7/12/2022 - Economy and Finance

Argentina: The economy in which everything acts wired

By Ramiro Sciandro

Argentina: The economy in which everything acts wired

In recent months, in particular in recent weeks, the unsustainable economic model has become especially transparent. It's a model of holding, juggling, putting everything under the carpet. Tax, monetary, and exchange imbalances are re-evaluated with each other, and are associated with short-term solutions.

By placing a reference point, we can start counting the tale from the dynamics observed in the market of sovereign debt on weights in recent months. In April, the national treasury was unable to renew all its salaries in weights; it attempted to continue to put adjustable instruments for inflation and tied to the dollar in long time, and found itself with a market that was no longer willing to invest in bonds with deadlines after December. Thus, in a context in which uncertainty about the immediate direction of the economy began to mark the times, the treasure corrected in the month of May by placing almost exclusively letters with maturity of less than 7 months. With this strategy, more than 996 billion pesos were made, which served to renovate more than 922 billion monthly deadlines, but also began to seriously thicken the maturity schedule for the coming months. In early June, the film repeated itself; the treasury faced obligations over 617 billion, with an increasingly reluctant private creditor market in accepting new positions.

The investor's logic is clear; the lack of credibility of the Treasury had already begun to significantly limit the distance in the time that the ball of deadlines could be patented. The inability to put long deadlines leads to the fact that the debt is boiled in a few months, which eventually becomes unsustainable. And the driver exposed to this debt faces unfailing questions: Does the Treasury have the credibility to achieve the voluntary renewal of such a mountain of deadlines? Profit less and less likely. If you cannot be financed by placing new debt, you must do so with more emission. But is this government willing to deal with the consequences of a huge mass of weights for the market? Will it not be preferable to repeat history and compulsively exchange these problematic titles for instruments of much less liquidity, win in some distant future?

At the beginning of June, the climate of distrust among investors reached a determining point; a strong withdrawal from the market of letters and treasury bonds by common investment funds (FCI), which no longer tolerated the degree of exposure.

In the midst of this chaos, the Central Bank was forced to intervene to prevent the value of sovereign instruments from being deducted, injecting liquidity into funds and re-buying repudiated securities. That is, as has so often happened, the anticipation of the debt crisis, the anticipation of the debt crisis. And after artificially sustaining the price of the treasury bonds, the Central Bank left to receive the dead. The race is financed, the pure emission. Between 13 June and 4 July (last given available) the Central Bank would have intervened in the secondary market for nearly 770 billion pesos.

And where were the fresh weights? At this point it is important to understand “the path of the note”:

It begins with the fund, which sells its public debt title to BCRA. The fund then redirects money to immediate liquidity funds, as can be the deposits, in the so-called “money markets”. Alternatively, money directly finances the payment of a part, and ends up in the hands of a fund participant. In either case, with greater or less delay, the note ends in the hands of an Argentinean who, in the midst of uncertainty, does what he believes best to protect his money; the exchange for goods and services (importable, dollar substitutes), and for dollars, as it is and through the market that allows it. If this note buys reservations, we arrive at the end of your cycle. If on the other hand change hands in the market of goods or in the parallel market of changes, it finally ends up in the hands of someone who finally re-posts in the financial system. The bank will then make its own and deposit this note in the Central Bank, against an increase of Leliqs in its assets.

In short, the note goes in and out. Ex pos, the circle is the same. But in the middle, that note fueled inflation, or the pit, or the loss of reserves, or everything that precedes. And at the end of the story, the Central Bank continues to inflate its balance sheet, accumulating a huge stock of leliqs in the passive, and a stock of assets of the treasury, mostly CER obligations that no one seems to want to touch or with a stick.

The BCRA, of course, tried to take steps to reverse this dynamic. Eventually, he began to restrict the supply of leliqs to banks, hoping that in this way the funds and financial institutions will begin once again to demand sovereign obligations. The answer was not the desired; the banks had less investment options, and began to restrict their offer of fixed deadlines, because they had no way to make this operation profitable for them. The customer who could not make that fixed deadline, of course, gave an alternative destination to his note.

