Economy Minister Martín Guzmán on debt talks, sustainability, the IMF, the coronavirus pandemic, printing money and inflation.
At a key moment for Argentina and its economy, Martín Guzmán discusses everything – inexperience, negotiations with creditors, the role of the International Monetary Fund, the effect of coronavirus pandemic, exit strategies for the crisis, printing money and inflation.
In Mauricio Macri’s government there were many highly experienced outsiders who arrived from abroad to fix the economy, mostly with a clear Wall Street bias. You are also a newcomer but you arrive from the academic world. How does that differ from practical life?
There are questions which always need explaining with respect to where one comes from and with what experience.
I was very closely linked to Argentina prior to going to the United States in 2008 and never lost that link, coming back here every year for months at a time and giving at least one course at La Plata University as well as UBA [Universidad de Buenos Aires]. I was also close to Argentine reality, which is what motivates my dedication to economics. My focus is always on contributing towards resolving Argentina’s economic problems.
I also had the privilege of maintaining some very valuable channels of dialogue during all those years. I participated very actively in thinking through the Argentine economy.
As for my experience in the United States, it is correct that my career was academic but in the last seven or eight years I was also involved in practical economic policy thinking. Part of what I was doing at Columbia University was forming part of an institute specifically designed for economic policy dialogue. That experience was, of course, also enriching for thinking up policies in previous years, even if I was not directly in an executive post or influencing economic policy.
All that baggage greatly serves me daily here in this role.
When former Brazilian president Fernando Henrique Cardoso, who perhaps fathered his country’s democratic transition, reached power, he also came from the academic sphere, having lived in exile working as a professor. He asked journalists to “forget my books,” adding: “That was academic work; now I must govern.” Is it the same for you? Is it true that an abysm lies between academic analysis and economic policy management?
Knowledge is always worth it. Having a definite vision of the path sought, how the economy underlying the problems you seek to resolve works. How can that not be good?
Having a framework for thinking articulately about economic policy is something which helps. I wouldn’t say you have to abandon books, not at all. But it is real that as soon as we focus on very concrete problems, you have to resolve them at a different velocity. Economic policy tempos are different from academic tempos – everybody is aware of that. You have to know how to use the tools acquired over time responsibly and sensibly to resolve the concrete problems of reality which affect the lives of millions and millions of people in this country, how families grow, the Argentine environment in which our children develop their lives. That’s what concerns us today.
Some say: “Martín Guzmán lectures but where’s the dialogue?” Do you tend to talk like a university professor in your meetings, explaining reality synoptically?
One tries to be clear and pedagogic but dialogue is essential. I think that in all instances there was a valuable back and forth. We hope it continues.
Winding up this part, what would you reply to those who say that you are inexperienced?
You would have to define what that means. I have concrete worries about concrete realities. It’s true that for years I was studying and then teaching in the US without losing my links with Argentina and always with motivations that have to do with Argentine reality.
That’s what we are seeking to resolve today in a context of very tough restrictions. The country was already coming out of a deep macro-economic crisis and then coronavirus came along. We think we have acted rapidly and decisively on the economic policy front.
That’s what we’ll continue doing, seeking to calm the economy and establish conditions for a virtuous circle of development.
Was it an error to present, in public, your offer to the creditors which you now have to improve? Or what was the advantage of doing that? As Peter Drucker said, excellence is a road of successive approximations.
The initial proposal we made helped to anchor expectations. The reality facing Argentina was not understood. We had had negotiations under a non-disclosure agreement and the only offer reaching us from the creditors was a mega-swap similar to that of 2001, which increased Argentina’s debt burden. There was no real dimension of what we were undergoing here. Putting that offer on the table calmed expectations.
Marked the playing-field?
It was a bath of reality. The course of negotiations changed from then on.
Did other partners help you with the creditors? For example, Sergio Massa is often mentioned.
It’s the Economy Ministry which is heading this process completely. The president gave us the responsibility to carry it forward, which is what we are doing, negotiating.
Could exit from quarantine and default come at the same time?
Well, it would be a coincidence were that to be so. It’s not planned that way. As for the quarantine, the problem of coronavirus is persisting here and in all the world and it’s fundamental to look after the health of all Argentines. It will have to be prolonged or adapted to the extent of whatever’s necessary to meet the objective of looking after health needs.
