The Sad Tango of Argentina: the fear of bankruptcy returned

The “informal bankruptcy” that Argentina had to resort in last week denied hopes for a better future of the Argentine people who are chronicle suffers from bankruptcy conditions. The friendly governmental agenda, to businesses and to economic orthodoxy, of the Argentine President Mauricio Macri wrecked in the reef of the last week’s announcement that the Argentine government is failing once again to repay its debt.

by Thanos S. Chonthrogiannis-https://liberalglobe.com

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For this reason, the President of Argentina was forced to request an extension of time from his creditors and a prolongation of the loan repayment of $57 billion received by Argentina from the IMF in 2018.

President Mauricio Macri has not been completely defeated as the final elections for the Argentine Presidency will be completed by October 27th.  But the preliminary elections held on 11th August gave the win with 16 points difference (48%-32%) to his rival and Peronist to political ideology, Mr. Alberto Fernandez.

From the outcome of the preliminary elections alone, the capital and foreign exchange markets equally reacted “violently” to the political advance of the Peronists in power, causing the collapse of the Argentine peso that caused an increase in inflation at 55% per annum.

Donald Trump and Mauricio Macri in the Oval Office, April 27, 2017
Photo by Author: The White House from Washington, DC, Source: Foreign Leaders Visits
licensed Public Domain, https://en.wikipedia.org/wiki/Public_domain

But the causes that led Argentina back to its forced choice for the present informal bankruptcy are the result of a combination of the implementation of the wrong political and economic policies as well as the negative circumstances existed in the international economic environment.

The main cause of Mr. Macri’s election defeat was that the economic situation of the average Argentine citizen over the past fifteen months has deteriorated.

More specifically, when in 2018, the Argentine economy entered into an uncontrolled spin, forcing it to re-request the IMF assistance-loan in exchange for the imposition of fiscal austerity measures, for the period of the last fifteen months the life and economic situation of Argentine citizens is in a worse position than it was four years ago.

The Chronicle of the “spinning” of the economy

This long-suffering financial period of the last fifteen months can be summarized in the depreciation of the Argentine currency (peso) by 45% compared to before, the prices of the products were  increased more than 270%, real wages fell by 10% and inflation reached 55% while three million people were found below the poverty line.

However, before we accomplish any hasty conclusions as to what went wrong is better to look in detail at the policies that have been applied in the economic field.

The main component of the failure of the Government of Mr. Macri was that the whole of its government and not only its financial staff was never fully committed from the outset and to the end in achieving a hierarchy of economic goals within a framework of an integrated financial plan that would not allow anyone to deviate from the objectives.

1. The Government of Mr. Macri has tried to stabilize the country’s economy progressively and over a three-year horizon in order to avoid the “pain” that causes a restrictive fiscal policy that always translates into political costs.

This restrictive fiscal policy is correct but cannot be applied in the case of Argentina because its federal budget has a large deficit. A large state budget deficit which the Argentine governments, due to reduced annual state revenues, must always covered it by continuous printing of money that ejected and maintains inflation at high levels, while leaving any applicable fiscal policy “unprotected” to changes in the international economic environment. More we will mention in subsequent paragraphs.

2. Applying the government of Mr. Macri a gradual restrictive fiscal adjustment to the country’s annual federal budget and after having first paid off the hedge funds (a right political action) with $4,55 billion in nominal value bonds of the government which the hedge funds held them since the country was bankrupt, its budgetary policy was exposed in the alterations of the international economic environment.

3. The government of Mr. Macri then proceeded to remove the restrictions on capital movements.  The result of this policy was in 2018 and when the US increased their interest rates causing massive capital outflows from countries such as Brazil, Argentina, China, Russia and South Africa to the USA, Argentina which has the largest part of the foreign debt in US dollars was found in very

high pressure in its demand and consumption respectively and given that more domestic funds will they were headed towards the repayment of Argentinian foreign debt.

4. Anticipating development through the growth rates of the economy the government reduced export taxes to further increase the volume of trade with abroad (a sound economic policy).

The government in its effort to limit the annual federal budget deficit abolished allowances/benefits that were given to the lower income classes and had been institutionalized by the previous government. Due to high inflation the tariffs of utility companies (electricity, gas, water etc.) reached an astronomical height.

5. In addition, no investment was made from abroad that could boost domestic growth rates.

6. The main problem in Argentina’s economy is that the primary objective, the battle against inflation, was not won because it was never actually given and given that many executives from Mr. Macri’s government were not committed to this goal.

Many members of the government because of the fiscal cost that translates into political costs did not mean a strict monetary policy and since the price of restrictive fiscal policy is the drastic limitation of money supply in the economy.

While the hard peso is not conducive to exports that the government expected to increase, then increase state revenues and creating also a higher number of jobs in the economy.

The flag of Argentina
Photo by Author: Argentine State Authority,
Source: http://manuelbelgrano,gov.ar/bandera/creation-de-la-bandera-navional/
licensed Public Domain, https://en.wikipedia.org/wiki/Public_domain

The right (in our opinion) economic policy for Argentina

When as a government you face a large amount of annual inflation caused by the continuous printing of money to finance the huge deficit in the annual federal budget, due to reduced annual state revenues, you do not choose the implementation of a restrictive fiscal policy over the years, but you are choosing a steep (violent) reduction in government spending at a height that creates an annual surplus (a violent adjustment of governmental expenses in the line of the government revenues in the federal budget with aim to turn from deficit to surplus).

This means not only cuts in allowances and salaries of civil servants but massive redundancies of public servants and closure of deficient state-owned enterprises and organizations. Reducing the size of the armed forces and internal security forces respectively.

These cuts in the costs of the federal government will have to be completed in the maximum within one week. So, that the new federal budget to give the maximum possible time for the economy to grow at a high rate (this maximum time is one year from the time the federal budget is being adjusted violently).

The total expenditure of the new annual federal state budget should never exceed 15% of GDP and 4% of GDP from these costs goes to the payroll of all civil servants. The same budgetary limits on annual expenditure should apply to the budgets of the local governments in relation to their annual revenues and not to annual GDP in this case. At the same time the currency should be devalued further to increase the competitiveness of the Argentinian exports.

Then there should be privatisation of state-owned enterprises, transfer of state administration competences to local governments which should then privatise them, generalized implementation of the outsourcing practice in the public sector.

Governments (federal and local) should keep a capital size covering unemployment benefits for a year for all the redundant civil servants. The dismissed civil servants will be enrolled in the unemployment office and a tax will be levied on public servants corresponding to that imposed on the salaries of private employees and will be directed to the fund of the unemployment office. 

After the deficit has been zeroed in the federal state budget and there is a margin for reducing state expenditure further to 15% of GDP annually, the saving funds will be channeled solely through the application of equivalent fiscal value measures in the economy to further reduce tax rates on indirect and direct taxation.

Then and only then can taxes on export products in which Argentina has a comparative advantage (e.g. meat, cereals, etc.) be completely reduced to enable these sectors to compete with the respective branches of EU and USA economies etc. and given that the peso has been devalued first.

In such an economic context will drastically increase the pace of foreign investment in the country by operating strict fiscal policy as a magnet for attracting investment.

In this case, inflation has been drastically reduced (no money is being printed) and the economy is growing at a drastic pace. But this fiscal policy has enormous political costs and will face multifarious interests. Only the entire political world of Argentina united should explain it to the whole people. To never find Argentina in this predicament again.

Thanos S. Chonthrogiannis

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