October 1, 2014
Bullish over bull
Last Thursday’s column very gingerly floated the possibility that the government might sink this year’s growth-linked bond by some statistical legerdemain outrageous by even its standards without really believing that it would happen, especially since the far more expert money markets emphatically thought otherwise. But surprise, surprise — that is exactly what happened last Thursday (even if overshadowed by the utility rate subsidy cuts which may well have been announced ahead of plan precisely for that reason). Yet subsequent developments contained an even greater surprise — this latest mischief seems to have worked out positively in balance with country risk closing March fully 12 percent down on the start of the month.
This is truly astonishing because the degree of statistical distortion required to save US$3.6 billion on the growth-linked bonds (rolling back the growth rate from the 5.4 percent of the first three quarters of 2013 to under the 3.22 percent needed to trigger payment in just one quarter) should have spelled double trouble big time. Firstly, admitting that the provisional 2013 real growth of 3.02 percent was only around 60 percent of that claimed seems to torpedo the whole “model” and “narrative” — projecting this to the “Chinese” growth rates of the “won decade” would yield a fairly mediocre performance within a region generally blessed by the commodity boom. Secondly, snatching billions from creditors would look too much like Argentina at it again — less than two months after seven years of systematically undershooting inflation data and hence index-linked bond payments finally ended, memories are far too fresh.
Former Treasury secretary Guillermo Nielsen has an elaborate theory that the bond will be paid after all (and Economy Minister Axel Kicillof said that Thursday’s figure was provisional with a final definition in September) but this column has strong doubts. Firstly, paying billions of scant reserves merely to satisfy false pride (and figures) is absurd by any standard. And secondly, the growth-linked bond money is less likely to be paid because it is already in the process of being spent — just over three billion pesos were immediately earmarked for the Progresar subsidies for those in the 18-24 age-group who neither work nor study (padding the slush funds for La Cámpora youth grouping, cynics might suspect; trying to protect this vulnerable group from lynch mobs, according to a more benign view). Whatever the Gordian knot imagined by Nielsen, the government will doubtless find some probably brutal way of cutting it.
And nevertheless shooting its statistical credibility in the foot yet again seems to have produced nothing but good vibes. Not just the improved country risk — there are insistent rumours of Goldman Sachs being on the brink of a loan. And yet as we advance into the soy harvest season, the strongest bet for a soft landing is still not working out — the stricken Central Bank reserves cannot bounce back above 27 billion with the soy dollars somehow going somewhere else. So what do the markets find to like?
Recent orthodox signals (from Kicillof of all people) would be the obvious answer — compensating Repsol for the YPF expropriation, looking into repaying Paris Club debt, raising interest rates, releasing credible inflation data so far this year for the first time since 2006, etc. But the markets could be looking at the future as much as the recent past. A very immediate future in the form of jumping onto juicy dollar interest rates of around six percent in the hope of moving in and out in good time (a world from which the likes of Goldman Sachs is not entirely alien). But also looking ahead a couple of years to a presumably more investor-friendly government as from the end of 2015 and Vaca Muerta shale starting to be on tap — a prospect accelerated by the Repsol compensation, the continuing exit from populist pricing (petrol and diesel prices went up another 5.4 percent at the start of this month for a total 55 percent in the last year) and YPF’s billion-dollar bond. An uncertain present with a bright future is an excellent business opportunity to enter on the downside in order to buy cheap and sell dear.
Yet while Argentina seems to be returning to global capital markets with giant strides, that detail about growth-linked bonds being reallocated to Progresar deserves attention. If orthodoxy and deflated growth rates might make it seem that the “model” and the “narrative” are being put through the shredder, reallocating the money rather than saving it shows that there is still no serious intention of tackling the fiscal deficit (and hence inflation). And why should there be if state revenue strength paradoxically depends on fiscal deficit in the form of the so-called “inflation tax” (a 12-digit figure last year)? Stagflation might be bad news for the economy but not necessarily for the state.
The subsidy withdrawals (or “reallocations” in the official parlance, a term which we should perhaps take more seriously) on the same day as the fudged growth rate made a much bigger splash at the time (which might well have been the idea) but since this is a moving story with action on electricity, we shall largely defer analysis for the next or a future column. Suffice it to say for now that there is an extremely broad consensus that this was the right move at the wrong time — and the timing could hardly have been more bizarre, coming after devaluation and before the end of collective wage bargaining. Indeed the effect on labour negotiations was almost instantaneous — if the 26.5 percent increase to which UOM metal workers agreed on Friday seemed the new benchmark, on Monday it was already 29 percent with the teachers and UOCRA building workers (in large measure due to the expectation of higher utility bills in the future).
This column will reappear next Thursday when the country will be facing its first general strike in 17 months so labour will presumably continue to be a major factor. Regardless of the strike’s success, collective bargaining will continue to be tricky — it is not just that trade unions are fighting a losing battle to avoid real wage losses of some 10 percent this year but there have already been real wage losses in the last quarter (estimated as high as eight percent).
But the money markets seem to march to a different drum to the real economy, as does state logic — that is what makes everything so complicated.