Leticia Abad and Noel Maurer here again, reporting on some news that while not unexpected, has arrived unexpectedly prematurely.
Imagine you are a banker in the mid-19th century. All of a sudden, you observe more and more people demanding that your banknotes be converted to hard currency. After a couple of days, this is getting serious and you see your reserves plummeting: this is a bank run!
If the bank were in a weak position to start with, then this bank run could have been warranted. The banker will stop paying when she runs out of reserves. But sometimes bank runs are just panic for panic’s sake. Then, as a banker you could refuse to convert these notes to restore sanity, to calm people down.
Now, replace “ban”k with Argentina. The bank run is a peso run. Welcome to President’s Macri’s life.
Since the last post, our dear country has not managed to hold a steady course. The Central Bank keeps on hemorrhaging dollars and technically the country has defaulted, well, selectively, according to rating agencies.
Right now, the federal government is facing substantial payments on its dollar-denominated debt over the next few months. (See the below chart.) That means that the federal government will need to dive into the market to get dollars make the payments. (The Argentine federal government, not surprisingly, collects tax money in pesos.) That will lead to one of two things: (1) A further fall in the value of the peso against the dollar, which would be very bad; or (2) A big drain on the Central Bank reserves as the bank provides the government with the dollars it needs, which would also be very bad, since those reserves are falling fast.
So what to do?
Well, ask creditors to let you postpone the payments.
On August 28th, to hold on to its foreign currency reserves, the government tried short-term debt management. It unilaterally extended the payment of short-term bonds on August 28th. That lasted a day. Then the government came up with a plan for further extending repayment — or as they call it a“reprofiling.” (Check #reperfilar for the corresponding memes).
My favorite: Reprofiling is the new “we need to talk.”
The renegotiation applies only to firms; individual creditors will receive payments as expected. This move should free up around $13.4 billions of reserves.
In other words, let’s kick the can down the road!
This strategy to ease the peso run failed quickly. The dollars kept on leaving the Central Bank’s vault.
To quell the panic, the Macri administration’s second move was the national equivalent of having the banks close their doors to depositors during a run. Capital controls ensued, first for foreign banks to repatriate profits. Then yesterday (on Sunday!) the government issued an emergency decree establishing good ol’ capital controls. All firms now require authorization to operate in foreign currency. Individuals have a cap of $10,000 per month on how much money they can change. Today will be the opposite of a banking holiday, withthe Central Bank extended banking hours until 5 pm (normally banks close at 3 pm).
President Macri decided that it’s better to adjust now when he has lots of reserves than adjust later. Will that stop the panic and make Argentine and foreign investors calm down?
It is clear that this is a last resort, as President Macri denounced capital controls during his presidential campaign. Since the primaries, he is facing an uphill battle to, at best, make it to a second election round. Hence, he is trapped between being a president and a candidate. From the quasi-populist policies announced two days after the elections to the imposition of capital controls binding for firms, he is trying to stabilize the country in hopes of attracting more votes. At the very least, he is trying to avoid to leave De-la-Rua-style — i.e., in a helicopter — before the end of his term.
All this, of course, has implications for the election and what the next president will do. Wait for the next post!
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