It may seem counterintuitive, but the best thing that could have happened to the Fernández-Fernández administration was the grounding and subsequent investigation of a suspicious Venezuelan-Iranian cargo plane flown by a crew with ties to the forces. of security of these two nations several weeks ago. Feeding Argentina’s absurdly polarized political ecosystem, this plane and its crew have become a battleground for supporters of the government led by Alberto Fernández alongside Cristina Fernández de Kirchner, and those who oppose it. There are reasons to believe that the situation is relatively serious, but not so serious in that there do not appear to be any immediate risks to the physical and political integrity of the nation, but it absolutely helped to partially cover growing tensions in domestic financial markets. markets, which have since exploded. These market jolts are also tied to the global change in market conditions that was precipitated by the Russian invasion of Ukraine and the coronavirus hangover, pushing the world’s most important central banks into different shades of monetary policy. restrictions that will most certainly have a direct impact on the well-being of billions of people around the world. The inside story of the start of Argentina’s peso run, fueled in part unwittingly – or not – by a government-owned company, once again reveals that we are nearing the precipice.
Just like in the days of Mauricio Macri, a series of external shocks coupled with inner weakness have made us aware of an ominous storm on the horizon. There was a massive abandonment of CERs or inflation-indexed bonds, causing a bloodbath in the City, as Argentinian financiers refer to our (very small) version of Wall Street. It has since spread to the all-important peso-dollar exchange rate and nearly crippled the economy. It is unclear which came first, but the psychological tipping point appears to be the liquidation of a large position, some nine billion pesos, or roughly the equivalent of $80 million, by the Investment Fund Pellegrini managed by the Banco Nación, in June. The sale instruction was ordered by another public company, Energía Argentina, the entity in charge of the purchase and distribution of energy and electricity formerly known as Enarsa and recently in the eye of the storm given the forced resignation of the Minister of Productive Development Matías Kulfas.
At the head of the energy company is a young technocrat named Agustín Gerez, who many suggest is affiliated with the political organization La Cámpora led by Máximo Kirchner, but who is actually a “Kirchnerite de the old school” who served under Julio de Vido. Accused of being too bold in his decision to invest the company’s short-term cash in floating rate funds rather than money market funds (which Energía Argentina rejects), Gerez needed the money to cancel an invoice for an LNG carrier, which we can expect to see for the rest of the Argentinian winter. Whether due to a lack of coordination with the Ministry of Economy and the Central Bank, their decision not to participate, or some other set of motivations, the liquidation of this position by Energía Argentina has caused fear in a jittery market, causing a massive sell-off of pesos. – denominated bonds which, according to economist Salvador Di Stefano, roughly result in the market saying to the government: “It’s over.” It has since deteriorated sharply.
Although Di Stefano sounds a bit too dramatic, his reasoning is that former economy minister Martín Guzmán was quickly running out of options. Excluded from international debt markets but having carried out restructurings with private bondholders and the International Monetary Fund, Guzmán and Central Bank Governor Miguel Ángel Pesce had pledged to reduce the budget deficit and print money with the International Monetary Fund. The creation, growth and consolidation of a domestic bond market where the government could fund itself in pesos was their response, but in order to attract any interest they were forced to aggressively raise rates and issue paper denominated in inflation. Investors were earning 15 percentage points above inflation on these bonds, but at one point confidence in the government’s ability to pay its debts eroded aggressively. This is partly due to an inflation rate out of control, exceeding 5% in May and June and aiming for 70-80% on an annual basis, while Guzmán and Pesce had accelerated the rate of money printing to 504.5 billion pesos in the first half of the year, an increase of 52.9% compared to 2021. The risk of even higher inflation stems from the need to continue raising rates (which is part of the agreement with the IMF), making debt servicing even more expensive, and more money printing, which finds its way into “alternative” peso-dollar exchange rates, including blue and contado con liquidation, which have since exploded. A possible local-currency debt restructuring like that led by Hernán Lacunza in the last year of Macri’s administration was reportedly underway, sparking fresh fears and forcing the government to accuse the opposition of ‘operating’ against them. Since then, the Economy Ministry and the rest of the economic institutions have been in crisis mode, with new Economy Minister Silvina Batakis coming under fire since her first day in office.
Argentina, of course, will need more hard currency for everything from energy imports (remember that gas pipeline that still hasn’t been built?) and intermediate goods to keep the economy growing. ‘economy. Yet, despite record figures from the agro-export sector which should have helped the Central Bank fill its coffers, Pesce is running at full speed. In addition, global energy prices promise to remain high given the war in Eastern Europe, while the US Federal Reserve has embarked on an aggressive course of interest rate hikes that will hurt the value of assets at risk worldwide, including some sort of impact on commodities.
A global rebalancing is now taking place, as rich countries exit their easy money policies adopted at least since the 2007-2008 global financial crisis (if not earlier) in order to tackle inflation figures that reached levels seen for decades. Never mind the risk of recession in the United States, just that its growth, as well as that of most major Western economies, will slow considerably. That, along with the global supply chain shocks that have taken root in the wake of the Covid-19 pandemic and the ongoing war in Ukraine – and growing geopolitical tensions that include China – promise to make the much more unstable and difficult future.
Argentina, of course, have a big opportunity ahead of them. Record agricultural export prices and high energy prices are supporting our competitive edge in natural resources, while a certain “decoupling” from global financial markets has been in place since our exclusion. We are witnessing a strong industrial and economic rebound which could continue if manufacturers are assured of intermediate goods, but also of a global demand which seems to be lacking. Consumption is rising, but largely because of fears of a loss of purchasing power, which requires lower inflation and higher wages to come back. It’s possible, but it seems harder every minute.