In the United States, the mismanagement of the financial crisis, in particular the ill designed Troubled Asset Relief Program (TARP), has led to a wave of populist protests, and to a narrow confirmation vote for Bernanke. In Argentina, where the recession was considerably milder than in the United States and had no financial cause, the president Cristina Fernandez de Kirchner fired the head of the central bank, Martín Redrado, a holdout from the neoliberal 1990s.
The problem was caused by the plan to the use US$ 6.5 billion of the almost US$ 50 billion of the international reserves accumulated over the boom years, between 2003 and 2008, in which the economy grew at an average of 8.5% per year, recovering spectacularly from the 2001-02 crisis and external default. Redrado, harking back to his neoliberal years, refused arguing that this would violate central bank’s independence.
There are two surprising aspects to the whole affair. The Argentine economy has maintained in 2009, even in the face of the crisis, both a primary budget surplus and a current account surplus. Twin surpluses NOT deficits! It is true that the budget and balance of payments surpluses have shrunk with respect to previous years, and that even though the primary budget is still positive, the same is not true of the global budget balance [the difference between a primary and a global balance is the payment of interest rates]. Still the red ink is not alarming by any standards with a global deficit of around 1.2% of GDP.
If the country has a current account surplus of 3.7% of GDP, meaning that exports are sufficient to pay for imports and servicing the debt, and the government, once excluded financial payments, has, in fact, a surplus, one should be puzzled as to the reasons for using the central bank’s reserves. In principle there should be no problem. The dollars that enter the country as a result of the trade surplus are exchanged for pesos and kept at the central bank. If the government needs dollars to service its dollar denominated debt, they can exchange pesos for dollars in the central bank and use them. The use of the previously accumulated reserves should be unnecessary.
The fiscal stance is irrelevant in this respect, since the payment on foreign debt obligations must be done in dollars. Hence, the current account surplus, and in extremis, if the surplus vanishes, the reserves are the only source of dollars, with the exception of borrowing in international markets (which should be avoided for obvious reasons). The problem in the Argentinean case is that the institutions remain tied to the resilient dogmas of the Washington Consensus, in particular, the view that all fiscal deficits are nefarious. The central bank is then forbidden to finance the treasury, even in a crisis, by expanding the monetary supply or buying peso denominated debt.
In other words, even though the economy grew only around 0.5% in 2009 and unemployment increased to more than 9%, the government cannot expand its fiscal deficit. It is important to note that if the government increased the global budget deficit (and even run a primary deficit) to get the economy out of the current recession, there could be no demand pressures on inflation because of the slack in the economy, and no risk of a foreign default because increased imports could be covered by the current account surplus. In this particular case, the idea of creating a fund (the so-called Bicentennial Fund) using the central bank’s reserves to lend to the treasury is an innovative idea, in the midst of the crisis, to increase the government deficit without challenging the sound finance dogma that shackles the Argentinean institutions.
Sound finance and central bank independence are alive and well in the developing world, and the ability of governments to pursue counter-cyclical macroeconomic policies is still severely constrained. Creating mechanisms for increasing the space for full employment policies like the Bicentennial Fund are central for eliminating the pro-cyclical bias of macroeconomic policies in the development world. The firing of Redrado should make everybody rethink what purpose does central bank independence (from the treasury, but not from financial markets) serves. Maybe it is time to rethink the independence of the central bank from the treasury in the developed world too, or at least fire the central bankers that are too submissive to their financial market masters!
These events could have been avoided if Kirchner had been successful in passing the agricultural export tax she proposed during the boom. Despite the criticism in the mainstream press the Kirchner’s were attempting to deploy, at least in spirit, sound counter-cyclical policy: increase taxes and surpluses during a boom so they can be alleviated and spent during a bust. Kirchner was unsuccessful at that effort, and has thus resorted to approaching the central bank for reserves, which obviously raises more questions. Though the spirit of both these attempts at counter-cyclical policy seems generally on target, it seems that the Kirchners lack the political savvy to get the job done. Sound familiar?
