Argentina’s new President Mauricio Macri took office today, but when the pomp and circumstance of the day’s festivities fade, he will be a man with an economic mess on his hands. His predecessor, former President Cristina Fernández de Kirchner, ran an economy made up of a mess of piecemeal populist measures that slowly lost the illusion of sustainability in the minds of Argentina’s voting public. But beyond these actual policies, she did something else. In the final weeks of her presidency, she went out of her way to spend every cent she could and create economic problems for President Macri.
In one of her final speeches as President of Argentina, Cristina crescendoed with the applause-inducing point that, “A country is not a corporation.” While that is certainly true, countries, people and corporations have at least two things in common: they can run out of cash and they can drown in debt. Cristina’s administration spent all of the cash and deliberately ran up bills that can’t be paid.
Within the Central Bank (BCRA), official reserves have fallen to near US$25 billion. But official reserves do not translate into cash. Close to US$12 billion, or nearly half, are a swap line from China that Argentina could draw on. Another sizable chunk belongs to commercial lenders or is made up of blocked bond payments. Barclays estimates liquid reserves to be US $2 billion, while the Financial Times reported rumors that the true number is closer to US$1 billion. That is not a lot of billions to work with.
The “no cash” thesis underlying these rumors is supported by the fact that the national tax collection agency (AFIP) webpage that sells physical dollars to savers mysteriously crashed for four days at the beginning of December. In November, AFIP authorized roughly US$723 million to be sold to savers. The amount sold in the first few days of December was half of the amount sold in the first few weeks of November.
Besides spectacularly running out of cash, the BCRA issued approximately US$10 billion in futures near the official rate of 10 AR$/US$. These futures care are like tiny short-term dollar-denominated bonds. They oblige the BCRA to pay US$10 billion around March/April 2016 to holders and receive only AR$100 billion in return. If the Argentine peso is allowed to float to 15 AR$/US$ as the market suggests and President Macri has indicated, this means the BCRA has to basically give away for free US$3.5 billion. That’s a lot more cash than they were left to work with in the first place and it’s akin to literally stealing cash from Argentine people who could really use this money to deal with inflation.
The BCRA was banned from issuing dollars by the securities regulator (CNV) on December 1st, following a November 20th suspension of the Rosario Futures Exchange (ROFEX), local futures exchange, for trading these products. The CNV’s action stemmed the tide but won’t change the fact that in three months, Argentina will have to sell US$10 billion at a steep discount.
Besides leaving the BCRA in tragicomic disarray, Cristina also trashed the Economy Ministry and Treasury. Cristina’s former government ran the biggest fiscal deficit Argentina has seen in 33 years — 7.2 percent of the GDP. Fiscal deficit is not to be confused with external public debt, although the two are related. A fiscal deficit is the shortfall between how much a government spends per year and how much money it takes in. 7.2 percent of the GDP is higher than any Organization for Economic Cooperation and Development (OECD) country, Brazil or India in 2015. Most countries that run fiscal deficits finance this difference by raising public debt or selling bonds. Argentina was effectively blocked from international capital markets, so it resorted to what is known as “monetizing” the deficit, or using the BCRA to print money and increase the money supply, devaluing the currency and leading to inflation.
In her final days in office, Cristina’s government announced a spending increase of AR$133 billion this year on salaries and energy subsidies. She signed an emergency decree divesting roughly AR$100 billion from state pension fund ANSES to select provinces, requiring Macri to pay this sum from the treasury immediately. There is also a AR$27 billion deficit with the AFIP tax agency. Days before leaving, Cristina also attempted to borrow an additional AR$22 billion from Banco Nación to finance the Treasury.
Cristina castigated her husband, former President Néstor Kirchner’s predecessors for leaving behind a country in shambles and a nation in debt to foreign creditors. She has left her successor a nation with unsustainable debts to its own people and institutions in ruin.
That being said, President Macri knew he was up against an economic mess and still ran for the job. Cristina’s mismanagement is over, and both Argentina and President Macri will be better served by quickly assessing the damage and pursuing policies to redirect the economy than by crying over spilled Malbec.