December 13, 2013
This little pig went to Market
Slow return to international scene
For once Argentina and the rest of the world (at least as represented by the Nobel Economics Prize award in Stockholm) were on the same page last week — the name of the game is money markets.
And here we are not only talking about an exuberant Bolsa which has virtually doubled this year — dancing on the Titanic while the United States teetered on the brink of shutdown with the rest of the world fearing the domino effect (finally averted yesterday but only for the next few months). Over the past week Amado Boudou’s acting presidency might have seemed totally hamstrung in terms of the election campaign but his more open attitudes to international finance have left their footprint — it would be an exaggeration to say that his protégé Hernán Lorenzino is measuring up to his title of Economy Minister but he no longer seems to have one foot through the exit door.
Unblocking three billion dollars worth of World Bank credits in exchange for a pledge to honour some half billion dollars worth of CIADI international arbitration rulings against Argentina were baby steps towards returning to international capital markets but the precedent is significant — not least because many of these CIADI claims had been relinquished to hedge funds by despairing creditors so that redeeming these claims would break through the taboo against any truck or trade with “vultures” (in the ornithology of the Cristina Fernández de Kirchner administration).
A nod might be as good as a wink to a blind man but not to global finance — each new step will be fraught with difficulties, quite apart from the political constraints of Boudou or a lame-duck presidency. After the World Bank and CIADI, the logical next step would be the Paris Club but settling this defaulted debt would be pure outflow — almost nine billion dollars or over a quarter of Central Bank reserves. The late Néstor Kirchner deployed a similar proportion of Central Bank reserves to pay off the International Monetary Fund in early 2006 but these were then a renewable resource — the currency curbs of the past couple of years seem far more effective in preventing any inflow than exodus (dollars will not come in unless they can also go out). Rather than the accidental presidency of Boudou, the past week’s glasnost was largely driven by the dead end of meeting borrowing requirements via the steady drainage of Central Bank reserves but these depleted currency holdings also conspire against paying off the Paris Club.
Yet the IMF has always been considered the key front. Néstor Kirchner’s use of almost 10 billion dollars in reserves to pay off all debt to the IMF was considered a prelude to emancipation from IMF monitoring to massage inflation data at will and slash billions of dollars off index-linked bonds over the years. This strategy was clearly understood as such by the IMF and the only way to end this covert default would be to end the implausibly low inflation figures as from early 2007 by speeding up the introduction of the new and serious nationwide price index long promised.
Yet finally coming clean on inflation in no way solves the problem — projecting this newfound honesty into the exchange rate in the form of devaluation would have devastating consequences and ditto for relative prices. Indeed the terrifying dimensions of the problem almost dictate denial — the more so in a country where a solid majority seems convinced that the cure is worse than the disease.
But let us return to that ebullient Bolsa, which seems almost a case study in Alan Greenspan’s “irrational exuberance” (or “animal spirits,” to quote one of Monday’s Nobel Prize winners, Robert Shiller). Especially irrational here because not only do the markets seem to be spotting a glowing future which everybody else is missing amid the general gloom and doom — their optimism is in inverse relation to the economic cycles. Thus the second quarter of this year was pretty buoyant without much spectacular reaction from stocks and shares — now that things seem to be grinding to a halt in the second half of 2013, the Bolsa is bursting through the stratosphere. And quite apart from economic slowdown, the political and institutional backdrop could hardly be worse with a dire capital markets reform facilitating intervention in the board of directors of almost any company.
Yet markets always have their logic even if the reasons in this case are not the most typical. In part it is simple backlog — share values have been lagging behind for years (despite Argentina being one of the world’s fastest-growing economies in the past decade) with plenty of catching up still left to do. Not only had share values been depressed for years but last year’s YPF nationalization knocked them back yet further.
The CFK defeat in the August primaries was certainly a turning-point — on the assumption that almost any future administration will cripple the economy less, it seems smart to buy cheap and sell dear in a future boom rather than wait for take-off. Perversely enough, many of the things most wrong with the economy seem to be benefit the stock market — almost all the other areas to invest in have been blocked off with companies not even able to distribute dividends, which are thus ploughed back into capital stock.
All of which does not leave much space for the third topic of this column — Shiller and his two fellow-winners of the Nobel Prize, Eugene Fama and Lars Hansen — which is probably just as well because they are far too clever for me. If CFK is especially scathing against assessment agencies, there has been growing worldwide skepticism since the collapse of Lehman Brothers just over five years ago and this fundamentally empirical trio has done its bit to point out the irrational and the illogical in the workings of the markets, especially Shiller. But instead of throwing out the baby with the bathwater, their conclusion is to step up the rigour of econometrics so that it matches the unexpectedly complex reality of asset pricing.