Less than a week after having secured the support — and a loan worth US$50 billion — from the International Monetary Fund (IMF), the government this week found itself ending the week caught up again in a financial crisis that refuses to go away.
Despite the commitment of US$50 billion to put an end to a steep depreciation of Argentina’s currency, the peso hit new lows against the US dollar this week, reaching $28.80 pesos on Thursday. Just a couple of hours later, the crisis had claimed a scalp as Central Bank chief Federico Sturzenegger resigned his post,
The government announced that Finance Minister Luis “Toto” Caputo would take Sturzenegger’s place at the helm of the Central Bank, with the functions of his now former ministry coming under the wing of Treasury Minsiter Nicolás Dujovne.
Interestingly, Sturzenegger had just co-signed a Letter of Intent with Dujovne, layingout Argentina’s commitments with the IMF which, among other things, ratified further costcutting measures and a freeflowing exchange rate.
Dujovne, speaking on Friday, told reporters he understood the turbulence of the last few days had concerned investors.
“The liquidity that we will be pouring into the market in the coming weeks will contribute to significantly reduce those turbulences that we have seen in the foreign exchange market,” Dujovne said.
The week was also marked by social tensions as union strongman Hugo Moyano led a transport union strike on Thursday, fresh off the historic vote in the Chamber of Deputies that legalised abortion, while promising further strikes next week alongside the General Confederation of Labour (CGT).
Inflation is eating away at wages, forcing the government to announce that it would support a further five-percent increase in collective wage negotiations. Initially, the Macri administration was pushing for 15-percent increase, in tune with the government’s now-vanquished inflation targets, but needed in order to limit rising prices both in terms of input costs and increased demand.
Yet, a stagnant economy and stubbornly high inflation, along with a conflict with Teamsters boss Moyano have forced the government back to the negotiating table. Thursday saw a strike that paralyzed all transportation activities across the country, while the CGT called for a general strike on June 25. Moyano has already announced his union will adhere to the general strike, while also refuse to work on the following two days.
President Mauricio Macri and his closest advisers hoped that the 2018 FIFA World Cup would help the government turn the attention away from the pessimistic economic headlines that have dominated the news over the past couple of months.
Throughout all the noise, Macri managed to stay out of the limelight. He gave a public speech praising the historic debate regarding the legalisation of abortion — which he opposed — but avoided speaking of the economic situation.
As Russia faced off with Saudi Arabia in the first match of the tournament on Thursday, Dujovne released a document which laid bare the details of the agreement with the IMF.
The minister said that once the IMF board rubberstamps the loan agreement on Wednesday, Argentina would receive the first US$15 billion of the loan, and will immediately put it to work defending the peso, with the government pledging to accelerate its fiscal tightening in order to balance the deficit by 2020.
Half will go to finance the budget and “the other US$7.5 billion will go to strengthen the reserves of the Central Bank,” Dujovne said.
He also confirmed that bill will also be sent to Congress to further bolster the independence of the Central Bank — initially seen as supportive of Sturzenegger — which in turn would progressively end its financing of the Treasury.
Inflation expectations for 2018 are around 27 percent, dropping to 17 percent by yearend 2019, 13 percent in 2020, and finally nine percent by December 2021. At the same time, the Central Bank would cease its interventions in currency markets, through which it sold US dollar reserves in order to stave off further declines in the value of the peso. GDP growth for 2018 is expected to fall between 0.4 and 1.4 percent, while 2019 should see output hit two percent.
Rumours of Sturzenegger’s dismissal started circulating earlier in the week, as market participants, economists, and others questioned the Central Bank’s unpredictable unsuccessful interventions. Last month, Sturzeneggerhiked interest rates to 40 percent and spent billions in foreign reserves to try to revive the peso, which has lost 34 percent against the dollar since the start of the year.
As the peso continued its slide, a meeting of Macri’s closest advisers — including Caputo, Deputy Cabinet Chiefs Gustavo Lopetegui and Mario Quintana, and Interior Minister Rogelio Frigerio — sealed Sturzenegger’s fate.
Supposedly autarchic, the Central Bank governor published a resignation letter on Twitter indicating his “credibility” had been severely eroded to the point where he could not perform his tasks.
While Sturzenegger’s departure had been anticipated for months, the timing and execution were strange. A day after having signed the all-important deal with the IMF, which put emphasis on Central Bank Independence, Sturzenegger was suddenly out, with Caputo – who is extremely close to the Casa Rosada – tapped to replace him.
The role of Finance Ministry, where he excelled at getting much-needed dollars through sovereign debt, will be absorbed by the Economy Ministry, further concentrating power around Dujovne, who was recently appointed economic coordinator.
Dujovne told reporters yesterday that his ministry is working with Caputo to strengthen the Central Bank by replacing bills “that have very high rates and short-term maturity with longer-term treasury bills, a process that will be gradually He pointed out that external factors this year, such as rising interest rates and oil prices, had contributed to weakening the economy.
“There are internal reasons, the fiscal and trade imbalances, and there is an international context, with an appreciating dollar across the world,” said former Central Bank chief Aldo Pignanelli.
Sturzenegger, a staunch monetarist, leaves behind him a tarnished legacy.
“Pressures to change part of the economic team had been intensifying, with a lot of that pressure focused on Sturzenegger. The sense in the presidential palace is that he had no credibility left,” said Eurasia Group’s Daniel Kerner.
“With the currency weakened by 50 percent since the beginning of the year and inflationary dynamics worsening, it was hard to defend Sturzenegger.”
After having successfully navigated the exit of currency controls inherited from the administration of Cristina Fernández de Kirchner, Sturzenegger was unsuccessful at battling inflation, which fell from around 40 percent to 24.6 percent by the end of 2017, but remained well above the Central Bank’s own targets.
The harshest criticisms, though, had to do with interest rates which were raised and lowered erratically — and today stand at 40 percent, one of the highest in the world — and the inception of a massive amount of short-term debt. Lebac, as the instruments are called, were used to sterilise or absorb pesos emanating from the injection of fresh capital from Caputo’s bond sales, and have reached US$1.4 billion.