September 16, 2014
Green, blue, white, black and red
The global clash with the vulture funds now looks like being joined by the more domestic battleground of the anti-hoarding law reform but the government would do well to review some of the more technical aspects of monetary and economic policy without waiting for the outcome of the default crisis. While it would be simplistic to make any exact comparison between current difficulties and the situation preceding January’s major devaluation, many of the solutions found to that crisis have started to become problematic in themselves.
The most obvious example is the steep rise of interest rates (almost doubled last summer) which stopped post-devaluation inflation in its tracks but strongly contributed to the economic slowdown and indeed this is already starting to change with rates inching down. Now that default has pushed the expectations of annual inflation beyond 40 percent as the fiscal gap widens (partly because foreign debt payments have risen sharply despite the default and partly because of anti-cyclical spending against recession, aside from fuel imports), rates of nearly 30 percent are not much better than 20-plus percent in terms of attracting money into fixed-term peso deposits. Once the race is lost with inflation, high interest rates only slow down the economy but lowering them risks compounding the dollar-peso imbalance.
But the “blue” dollar should also serve to set alarm bells ringing, even though the government is right to scorn that tiny market as overrated. Rather than the cause of any serious problem in itself, the “blue” dollar is a symptom of an exaggeratedly multiple exchange rate which is starting to be played for speculative purposes by a wider cast than the usual wheelers and dealers. The key to such operations lies in another of the successful solutions to the problems at the start of the year — namely, the option to buy dollars legally with a limited percentage of the wage, which was very effective at the time in taking the steam out of the “blue” but now lends itself to returning to pesos at the unofficial rate in order to repurchase greenbacks with a healthy margin. The problem here is thus not so much the gap between the official and parallel exchange rates (even though the current 60 percent is hard to manage) as the sheer multiplicity of options.
None of the above alters the fact that the core problems are the steeply climbing fiscal deficit and inflation but both interest and exchange rate policy could usefully go up for review.