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How Argentina Ended Up With Interest Rates At 40 Percent · Trumponomics

• 0:03
  Speaker 1: In Argentina, the cost of borrowing is shooting up to
• 0:07
  Speaker 1: stratospheric levels. We're talking about interest rates of forty percent
• 0:12
  Speaker 1: for zero percent. The country's leadership promised a new era
• 0:17
  Speaker 1: that put this sort of trajectory behind it. Now Argentina
• 0:21
  Speaker 1: finds itself in talks with the International Monetary Fund for
• 0:26
  Speaker 1: loans to shore up its finances. How does this even happen?
• 0:30
  Speaker 1: How can they make it right? And how is this
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  Speaker 1: part of a larger challenge facing emerging markets. Welcome to Benchmark,
• 0:48
  Speaker 1: a show about the global economy. I'm Daniel Moss, writer
• 0:52
  Speaker 1: and editor at Bloomberg Opinion in New York, and I'm
• 0:55
  Speaker 1: Scott landman and economics editor with Bloomberg News in Washington.
• 1:00
  Speaker 1: Joining us to explain Argentina's ills, why we should care,
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  Speaker 1: and whether there are broader lessons is Federico County. He's
• 1:08
  Speaker 1: head of Emerging Markets fixed Income at UBS Asset Management.
• 1:13
  Speaker 1: He's also a former economist at the I M. F. Federico,
• 1:16
  Speaker 1: Welcome to Benchmark. Thank you for having me so, Federico.
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  Speaker 1: Argentina's president, Mauricio McCree promised a new era for the country.
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  Speaker 1: What practices did he say he would change. Well, when
• 1:30
  Speaker 1: he took off his he had to manage a number
• 1:33
  Speaker 1: of challenges that the previous administration had inherited to him.
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  Speaker 1: You know, there was a system in which Argentina was
• 1:41
  Speaker 1: effectively an altar key. He didn't have many relationships with
• 1:44
  Speaker 1: international economy, and you know, had a fiscal situation that
• 1:49
  Speaker 1: needed repair. What he promised is a gradual adjustment program,
• 1:55
  Speaker 1: a multi I don't know, fiscal adjustment program that involve
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  Speaker 1: lowering inflation and fixing the fiscal accounts once and for all.
• 2:02
  Speaker 1: Markets understood that, and we're willing to finance that effort
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  Speaker 1: because of, you know, among other reasons, Argentina didn't have
• 2:10
  Speaker 1: that much that when this administration took office back in
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  Speaker 1: two thousand and fifteen. So markets understood this. It was
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  Speaker 1: going to be a gradual program, and they delivered. You know,
• 2:21
  Speaker 1: they were able to deliver on that growth. They started
• 2:23
  Speaker 1: to pick up fiscal accounts and started to improve. What
• 2:27
  Speaker 1: it never actually happened though, was or indirect investment coming
• 2:31
  Speaker 1: to the economy for different reasons. So was it just
• 2:35
  Speaker 1: foreign investment not coming in? What else went wrong that
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  Speaker 1: made us get to this point in Argentina? There were
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  Speaker 1: a couple of policy mistakes, and obviously external conditions turned
• 2:45
  Speaker 1: sour into thousand and eighteen for emerging markets. The policy
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  Speaker 1: mistakes had to do with a perception that the central
• 2:51
  Speaker 1: bank was an independent institution and a very powerful one.
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  Speaker 1: In December, when the exchange that had appreciated two levels
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  Speaker 1: that the government thought were too strong, and we're having
• 3:02
  Speaker 1: an impact on manufacturing, production and export, it's when they
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  Speaker 1: started to intervene on the on the central bank, and
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  Speaker 1: investors took that very badly because all of a sudden
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  Speaker 1: and independent institution was being meddled with by the government.
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  Speaker 1: That was the beginning of it. And after that they
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  Speaker 1: changed the inflation target. In inflation was already very high,
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  Speaker 1: but the inflation target was actually raised even further, and
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  Speaker 1: next the next month the central bank cat rates in
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  Speaker 1: an environment which probably they shouldn't have done that. Then
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  Speaker 1: they actually impose a small tax on the stock of
• 3:38
  Speaker 1: debt that foreigners had actually bought, called their backs. Um,
• 3:43
  Speaker 1: there these are, this is the name of the bonds,
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  Speaker 1: and that five percent tax actually generated a run on
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  Speaker 1: the bonds and a run on the currency. So there
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  Speaker 1: were policy mistakes. There were Um, I think you know,
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  Speaker 1: they underestimated how jittering markets were in relation to a
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  Speaker 1: program that was vulnerable and that needed everything to go
• 4:04
  Speaker 1: perfectly well in order to work. Um. So that's how
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  Speaker 1: we go to the point in which the central band
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  Speaker 1: had to high rate more than a thousand basis points
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  Speaker 1: in two days to stabilize the currency and to actually
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  Speaker 1: you know, announce further physical measures and finally, you know,
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  Speaker 1: not at the doors of the I m aficain to
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  Speaker 1: get some some support from them. How does an economy
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  Speaker 1: even function with interest rates of right? Inflation in Argentine
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  Speaker 1: is high, right, so under under you know, the inflation
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  Speaker 1: target for two and eighteen is fift Now, given what
• 4:41
  Speaker 1: has just happened, probably inflation will be close to so
• 4:47
  Speaker 1: is not as you know high as if it as
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  Speaker 1: it will be the case if inflation was running at
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  Speaker 1: you know, single digits. But in any case, it's very
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  Speaker 1: high under you know, the more pessimistic inflationary expectations, we're
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  Speaker 1: talking out an interest rate in real terms of around
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  Speaker 1: fifteen percent, which is very high. Indeed, the idea is
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  Speaker 1: to shock markets right, to actually eliminate any chance of
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  Speaker 1: a further effects run, a currency run, that is, and
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  Speaker 1: to stabilize the financial situation. Now, this cannot last for long.