Why do you think the Bicentennial Fund is countercyclical policy? The explicit objective of the Bicentennial Fund is to ensure Argentina’s return to the international financial markets as it faces USD $13 billion of external debt due for maturity in 2010. Don’t forget Argentina also needs to settle accounts with creditors who rejected the swap in 2005 (another USD $ 30 billion). With the Bicentennial Fund the government seeks to assuage creditors’ anxieties. The message is clear: Argentina is decided to continue servicing its debt even with its reserves. Nothing countercyclical here. The Kirchner administration may be simply establishing the foundations for another cycle of growing indebtedness.
My point is (maybe a bit innocent): if not being a “leftie” president in the Casa Rosada, which has ties with governments as the Venezuelan one, and that has also defend initiatives like Banco del Sur in contrast with the Bretton Woods Institutions dogma, there would be the same cleavage or it’d be different?
I have my doubts about if this is an economical or a political confrontation. Bussiness as usual is in the front line, and we are “ready” to repeat the same mistakes that has lead us to the greatest and deepest recession. Counter-cyclical economic measures are vox populi, even in Davos, but one thing is to talk about’em and a very different thing to implement’em. Schopenhauer used to say that “All truth goes through three steps: First it is ridiculed. Second, it is violently opposed. Finally, it is accepted as self-evident.”
Kevin, it’s true that the export taxes would have increased the revenues, and implied that the government could use those additional pesos to pay for the external obligations. Note that they would still use the revenue in pesos to buy dollars in the central bank, since those must be paid in dollars. However, there is no reason to only have surpluses. So the government should be allowed to have small deficits, and still buy dollars from the central bank. That would imply that the central bank will have to hold government bonds or print money, i.e. not be completely independent from the treasury. Can you imagined what would have happened if the Fed did not do quantitative easing and monetary expansion? So the use of reserves is a good solution!
The Bicentennial Fund is not counter-cyclical policy, Alejandro. It allows them to run fiscal deficits and overcome the inability to borrow from the central bank (by issuing bonds or printing money). The Bicentennial Fund has nothing to do with the renegotiation of the debt, which is hardly necessary. Remember Argentina has a current account (CA) surplus of 3.7% of GDP. Why would the country want to return to international financial markets, when they just proved incredibly volatile and prone to crisis!!! The return to international markets is also the result of the crazy straitjacket that the central bank independence imposes on the government. The CA surplus means that there is an excess of dollars to face foreign obligations, and there is by definition no need to borrow. Only because the government cannot print money or bonds in pesos to exchange at the central bank they were forced to create a fund that would basically transfer dollars from reserves to the government. That is good macro policy. It would allow Argentina to do counter cyclical policies like the US has done (fiscal and monetary), even though from my point of view those were still not strong enough. Thanks for the good comments!
Nan your point is well taken. Certainly there would way less conflict if the Kirchner’s were not in power. It is very much a political economy conflict.
The bicentenary fund, a measure resisted by the Central Bank, has had a destabilizing effect here within Argentina. As Mr. Nadal points out it is unfortunately thought-through strategy to attempt to re-enter the credit market by a government envisioning deficits.
When (the then) Minister Lavagna negotiated the default in 2004 some 30%+ of bond holders held out against the offer. Since then pressure groups (some formed by ex-Clinton economic team executives) fronting for Vulture capital firms (who bought out hold-out bonds) have taken the country to court in the World bank ICSID court. These lobbying firm which claims to represent Italian pension funds is called Task Force Argentina and operates in both the US and Italy. You can read about the suit in my investigative article on same in Americas Policy (.org).
Someone has convinced the government that it is a good idea to settle with the hold-outs. Could this be an unfortunate down-side of G-20 membership? President Fernandez de Kirchner is not as yet willing to consider the alternative of facing off to the markets by launching an audit on Argentine public external debt as did Ecuador much of which is by definition illegitimate.
Argentina’s president finds herself caught between the rock and a hard place. It should have been evident that vastly spiking loan repayment costs would lead to this kind of drastic measure but long term planning and politics often drag policies in different directions.
It will be an interesting few months here.
Matías raises some important questions and issues regarding the situation surrounding the recent removal of Argentine Central Bank president. However, I believe there may be a somewhat incomplete reading of the situation, which I hope to expand below. I apologize for the extent but I hope this will help understand the situation.