Already with a good proportion of the bonds paid in June in the power of the BCRA, the treasure announced a new voluntary exchange of this debt, which allowed it to extend the deadlines of 360 billion pesos of maturity. From this maneuver, they ingenuated to close June with positive net placements. The problem is, of course, that all of the instruments placed in this transition have triggered the deadlines for the next 6 months, which are already at unsustainable levels. It should also be noted that 70% of these deadlines are indexed to inflation. According to the projections of the study Arriazu Macroanalistas, to maintain the rhythm of current inflation, debt salaries in weights to which the treasure should face December add more than 4.2 billion pesos. That is, 150% of the current stock of banknotes and coins in public power.

These weighted needs are, of course, a primary budget deficit that is far from being found on the 2.5% track of GDP per year. In May it fired to 162 billion pesos, in June, the seasonality of pension and operating expenditure (such as the public servants' guilds) will likely lead to over 300 billion, and after that, the dynamics that perceive the account of energy subsidies when we are already entering the coldest months of the year. All this promises that June will be far from being an isolated event with regard to the solvency problems of the treasure. The move of emission and sterilization via Leliqs is probably repeated, with its logical impact on confidence, inflation, breach and reservations. In this case, it would not be strange that at some point the debt of the central bank begins to suffer the same fate as the debt of the treasure. And if, instead, the BCRA insists on its maneuver to restrict access to Leliqs, the monetary impact will be even deeper.

And in the middle of this dynamic, what is done to stop the loss of currency? The pressure is absolute. After the first 5 months of the year, BCRA's currency purchase in the exchange market deteriorated more than $4,800 million over the same period of the previous year. This deterioration occurred despite the fact that the exporting sector settled about $6 billion more than between January and May 2021. In turn, in the first 4 weeks of June, the net purchases of the central bank were deficient in $600 million.

Freeing the exchange rate does not seem to be a sensible option; without a comprehensive and consistent macroeconomic program behind, free fluctuation would essentially be a monetary suicide. In a context such as the current one, the exchange rate is the compass with which companies are guided in pricing. To release it would no longer trigger a spiralization at all other prices of the economy, whether wages, tariffs, goods or services, whether transable or not. In turn, little would make a currency adjustment to reduce the real weight of the needs on government weights; expenditure on subsidies is naturally linked to the evolution of the dollar, since they originate in the import of fuels. Moreover, although the acceleration of inflation can partially help to cover social expenditure in the short term (since they adjust back), they would quickly recover. And in the matter of Treasury debt in weights, significant adjustments cannot be expected; 85% of the current stock is indexed, either to inflation or to the exchange rate.

The real solution would be to deal with the counterpart of excess currency demand, which is the excess weight supply. But it is considered that there is no room for that. So the strain is being pressed, and a torniquet is being put on imports, and with that we water with the little we have left.

However, what happens to the activity? Practically everything that occurs in the national industry has some imported component, with which restrictions are paralyzing. And the nominal instability, as always, also plays its role; the seller not only makes it clear if you will have new inputs when you should reset them, but has no idea what price you will have to buy them. This uncertainty implies that many transactions are no longer carried out. And, of course, less activity will be lower collection, and greater fiscal deficit that should be achieved with greater emission of notes... and we're back in the truck.

The cycle is clear; a fiscal deficit that only increases the erosion of government credibility in debt markets leads to a boiling of needs in weights. The solution is to finance it with emission, and then sterilize overweight with an increase in the almost fiscal deficit. In the middle, the gap and inflation grow, and the reserves continue to deteriorate. We solve by breaking the current account, and paralyzing economic activity. Distrust is deepened, poverty, and political and social cost increases even more. Then, in a Lysian economy, we naively try to recover income with parity every 3 months, contributing to inflationary dynamics. And of course, we insist on halting the increase in prices on the basis of agreements. We attack the symptoms, not the disease. Everything acts wired.

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Ramiro Sciandro

Economist graduated from Universidad Torcuato Di Tella, on his way to finish his Master's degree in Economics at the same institution. Former university professor and academic research assistant, currently macroeconomic analyst for consulting purposes. I worked for 2 years at Arriazu Macroanalistas, with a special focus on the local economy, and currently I work in the macro research team at BlackToro Global Investments.

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