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  Speaker 1: Otherwise it was going is going to shock economic activity
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  Speaker 1: and the economic my actually even running into a recession.
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  Speaker 1: To avoid that, they have to come up with credible
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  Speaker 1: measures on the fiscal front and also with a program
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  Speaker 1: sponsored by the MF in which billions of dollars are
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  Speaker 1: put at the disposal of the government. And this is
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  Speaker 1: extremely important. Argentina has now the is now negotiating a
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  Speaker 1: program with the MF and standard stand by agreement as
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  Speaker 1: it is called, and they could get, you know, billions
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  Speaker 1: of dollars from the MF for exchange of an adjustment
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  Speaker 1: program that most likely will be very similar to what
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  Speaker 1: they were already doing. The MF is a very change institution.
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  Speaker 1: It's not you know, the institution of twenty years ago
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  Speaker 1: when they were requiring demand orthodox policies with you very
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  Speaker 1: deep adjustment. That doesn't happen anymore. Think about what they
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  Speaker 1: just did with Greece. Um, you know, with Greece, basically
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  Speaker 1: they agreed to give them thirty two times their quota
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  Speaker 1: and uh, you know that was a significant amount of
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  Speaker 1: money for Greece, thirty billion euro back then for in
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  Speaker 1: exchange of a very gradual physical program. So is this
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  Speaker 1: I M F loan or or facility, whatever you wanna
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  Speaker 1: call it, Is this the way for Argentina to get
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  Speaker 1: out of this trap that it seems to have been
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  Speaker 1: in for several decades. And if it doesn't work, what next?
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  Speaker 1: There are many things that have happened in the recent
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  Speaker 1: past with this administration. Right, this administration basically clean up
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  Speaker 1: the mess that the previous administrations actually left the country
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  Speaker 1: in and they have a real shot of actually changing
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  Speaker 1: things in Argentina at the fundamental level. Right, I mean
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  Speaker 1: going to basic stuff like the rule of law, the
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  Speaker 1: way the private sector is treated, how wages are negotiated,
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  Speaker 1: you know, how our priced in the economy is set up.
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  Speaker 1: How much of an adjustment they will implement on tariffs
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  Speaker 1: and other public goods to provide an incentive to investment
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  Speaker 1: in those sectors. I mean utilities in Argentina having gotten
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  Speaker 1: investment in the past ten fifteen years, and there is
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  Speaker 1: a need for that to happen. So it's not only physical,
• 7:32
  Speaker 1: it's not only monetary. There are a number of things
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  Speaker 1: that have changed and are changing in Argentina that could
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  Speaker 1: allow them to actually have a chance in the longer term.
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  Speaker 1: So you know what this program with the m F
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  Speaker 1: and this effort that they are into, uh, you know,
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  Speaker 1: could provide is a way for Argentines to understand that,
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  Speaker 1: you know, these new paradigming which they find themselves is
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  Speaker 1: something that could be sustainable and could result in higher
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  Speaker 1: growth and lower inflation without me to resort to price
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  Speaker 1: controls and capital controls and all sorts of atificial, artificial
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  Speaker 1: measures that they're having accustomed to because of the inefficiencies
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  Speaker 1: of the economy in the past. So you're saying, there's
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  Speaker 1: a lot that's going right, and a lot of the
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  Speaker 1: macri promise is being delivered, but this fort interest rates
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  Speaker 1: and the letters I am F, that's just getting in
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  Speaker 1: the way of that narrative. Too much bad pr well,
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  Speaker 1: no question about it. I mean, I m F is
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  Speaker 1: not a good word in in Argentina. It will be
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  Speaker 1: hard for this government to actually, you know, withstand the
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  Speaker 1: political cost. But again I repeat, and I think this
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  Speaker 1: is important. This I m F is not the MF
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  Speaker 1: of Indonesia in and it's an IMF that is willing
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  Speaker 1: to to help and to actually accept gradual programs in
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  Speaker 1: exchange of you know, cheap money. I mean, I think
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  Speaker 1: of out. You know, what are the Argentina pay foreign
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  Speaker 1: investors that buy their bonds As recently as in January, right,
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  Speaker 1: the coupons were between seven and eight percent. The I
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  Speaker 1: m F will lend them this money for four percent,
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  Speaker 1: so and this will be money that will be as obviously,
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  Speaker 1: you know, conditional on certain measures being implemented and approved
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  Speaker 1: that are already envisaged in their own program, in their
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  Speaker 1: own Argentine you know, adjustment program. So I think that
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  Speaker 1: you know, they will have to do a lot of
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  Speaker 1: work on in Argentina itself to make Argentines understand that
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  Speaker 1: they will not have to actually suffer, you know, the
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  Speaker 1: way they might have back in two thousand, two thousand
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  Speaker 1: and one, right where they were following an I m
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  Speaker 1: F prescribed program and the economy going in deep trouble,
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  Speaker 1: in a deep recession that at the end, you know,
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  Speaker 1: resulted in a in a in a default. In two
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  Speaker 1: thousand and one Fererico, with the election of Mr mccreed,
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  Speaker 1: that changed in era of Argentina's politics that had been
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  Speaker 1: in place for quite some time. And you say that
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  Speaker 1: even though the I m F has changed to some
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  Speaker 1: extent from it's kind of policies and philosophies twenty years ago.
