According to this announcement made yesterday, President Mauricio Macri is proving his pro-business chops by allowing short-selling in Argentina’s capital markets.
“Short-selling in capital markets” might sound like it only affects super-rich investors, but it doesn’t. It can actually have a major impact on a national economy, and Macri is hoping that this will make Argentina’s markets freer, and as a result, more attractive to international investors after years of a protectionist policy (in 2012, then-President Cristina Fernández de Kirchner passed a law outlawing short-selling to prevent speculation from foreign investors) and intense inflation.
You may have heard about the term “short-selling” or “shorting” if you’re super into the stock market – or if you’ve seen the movie The Big Short, which explains how several investors “shorted” the US real estate market, making a profit off of its enormous crash and subsequent recession.
How can an investor profit if a stock or currency does badly? Sounds counter-intuitive, right? Usually, someone invests in something if they believe its value will increase. You buy a share of that company or country in the form of a stock or a bond, and when it does well, you do well: win-win! Well, that’s considered a “long” position. A “short” position is very different.
Let’s stick with companies for now – even though you could do the same with an entire country’s economy. If you think that a company is going to go down in value, you can “short” it and make money off of its decline. In order to short something, you don’t want to own actual stocks, since that would make you have a stake in the company you think is going to fail. Instead, you borrow stocks and then sell them to someone else. Expecting the price to drop, you would then buy the stock back at a lower price, and then make a profit. So instead of buy low, sell high, it’s borrow high, sell high, then buy low. It’s risky, but if you hedge your bets well, you can make a lot of money.
Therefore, to many, short-selling isn’t super ethical; since profiting off of the decline of a company, or in some cases, a country, can seem sketchy. American hedge fund manager George Soros earned the reputation of “breaking the Bank of England” when he shorted the British pound, subsequently making US $1 billion off of its fall. And in the case of the 2008 crash, hedge fund manager John Paulson made US $15 billion for his company (and US $4 billion for himself) when he shorted the US real estate market.
With Macri’s changes, investors can begin shorting Argentine companies and currency. However, American political scientist and expert in international political economy Stephen Nelson says he’s not sure who would take the long-end of a peso-shorting trade, considering everyone is pretty sure the Argentine peso is failing. Shorts only make investors rich when most people think the stock or currency will succeed.
“The stock exchange in Argentina is, in comparison to the US or even Brazil, pretty moribund. This [new resolution] may help stir some activity but I doubt it will lift economic growth very much,” he told The Bubble.
That being said, it’s likely that Macri thinks opening the market will earn him points with MSCI, the company that ranks different international markets. Macri is trying to move Argentina up from the “frontier” category to the “emerging” category, according to Reuters, and Nelson said that loosening up some capital controls — like this resolution does — might help with that.
Nelson said Argentina is borrowing again in international debt markets, and rising a category will help them borrow at a lower cost. Whether or not this change will attract investors is another story, and time will tell if Macri’s free-market dogma will grow Argentina’s economy for the many, or just the few.