March 11, 2014
Bullish or just bull?
If John Updike rephrased that old truism: “Nothing succeeds like success” as “Nothing exceeds like excess,” how about: “Nothing succeeds like excess” with the recent taming of the greenback as a case in point?
Much of this year’s currency volatility stems from two focal points of excess — an excess of pesos accounting for much of the spiralling inflation and an excess of unexported soy frozen into immobility by the prevailing uncertainty despite the hazard of falling prices later this year. It was shrewd of Central Bank Governor Juan Carlos Fábrega to pick up on these two areas of excess and play them off against each other, thereby reversing the downhill plunge of the peso.
Fábrega’s double play took the form of pumping up interest rates (even beyond 30 percent at times) to make the peso’s attractions more competitive while (in an admittedly arbitrary move) shifting more dollars onto the market via a circular obliging banks to shed their dollar bonds beyond 30 percent of total asset value and futures beyond 10 percent. This was considerably more subtle than simply wresting a given quantity of greenbacks free from bank coffers — the decimation of futures means that exporters are offered the chance thereby to acquire cheaper dollars than current cash levels, thus providing them with an incentive to place their soy on the market and cash in further greenbacks. At the same time the almost doubled interest rates give those who would rather not take their chances with futures more reason to cash in the dollars for pesos. This all creates the beginnings of a virtuous circle, which has already started to happen.
The lesson of all this is that brain pays off more than brawn (even though there was something of the latter in the circular muscling the banks out of some dollars) — more was achieved by one smart move than all the previous months of bullying and wishful thinking. Moreover, inasmuch as force and gamesmanship was involved, it shows that the Central Bank is far from helpless in the current turbulence with both firepower and tricks up its sleeve.
Nice one, Fábrega, but it will take far more to reverse the truly massive credibility gap which Kirchnerism has spent over a decade accumulating. Not least because his Central Bank has yet to start mastering the most basic monetary task of them all — the control of the money supply. This column has long insisted that the root cause of inflation is runaway public spending financed by printing money (plus the drainage of Central Bank reserves until recent days at least) — and nor has it been especially original with this assertion. The simple fact that some 8.5 billion pesos were printed last month shows that this infernal mechanism remains alive and well. And if the Central Bank has been soaking up even more liquidity than that with its newly aggressive policies (11.3 billion pesos at the last go), the price is the return of that curse of the 1980s — creating a quasi-fiscal deficit. While the Central Bank is forced to run behind the fiscal deficit instead of staying on top of monetary policy, the interest rates can never be high enough to tame inflation.
Even taking the brightest view of trends (“Be Optimistic,” as the late Shirley Temple sang 76 years ago), setting into motion a virtuous circle with the soy exporters would last until next spring at best and if no fiscal corrective action is taken in the interim, the same problems would unfold in more or less the same timetable as in recent months. And these six or seven months would not suffice to resolve Paris Club debt and re-open global capital markets as a revived source of dollars — even if the government were to show a greater sense of urgency with what it now admits to be a priority. But “if what goes up must come down” (the simplest way of explaining gravity), it is also true that “what comes in must go out” — prospects of investment inflow are perhaps directly proportional to the ban on repatriating dividends being relaxed.
Yet even if the time does not suffice to tap international credit, the fact remains that the government has invested considerable effort into buying time and has at last succeeded — the question now arises what it intends to do with that time. Those trotting out the tired cliché: “Time will tell” need to be told that time will only tell them time. If the only use made of the time gained is to wait passively for things to grow worse again, it would be a sheer waste. If the peso can regain ground on the dollar for any appreciable length of time, why not take advantage to seize the initiative and move towards unifying absurdly multiplying exchange rates?
Despite the local passion for exceptionalism, Argentina is by no means alone with inflation, rising interest rates and devaluation in this year’s incipient emerging market crisis. Various other central banks around the world are also raising their interest rates to counter inflation despite the risk of slowdown — with indifferent success. Moreover, a prime cause of inflation elsewhere should be deeply worrying for Argentina — world oil prices returning to three digits at a time when devaluation spells steeper fuel import bills for many. Economy Minister Axel Kicillof has just spent several days trying to persuade the governors of oil-producing provinces to absorb the devaluation into their royalties via yet another new exchange rate and has ultimately failed.
While the emerging markets are striving to fight off inflation, too much of the developed world has yet to struggle out of deflation convincingly into sustained growth — an objective for which they would need dynamic emerging markets.
Yet this emerging market crisis could also be overrated — almost all the countries in trouble (and this also applies to Argentina) have fairly solid macro-economic fundamentals, including low indebtedness as a percentage of Gross Domestic Product, solid banking systems and relatively abundant reserves while the fiscal and monetary imbalances are far from extreme. Even a China growing below eight percent (around a third of total global expansion) is still a generous market.
Meanwhile, back here we have just been through a week in which the peso actually gained ground overall (even if there were mixed messages from the money markets yesterday with the official exchange rate and the “blue dollar” both strengthening) — and with even beef prices inching downward at some levels (despite a wet February). Perhaps Shirley Temple had the right attitude after all.