The debt will depend on the understanding of the creditors and the restrictions faced by Argentina. What we’re not going to do is to kick the problem ahead, where Argentina has a long history, as the President has already said. We’re not working for ourselves, we’re working for Argentina, that’s the guiding principle…
The discussion is about after the term of Alberto Fernández.
We propose an integral restructuring giving Argentina what we call a path of sustainability, removing an unsustainable debt burden now and also in the medium term in order to have sound public finances, something which will not only be resolved with the debt. Argentina needs more than that to permit the State to have the capacity to implement public policies vital for development and to permit the private sector to operate in conditions of relative certainty, which is not the case in Argentina today, nor has been in the last few years. Makeshift solutions will not do, afterwards they break down and we then return to the same problems as always. That has led to the boom and bust cycles in much of this country’s history.
Do you fear Argentina being used as a laboratory for debt negotiations, given that due to the circumstance of coronavirus the supposition is that many other countries will have to renegotiate their sovereign debts?
We’re not looking for that to happen. But there is one reality: Argentina already had a debt crisis. On December 10, 2019, when we entered government, Argentina was facing an economy in freefall. All the economic and social indicators showed deterioration with double-digit unemployment and poverty above 35 percent – or 52.4 percent in the case of children aged under 14 – along with the total impossibility of refinancing debt. Country risk topped 2,000 points, giving Argentina no possibility of acceding to credit at interest rates which would permit the refinancing of its debts.
Then along came coronavirus in all the world, placing various countries also in a debt crisis situation but with Argentina at the head of the queue. The creditors see this and that whatever happens with Argentina might imply something for what follows. But our focus is absolutely on Argentina, we want to separate Argentina from the rest…
We face a global problem with Argentina in the middle of it but Argentina already came with its problems and what we’re seeking to resolve is the problem of Argentine society.
From the debt viewpoint, coronavirus generates a paradox. On the one hand, it creates awareness of crisis problems but on the other, means that the negotiation with Argentina could be a test case so that any concession made to Argentina is not measured by its debt but by the total debt of an important percentage of emerging markets.
That is correct. There are conflicting forces operating at the same time and marking out what follows. That’s not something which suits us at this moment.
But on the other hand, there is indeed a greater visibility in the world of the necessity of resolving debt problems to prevent societies from being shattered at this critical point in the history of humanity.
Did it surprise you that the first proposal was accepted by only 13 percent of bondholders?
That number is incorrect. We published it but the proposal was extended and still remains open because we are seeking to amend it. What is true is that some creditors accompanied it and others not. They had already anticipated their rejection, which gave us a bath of reality, as I said before. The problem of debt sustainability must be resolved before anything else.
So you were already expecting numbers which would not permit you to reach an agreement over the first offer?
Everything proceeds within the course of negotiations. A certain group of creditors came out with an explicit rejection and we accepted it.
The International Monetary Fund has published a statement saying that the government could improve its offer to 50 cents per dollar while heeding the criteria of sustainability, does that contribute to an agreement?
IMF legitimation is very important for this process. Obviously the fact that the Fund says what it said also contributes to anchoring expectations, especially taking into account that Argentina also faces a real debt problem with the IMF.
Remember what happened in 2018. The country had already been falling into debt as of 2016 in the expectation of export-led growth, giving Argentina the hard currency to meet its debt payments at really high interest rates, averaging seven percent for dollar debt in a world where interest rates were close to zero, thus obviously showing a certain risk of which the creditors were aware – hence those rates.
And in April, 2018, in a context of emerging economies coming under review, Argentina suddenly experienced a classic shock which changed expectations. That model of a virtuous circle generating perspectives of sustainable growth for Argentina lost credibility.
The previous government immediately turned to the IMF in the expectation that its loan would generate sufficient liquidity for a positive confidence shock, thus again lowering the cost of financing by private creditors and hence resolving the problems. But what happened is that the entry of the IMF on the scene triggered even more anxiety. The world said that every time Argentina and the IMF get together is a sign of trouble and the run only accelerated.
There was a second exchange crisis shortly afterwards so that the Fund’s dollars – which originally were going to be available but not for use – ended up being used to pay debt and to finance capital flight.
