Last Friday, Federal Judge Claudio Bonadio called on 13 government officials to testify as to why the hell the Central Bank (BCRA) sold swap futures contracts to exchange house ROFEX at below market rate. Bonadio’s list includes three key names that show just how deep this shady business may go:
- Former BCRA President Alejandro “I can’t believe the tone Macri used!” Vanoli
- Former Economy Minister Axel “Got dat senator immunity now” Kicillof
- Ex President Cristina “Colectivos and Twitter for now” Fernández de Kirchner
According to reports, in December 2015 the BCRA — prior to the Macri administration’s formal takeover but AFTER his electoral victory — issued an exchange of futures contracts for cash. To explain, the purpose of this contract is to protect against currency risk while waiting for the future arrival of cash. The BCRA doesn’t know when specifically the money will flow into its accounts, but it can estimate the amount using some financial math. It protects it from expensive borrowing in the future to make up for shortfalls.
Unfortunately while it waits, the exchange rate could change, affecting budget projections. However, central banks have a tool that gives themselves some certainty: They can draw up a contract that says on this date, we will pay you a predetermined exchange value — called a deliverable futures swap. The swap in question set the rate at AR$10.68 per dollar, redeemable on March 31st, 2016.
Thanks to the Cambiemos “devaluation” (or normalizing, depending on what side you’re on), the Argentine peso leapt from AR$10.50 to AR$13.80 to the dollar in just 24 hours. Now here’s the contentious part: Vanoli knew that Macri would assume power and was very aware of Finance Minister Alfonso Prat-Gay’s devaluation strategy as a method of stabilizing reserves. This meant the “hedge” (i.e the swap contract) was actually a really stupid financial bet on the part of the BCRA — with Macri already in office, of course the peso’s rate would rise significantly before March 31st next year.
The BCRA will see losses estimated at AR$75 million from this swap alone — that money must be transferred to ROFEX at the end of March 2016.
If Vanoli signed off on the same deal as a custodian of a private investment bank, he’d be fired and likely face a list of criminal negligence charges at least — and accusations of embezzlement. Fiduciary duty is no joke. You can’t plead ignorance, you have a special duty to make prudent decisions.
So what was Vanoli’s response?
“[The swap] was carried out and consistent with the Budget Law of 2016, which was stabilizing the exchange rate from AR$10.60” and “the intervention in the market also held consistency with the policy of interest rates.”
Hey, I was just fulfilling my obligations under the law.
Disingenuous, party of one.
“It’s important to remember that the criminal charges were filed against a central bank director, but in a persecutory attitude and a marked ideology, they included the ex-President in the investigation.”
Normally I’d have a some sympathy for this. You shouldn’t call for ex-Presidents to testify until you know exactly what their subordinates have to say. However in cases such as this — where the theft was so brazen and the credibility of Argentina’s most important institution at stake — it’s imperative to send a message that this isn’t Télam and you can’t behave like La Cámpora, wheeling out everything not bolted down as you relinquish power. This isn’t ‘nam, there are rules.
So What Exactly Was Going On?
As I see it, there are three explanations:
1) This was a case of classic embezzlement, a situation where those in power are syphoning money, either to their own accounts (unlikely) or to a third party who will later “take care of them.”
2) Just a giant middle finger to Prat-Gay and Cambiemos. “Fuck you for changing economic course, eat these losses you jerks.”
3) A more complicated, shadowy political agreement was in place.
What I suspect happened was the Victory Front (FpV) had certain “informal” positions at the ROFEX exchange that would be underwater if the devaluation went ahead. Arrogantly thinking they couldn’t possibly lose the election, they let these positions ride, despite the risks if a new monetary regime were to be put in place.
As for what exactly they were doing, we don’t have enough information to say. A lot of agricultural position — future contracts on soy beans, wheat etc. — are held in ROFEX. Now the Kirchners were never politically allied with farming interests, but suffice to say, soy bean exports were crucial for balancing the books. We will see.
The thing that gets me about this case, is how theoretically stupid it is to rob your own central bank directly. Let me explain:
** Warning: Kind of dense **
Central banks hold a lot of money. Billions, sometimes hundreds of billions, are held on a complicated balance sheet. Intuitively you might think of central banks as a giant vault where the nations savings are stored, ready for future use. This is not accurate: Central banks are really just the final middleman between governments, banks and other institutions. They keep track of where the money is (liability ledger), what it is worth (money supply) and manage the expectations of international creditors (inflows and outflows).
Modern central banking is not a vault like the gold standard days. Fiat systems are a totally different system.
As a consequence, stealing from a central bank is another thing entirely to dipping your hand into say, a pension account — in that case, you’re taking from a very specific group of people (those who will collect pension money later). Taking from the central bank results in redistribution of risk across all stakeholders, cascading throughout the nation as a whole.
Less “reserves” mean an increased liquidity risk and higher borrowing costs. Importers and exporters respond (through bank assistance) by changing the composition and timing of balance sheet liabilities, meaning production (supply) and buying (demand) shifts automatically without these businesses even knowing why.
So you steal from the central bank, you’re stealing from the wrong place: All it does is distort, raining down problems for everyone else. Money starts being moved in, out, and outside, thus causing market volatility. It is very difficult, but not impossibly to calculate the loss of wealth proportional to the distortion.
This is why central bank looting is terrible corruption play that doesn’t even enrich the kleptocrats. Everyone becomes poorer, even those doing the actual stealing. See: African dictators.
But what if you knew you were going to lose executive power? What if you didn’t care about whatever the system would be post-election defeat? What if you didn’t mind burning untold number of financial bridges you’ve built over the years?
This to me is completely irrational: All of these participants, Kicillof, Vanoli and even Cristina aren’t going anywhere — they’ll spend some time licking their wounds, but they’re still in the game. Even for non-kleptocrats, it’s important to have sterilised mechanisms for transferring wealth, which is why development banks etc exist. You need to have control over production, so you can redirect towards those who put you in power. I thought the Kirchners understood this.
As it turns out, the last days of Cristina were just a free-for-all. It’s depressing when your kleptocrats are out manuevering control systems. It’s downright frightening when they can’t even figure out how to act in their own self-interest. Because what else do these people think about?