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Argentina Project Director: ‘A Political Pact with the Peronist Opposition Would be a Delightful Development’

Benjamin Gedan is the Director of the Wilson Center's Argentina Project.

By | [email protected] | August 31, 2018 3:25pm

Benjamin GedanBenjamin Gedan, Director of the Wilson Center's Argentina Project, Benjamin Gedan.
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As the Director of the Wilson Center’s Argentina Project and the former Director for Venezuela and the Southern Cone at the U.S. National Security Council during the Second Obama administration, Benjamin Gedan has the ability to provide an insightful analysis of Argentina’s political and economic juncture.

As the country goes through a new run on the currency, which saw it depreciate by  15.6 percent against the US dollar on Thursday, with the exchange rate clocking in at AR $39.77 per US dollar, The Bubble talked to Gedan to learn about his perspective on its causes, the likeliness and potential effects of reaching a deal with the IMF to expedite the disbursement of the US $50 billion bailout from the stand-by agreement reached in June, and the perception that would be generated by different political moves such as a Cabinet shake-up, or a pact with the so-called “rational Peronism” that results in the production of an economic plan.

TB: – What do you make of this new run on the peso?

BG: The pressure on the peso is an overreaction, but it illustrates that President Macri has lost investor confidence. That is not as ominous as it sounds, because the IMF is providing Argentina most of the loans it needs these days, and budget cuts are also sharply reducing the government’s financing needs. That said, the country’s tattered reputation might also scare away companies that Argentina needs to improve its infrastructure, overcome its energy deficit, produce jobs and reduce poverty.

TB: – Do you think its main causes are political?

Oddly, the run on the peso is occurring despite continued admiration for President Macri in the international financial community. Just look at Macri’s celebrity reception at Davos, or how quickly the United States and other major players reacted when Argentina sought a massive IMF bailout. Sure, Macri’s gradualismo has frustrated some investors, analysts and economists, and questions about Central Bank independence did not help. But fundamentally, the pressure on the peso is occurring despite the government’s bona fides as a champion of pro-market reforms.

So why are so many investors stampeding away from the peso? In large part, it is related to factors outside of Macri’s control, such as interest rate hikes in the United States, and economic warning lights in other emerging markets, such as Turkey. It is also a product of Argentina’s economic weakness, with the body blows of the drought and Brazil’s economic doldrums compounded by the contractionary effects of budget cuts and stratospheric interest rates. Finally, despite the initial private sector euphoria over Macri’s election, the deck was always stacked against him. He inherited a slowing economy, low foreign exchange reserves and a high deficit, and he has always lacked the congressional majorities needed to address these structural burdens.

Still, the US $50 billion IMF bailout should have calmed nerves. Instead, it was not enough to disabuse investors of the idea that Argentina is perpetually on the verge of a meltdown. As I wrote in May on The Hill, “Argentina’s reputation deprives its leadership of an indispensable resource: the benefit of the doubt.”

TB: – Have you talked to other analysts or private investors holding Argentine assets? Is there a cohesive analysis or have you heard different theories regarding the causes?

BG: It is never easy to predict investor behavior, but the fundamental roots of investor skepticism in Argentina are well-known.

TB: – Do you think Macri rushed by making the announcement regarding the expedited IMF support?

BG: It would have been nice had Macri coordinated better with Christine Lagarde, and offered greater details about the expedited IMF lending. That said, I understand Macri’s instinct to try to calm investors by reassuring them that the IMF is in Argentina’s corner. IMF support, after all, not only assures Argentina of critically needed funds, it also signals that its economic reforms are on track. Unfortunately, however, the strong international support so far has merely highlighted Argentina’s vulnerabilities and desperation.

TB: – If this deal ends up being reached, could it convey some peace of mind to the markets?

BG: Because Macri, at great political peril, has adhered to the IMF’s austerity mandates, Christine Lagarde will likely succeed in winning international support to frontload the bailout. That should, over time, help stabilize the peso and improve Argentina’s investment climate. But every headline about IMF support is also a reminder that Argentina, once again, has found itself wheeled into the economic emergency room. That is not the image Macri hoped to project in November, when he hosts the G-20. And it is certainly not the image he wants to trumpet in campaign ads before next year’s election.

TB: – Many economists here agree on the external factor’s influence on the crisis, but claim the government added a great dose of malpractice. What do you think about this?
BG: The precise apportionment of blame is debatable, but I’d say “malpractice” is an unfair characterization. Government officials frequently emphasize that [Cristina Kirchner], for all her faults, left office without a crisis, and the sense of calm obscured Argentina’s structural problems and made it hard for her successors to justify the dramatic, rapid and painful reforms that Argentina arguably needed in 2016. That makes sense to me. What’s more, following the October midterms, most analysts were awestruck by the government’s performance, and few saw gradualismo as an inherently flawed approach. Today, it seems clear that a faster fiscal consolidation was needed, to reduce borrowing, control inflation and retain investor confidence. But had the president sought to please Wall Street from the get-go, the political cost might have been unacceptably high.

TB: – Would a Cabinet shake-up help? Are there officials whose credibility has been eroded, particularly Marcos Peña?

BG: It is hard to imagine the government without Marcos Peña. It would deprive the president of his closest political confidante, and raise questions about his political prospects, which would further spook investors who still have nightmares about the economic management under Argentina’s last two Peronist presidents. For investors, meanwhile, the senior officials in the hot seat, other than the president, are the finance minister and central bank governor.

I understand Macri’s frustration. His election and early reforms were not enough to regain global confidence, and even his midterms triumph was somehow overshadowed by Cristina Fernández de Kirchner’s faint political heartbeat. Now, the external pressure has revealed just how little goodwill Argentina built up in the last two years, or perhaps just how tarnished a national brand Macri acquired in 2015.

TB: – Considering Caputo and Dujovne are in the hot seat, do you think their removal would be a good sign?
BG: Occasionally, cabinet changes are helpful in resetting expectations, but frequent personnel changes might also make a government appear chaotic and rudderless. In this case, the best way to demonstrate competent economic management would be consistent and independent monetary policy, and prudent spending cuts that are supported by opposition lawmakers, organized labor and provincial authorities.

TB: – What do you think about the political actors in Argentina calling for a broader agreement with the so-called “rational Peronism”? Do you think it would help to convey a message about a political leadership that is on the same page and willing to make cohesive decisions aimed at stabilizing the economy? Or would it be seen as a defeat, with the Macri administration caving and deciding to take in politicians who have been part of the Peronist governments that have caused investors so many nightmares?

BG: A political pact with the Peronist opposition, provided it produces a responsible economic plan, would be a delightful development for the country, and for the Cambiemos government. Like it or not, the opposition controls both houses of congress, so any solutions to Argentina’s economic troubles will require compromise. This is true of the most pressing item on the president’s desk, next year’s budget, which must include difficult spending cuts. An agreement with the opposition would be a great signal to the investment community, demonstrating that Argentina is capable of overcoming its economic challenges, and showing jittery observers that the alternative to Mauricio Macri is not necessarily Cristina Fernández de Kirchner and her recklessly populist movement.