In other words, those dollars are not there now and in the end Argentina did not grow, the problems were not resolved, the previous programme of tight fiscal and monetary policies in a recession triggered a greater fall in activity and increased interest rates which made credit access prohibitive for thousands of Argentine companies with many small and medium-sized companies [PyMES] disappearing.
Let us imagine a context in which the demand for what is sold falls and on top of all that the cost of refinancing is more than 80 percent annually. That generates the destruction of companies. Economic activity entered into a freefall and Argentina did not recover access to international credit markets, thus being unable to pay the IMF within the specified periods. We’re going to solve that problem and that makes what the Fund says about restructuring the debt with private creditors very important for us because it legitimises the process in general and that’s an important starting-point for designing a new programme with the Fund building from sensible premises.
Argentina decided on negotiating with private creditors without an IMF programme. Does this kind of recommendation involve the IMF in some way and project what might be the subsequent agreement?
We have a very constructive dialogue with the Fund until now of reviewing what happened in recent years, which will feed a new programme. What was happening was a different calendar of payments. The main burden of Argentina’s debt with the IMF was to fall between 2021 and 2023 while with private creditors it was for this year. This country had no way of facing that debt every year without harming its economy more. Having an unsustainable debt implies more anxiety, more suffering, more falling economic activity and a climate of greater economic insecurity for families. More falls in activity means less job opportunities, more poverty, more inequality. That is what we have to resolve. The greatest urgency in the calendar of payments is with the private creditors.
Did you vote in Argentine elections at the New York consulate?
Every time there were elections, I came to Argentina to vote. Not just now, always.
For whom did you vote in the previous two elections, 2017 and 2015?
In 2015 voted for Daniel Scioli and in 2017 for the then-opposition front to the Cambiemos government.
How are your links with Cristina Fernández de Kirchner?
We’ve had meetings with a very enriching dialogue.
Did you dissent at any point with the economic management of her two presidencies, accepting interpretations which might be critical or corrective? Does she share your economic line?
There are some very enriching reflections, which I even enjoy somewhat.
As for the economic model between 2013 and 2015, what happens is that there is no single frontier – there were different periods with different economic policies.
As I’ve written previously, what is very important here is to understand that in a recessive context there are measures which work for getting the economy going. When there is idle installed capacity, driving demand is absolutely fundamental and there are moments when bottlenecks start appearing in crucial sectors of the economy. It is also necessary to have productive policies which permit supply and demand to grow at the same time, thus maintaining macroeconomic consistency.
That’s a pillar for every development model which seeks to be inclusive, dynamic and stable, because instability works against growth.
Was that the problem in the last part of Cristina Fernández de Kirchner’s government and is it an error which would not be repeated today, and which the ex-president herself understands?
What happened in the previous Cambiemos government is that bottlenecks started appearing which began to trigger problems for the balance of payments. What happened with energy was very important in that sense. Measures were taken afterwards to attack that problem but once it arrives, it starts to generate imbalances which are hard to shake off – what’s very important is to be ahead of the game and here I believe that this government has a very defined and definite vision of these questions, indeed, that’s how we’re working…
And how do you propose to correct that?
The form in which we’re working now is preparing the ground for the medium term. Restoring public finances, so damaged in recent years, does not alone permit us to emerge from a recessive spiral where the fall in aggregate demand in a recessive context generates more recession. You have to create the conditions whereby the country can implement productive policies in the field of knowledge industries, the energy sector, infrastructure and logistics which permit sustainable growth and also from the viewpoint of developing capital markets which enable greater savings in our own currency, thus permitting an expansion of production and sustaining the balance of payments. The problem when imports grow alongside real demand is that exports do not join them.
Our economic policies look at what is happening now while also creating the conditions for the country to grow sustainably once it has got over coronavirus.
What do you think of the tax on the 12,000 richest people?
Today we face a situation of weak public finances, to which should be added the tensions of dealing with coronavirus. You have to do something. It is necessary to place this within an integral context of seeking to be able to sustain the power of the state, the capacity of the state to tackle the problems of the Argentine economy. That’s what this one-off contribution is about at a crucial moment in the history of humanity and at a crucial time for an already sick Argentina.