1. Martín Redrado is indeed a neoliberal economist. However, *he was appointed by former president Néstor Kirchner*. Furhtermore, Kirchner´s preferred candidate to replace Redrado was Mario Bleger, a long-time IMF bureaucrat and former CB president under the transitional post-crisis Duhalde admninistration. Nobody doubts Bleger´s neoliberal pedigree.
Bleger was also the preferred candidate for CB president of the current Economy Minister, Amado Boudou. Boudou, by the way, is another orthodox economist who received his graduate degree from the ultra neoliberal CEMA, where he eventually also taught. Furthermore, Bleger is also an advisor to Boudou.
All of this is to say that the battle over the Central Bank is not a battle against neoliberalism, which is alive and well in Argentina, it is a political power struggle.
2. The main issue with how the President fired the CB president is that she did it by decree when the current Argentine legal framework says that it is the Congress´s prerogative to do so. In other words, the president completely disregarded the legal framework. As with the conflict over export taxes mentioned by Kevin, the President could have avoided a major political embarassment had she chosen to act in a more politcally savvy way and respecting the institutions. Te be sure, institutional disrespect has a very long history in Argentina, but the Kirchner´s have done nothing to undo that.
3. There is much debate in Argentina surrounding what is the actual level of CB international reserves. While 48 billion is the number generally used, the actual number depends on what is included in the reserve count. Actual reserves could be a lot lower than 48 billion.
This is relevant because the amount assigned to the “Bicentennary Fund” (more on the name later) is based on a calculation derived from the total amount of reserves (which is subject to debate). The calculation essentially says that CB reserves must be enough to back up the monetary base (at the current exchange rate), and anything beyond that is to “freely disposed of”. The amount to be freely disposed of is unkown if the actual level is unkown. (Aditionally, potential exchange rate fluctuations could have an impact on this number, yet no provision is made for that).
Incidentally, this “concept” was introduced in the last reform of the CB charter, in order to be able to pay off the IMF, another “progressive” measure of the Kirchner administration: reward the IMF with full payment three years in advance, who undoubtedly shares a substantial part of the blame for the colossal failure of the convertibility regime. Remember that private creditors who entered the 2005 debt swap experienced a 50% “haircut”.
4. The stated objective of this fund was that it was to be used to pay Argentina´s public debt. This was supposed to “send a signal” to international financial markets so that Argentina could re-gain access to international markets in order to meet debt service payments this year and next.
This is problematic for several reasons. First, it shows that the government´s main priority, just like the neoliberal governments before it, is to pay the debt. Rather than using excess reserves (once their true level has been ascertained) for development purposes, or for eliminating hunger, the goverment prioritizes paying the debt. Second, it also shows that the sustainability of the current debt load is once again becoming an issue. In other words, Argentina appears to not have overcome its debt problems, so characteristic of the neoliberal era inaugurated with the military dictatorship of 1976.
This is what makes the name of the fund so scandalous. It is named in honour of Argentina´s bicentennary, and yet its purpose is to continue Argentina´s enslavement to international financial markets and the neoliberal logic that it entails.
In sum, while official rhetoric may have changed from that of the 1990s, the economic model still operated largely under the neoliberal logic.
Matias:
I believe the whole issue here is what to do with excess reserves and that’s not trivial in the case of developing countries. Excess reserves may be used for stabilization purposes, as an instrument of development finance, as a saving fund, as a distributive fund, as reserve assets, in debt-buy back operations or for debt repayment. Your case for fiscal and monetary policy coordination to support counter-cyclical fiscal policy is reasonable from a stabilization point of view, but I am afraid the current impasse between the Kirchners and the Central Bank in Argentina may not help the discussion. Paradoxically, what the impasse shows is that the Central Bank may loose its “independence” and still behaves in a very orthodox fashion. Why? Because the idea that underlies behind the Bicentennial Fund proposal is the return of Argentina to the international financial arena (not to increase the space for full employment policies as you literally argue).
With every thing that seems to be building throughout this specific subject material, all your opinions are actually rather refreshing. On the other hand, I appologize, but I can not subscribe to your entire suggestion, all be it exhilarating none the less. It seems to us that your comments are actually not entirely justified and in actuality you are generally yourself not really thoroughly convinced of your point. In any event I did take pleasure in examining it.