then he and Caputo have set about melting the snowball by the simple expedient of progressively reducing instead of increasing interest rates but this discourages savings in a country already notoriously averse to saving – at least not in local banks because adding the estimated US$430 billion stashed away abroad might put the Argentine savings rate on a par with the United States – when saving and investment rates are highly correlated worldwide.
If this turnaround transpires and credit can be shifted from the public-sector borrowing requirement into private hands, it could make an invaluable contribution towards offsetting battered wages and pensions in jerking the economy into growth. But the momentum of the quasi-fiscal deficit since its arrival in 1977 (perpetuated by the Central Bank under Domingo Cavallo’s assuming private-sector debt in 1982) has been non-stop. Many things changed when the elected government of Raúl Alfonsín replaced the military dictatorship in 1983 but not the quasi-fiscal deficit (albeit at only around a quarter of recent levels) with not even the Austral Plan of 1985 making much of a dent. Carlos Menem replaced a hyperinflation-stricken Alfonsín in mid-1989 but the Bonex Plan in the closing hours of that year converting bank deposits into bonds made the quasi-fiscal deficit endogenous by creating new interest rate obligations. Cavallo’s convertibility temporarily stunted the quasi-fiscal deficit with a statutory ban on new liabilities not covered by Central Bank assets and reserves but a persistent fiscal deficit soon found its way around that. Once Kirchnerism fell into the bad habit of printing money, the need to “sterilise” those excess pesos perpetuated a quasi-fiscal deficit which was consistently underestimated by the 2015-19 Mauricio Macri interlude, allowing the Leliq snowball to gather momentum. Acquiring epic record dimensions with Frente de Todos.
And now there is a quasi-solution to the quasi-fiscal deficit – one step has been taken forward but will there be two steps back?
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