A whole lot of money must be printed to help palliate the coronavirus crisis: somebody is going to have to pay for it. You can pass it onto the next generation if you transform it into debt but if you cannot, you transform it into inflation and it makes a difference who pays the bill if it is via taxation or inflation. How and amongst whom do you imagine being distributed the cost of this investment made during the last four months to maintain the entire productive structure without producing?
It is correct that we needed to print more money for coronavirus relief. For example, we had to spend on emergency income [Ingreso General de Emergencia], wage subsidies [Asistencia del Trabajo a la Producción] and family benefits, all measures necessary to protect people.
What we now face is a fall in activity and funds, with which you cope by printing more money, but that’s not going to resolve the problems of the real economy. What it does do is permit us to have the possibility of protecting immediate needs. Afterwards you need to avoid all this printed money passing into prices and to do that, you need to avoid the exchange rate taking off.
It is thus necessary to direct demand to things produced in Argentina and to financial assets denominated in our own currency. We aim for that. Constructing a yield curve in pesos and boosting peso markets helps to pass part of that money printed into demand for financial assets in our own currency. An important idle capacity also helps me to steer another part to production and this combination is important for it not to go to the dollar.
In 1975 and 1989 we happened to have hyperinflation because money was being printed at levels now imposed by coronavirus. Can you say that the difference with what happened in the hyperinflation of 1989 and 1975 is that there were no financial instruments to absorb the money printed and now there are?
There are other differences. The situation is different in general. Firstly, the profound fiscal weakness we inherited must be resolved.
Are you referring to politics with a new government now, unlike in 1975 and 1989?
Furthermore, there are capital controls which provide an additional instrument in these times of anxiety, as well as an important and well defined political power. That’s fundamental. With Frente de Todos governing, the situation is under control.
What inflation do you expect for this year?
In a context of so much uncertainty, forecasts are always short-term. It would be adventurous and irresponsible to make long-range forecasts when all the decisions are short-term, that’s why we do not give annual forecasts.
Consultants often get it wrong, but we have forecasts of 43 percent inflation and a Gross Domestic Product fall of around 10 percent for this year. The same data as 2002 when GDP fell 10 percent and inflation was 43 percent, apart from the years 2002 and 2020 being composed of the same two numbers, 2 and 0. To what reflection does this coincidence inspire you?
There are differences and also some similarity, of course. The similarity is an unsustainable debt burden in both cases. We’re working to resolve that.
As for the differences, the situation is under control today. The reason why economic activity fell by that magnitude in April and May is different.
Was it cyclical?
It was the coronavirus, aside from there already being a very big fall in economic activity. The economy had been collapsing in 2018 and 2019. But now there is a strong power with political control of the situation which is why I say that it’s a different situation because we have complete control of economic policy.
There was also an outgoing government in 2002.
In 2001, one government was on the way out, now there is an incoming and highly democratic government. What is also different is the world economy. Coronavirus is a global problem and no commodity price boom or world economic boom can be expected afterwards. That’s also obviously important for planning.
That would make it bad by comparison with 2002.
Exactly. Some parts are good and others worse.
There are those who affirm that you’re a Debt Secretary rather than an Economy Minister and that splitting up the classic Economy Ministry under recent governments has reduced its holistic outlook. What is your plan once there is no more default and coronavirus starts being left behind?
Something which gave me much pleasure in this interview is that you asked me a whole bunch of questions beyond the debt.
I appreciate that. We had the opportunity for an ample conversation about the real economy, about economic development, which is the function of this Economy Ministry.
Society’s big question: what comes next?
I appreciate having had the possibility of talking about that, which is exactly what we seek to do here. The debt issue is circumstantial but necessary to resolve in order to channel a productive model that’s good for Argentina. That’s why we talked of these two dimensions, these two pillars: the role of the State in productive policies, requiring sound public finances for a progressive capitalism and a social market economy at the service of the people, and the role of macroeconomics. Leaving the economy calm so that all the rest can function, also increasing the levels of investment with genuine savings so that Argentina can sustain its growth levels.
From the standpoint of implementation, let’s say we have the privilege of a president who strongly trusts us. We have a great team within a great government team. We’re working very positively with other ministries, all aligned with the same vision of economic development.