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The insider view on the latest Central Bank restrictions

Government hoped deal with foreign creditors would slow down capital outflows

By | [email protected] | September 30, 2020 5:13pm


Néstor Kirchner had a routine that he followed religiously during the years of his presidency. Every day he called the Central Bank to know how many US dollars were in its foreign currency reserves. After that, he called the Treasury to know the latest on tax collection and spending. No matter whether he was sitting in the presidential residency or in the middle of a long international trip, every day he took the pen and notepad from his coat and wrote down the status of the country’s dollar and peso accounts.

Despite having worked as Kirchner’s cabinet chief, Alberto Fernández was not as careful as his former boss. With foreign reserves close to their minimum, his administration was forced to tighten the cepo (Spanish for “clamp”) on foreign currency exchange through a complex web of resolutions whose central purpose is to prevent a run against the peso, and whose effectiveness is yet to be proved.

Néstor, Cristina and Alberto

Kirchner had two big fears when he took office in 2003. One was a “chaos in the streets”, and the other was a lack of dollars, because he knew that empty coffers in the Central Bank were always the prelude to crisis and hyperinflation in the country, and consequentially to the fall of governments. This was the discussion at the Government House at the time. Kirchner assigned a central role to the State, but this didn’t mean that he wasn’t keeping an eye on maintaining some basic macroeconomic equilibrium.

For his successor Cristina Fernández de Kirchner, the center of attention lay elsewhere. She was focused on institutions, courts, congress and ideology, as her closest circle attests.

Back to the present, Central Bank Chief Miguel Pesce, tasked with protecting foreign currency reserves, had been talking to Alberto Fernández about the unsustainable pace at which they were being drained. AFIP tax bureau chief Mercedes Marcó del Pont, also a former head of the monetary authority, was with Pesce on this issue, calling for stricter controls.

This is why on August 15, Alberto Fernández told a radio interviewer that “people are buying USD 200 per month (note: the maximum allowed by official restrictions) and all those small savers add up to a large-sized demand. These small savers have become a problem. The sums are not important, but 200 plus 200 plus 200… in the end it does add up into a problem. I will be discussing this matter with (Economy Minister) Martín (Guzmán) later today”.

On that same Saturday afternoon, Fernández met with Guzmán, and the latter shot down Pesce’s idea of banning dollar purchases for individuals in full. As the press has reported, the relationship between the minister and the central banker was damaged as a result. By the night of August 15, the Economy Ministry was telling journalists off the record that no changes on the rules for dollar purchases would be made. Basically, Guzmán denied what the president had said only a few hours earlier.

Diagnostic error

Guzmán believed that his deal with debt holders would not only clear short-term payments but also, in conjunction with his presentation of the 2021 budget, serve to ease the nerves seen in Argentine markets, and his view triumphed before the eyes of the President in that initial debate with Pesce.

The minister had indeed been successful in getting 99 percent of bonds included in his swap proposal, but the market ultimately thought very little of it, and the gap between the official exchange rate and its black-market value continued to broaden.

Those critical of Guzmán say he made a diagnostic error because “anyone that knows Argentine history understands that if the Central Bank is selling USD 1 billion per month, then you are three or four months away from new restrictions or a devaluation”.

Net Central Bank reserves were low by the end of last year, but they reached minimal levels on the last few days. Excluding gold, they went from USD 10.5 billion in December 2019 to USD 4.2 billion in August, according to the Ecolatina consultancy agency. This means USD 6.5 billion were lost this year, despite a commercial surplus (more exports than imports), a slowdown in financial payments and the suspension of tourism outflows.

The loss of Central Bank foreign currency reserves accelerated on the last weeks before the tightening of the clamp, with USD 2.2 billion flushed since early August. This meant that readily-available reserves went down to the absolute bare minimum, enough only to finance a month of imports at the current exchange rate, a level that activated all government alarms.

Private defaults next?

With this scenario presented to him, Fernández decided to act. The government made individuals’ purchase of US dollars more expensive (adding a 35 percent tax advance to its previous cost), and restricted the ability of companies to access the (cheaper) official foreign currency market to pay their foreign debts. Instead, Argentine firms will now have to re-finance 60 percent of what they owe to get access to the Central Bank’s hard cash reserves.

Logically, the resolution created a new serious problem for companies. Their representatives are denouncing that this puts them on the verge of default with their foreign creditors, or that it could severely damage their balance sheets.

These debts abroad include USD 1.2 billion that mature before March 2021, according to Delphos – Cohen calculations, but 80 percent of that sum is concentrated in just four companies: the state-controlled hydrocarbons firm YPF, Banco Hipotecario, real-estate giant IRSA and agribusiness firm Cresud. One third of these maturities belong to YPF, which means that paradoxically it is a state firm that is the most affected by the latest state ruling.

“Argentina already has a the reputation of a serial defaulter. And now private companies will be added to that mix,” an important businessmen complained. Another one quipped: “Does anyone believe this will not affect the possibility of making exports to foreign markets?”

The government, who has some ideological views on how the companies came to their current dilemma, has a simple response: “They should use the dollars they have stacked abroad and pay their debts with that if they want to.”

A similar conflict is emerging with regards to the wealth tax bill, which is starting to move forward in Congress. Businessmen perceive that the government has an overtly negative view of the private sector. “The government has to give some kind of signal”, some argue, like making changes in the Economy Ministry or the Central Bank.

For now, however, “Guzmán and Pesce are very firm in their positions”, sources at the Government House say.

(Abridged Spanish version. Full piece originally published on