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  Speaker 1: There still is I think probably hatred for the I
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  Speaker 1: M F in in a lot of corners of Argentina.
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  Speaker 1: Is there any possibility that this could be a danger
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  Speaker 1: to the current political leadership of the country and that
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  Speaker 1: we could go back to, you know, kind of situation
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  Speaker 1: that was in place for a long time under the
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  Speaker 1: Kirchener's There's definitely that risk. You can actually see it
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  Speaker 1: already from the reaction and the statements of some important
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  Speaker 1: people in the opposition. There is mill blat and they
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  Speaker 1: want more, right, I mean, this is a great opportunity
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  Speaker 1: for them to score a political point. I mean, I
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  Speaker 1: think that elections in Argentina will actually be run on
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  Speaker 1: the economy. And these elections are in two thousand nineteen,
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  Speaker 1: so you know, the sooner the better. And I think
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  Speaker 1: they made, you know, the right decision to try to
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  Speaker 1: fix this as soon as possible, because they will have
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  Speaker 1: a few quarters before elections come to play into those
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  Speaker 1: in the nineteen By then, if things work, the economy
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  Speaker 1: should be growing at a decent pace, you know, not potential,
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  Speaker 1: but at decent pace. Call it three percent, four percent hopefully,
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  Speaker 1: and uh financial markets domestically as well as phisical, as
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  Speaker 1: the fiscal situation should have stabilized. But I agree with
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  Speaker 1: you politically speaking, they will have to actually fight a
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  Speaker 1: number of battles with the position that will try to
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  Speaker 1: make the most of it, particularly with unions. Unions in
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  Speaker 1: Argentina are very powerful every first quarter, and it's still
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  Speaker 1: the case now that you know, the last unions are
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  Speaker 1: still negotiating their wage agreements for the year. Um what
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  Speaker 1: happens with inflation expectations is crucial. Otherwise you have in
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  Speaker 1: inflationary inertia in the in the in the in the system,
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  Speaker 1: and inflation never comes down. So they have been able
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  Speaker 1: to actually be successful in you know, this year with
• 11:56
  Speaker 1: those negotiations, and so what they need to do now
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  Speaker 1: is to dell e were on lower inflation. It's gonna
• 12:01
  Speaker 1: be tough because of the depreciation of the exchange rate.
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  Speaker 1: But if they can actually comply and be on the
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  Speaker 1: bold part of inflation by say the end of the
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  Speaker 1: first quarter two th nineteen, then they will have boosted
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  Speaker 1: their credibility with unions and with workers, and they will
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  Speaker 1: be able then to negotiate a new year way in
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  Speaker 1: negotiation scheme at lower inflation, Federico, Let's zoom out a bit.
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  Speaker 1: Is Argentina merely an extreme example of broader problems afflicting
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  Speaker 1: emerging markets? Well, I think that Argentina is a very
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  Speaker 1: peculiar case, right, I mean you think you have to
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  Speaker 1: think about a country that comes, you know, two years ago,
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  Speaker 1: had no access to international capital markets, extremely well prepared
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  Speaker 1: people with lots of credibility, come to the market and say, look,
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  Speaker 1: we have this program in front of you, We need
• 12:52
  Speaker 1: your financing. And in the past two years they have
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  Speaker 1: issued around a hundred billion dollars of that in international
• 12:58
  Speaker 1: capital markets, right, and in exchange for a program. And
• 13:03
  Speaker 1: so in the meantime, what has happened that is affecting
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  Speaker 1: other countries as well? Um, you know our many things.
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  Speaker 1: First of all, we have rates in the world economy
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  Speaker 1: actually going up, right. We have the ending of que
• 13:16
  Speaker 1: e in the U S and maybe the ending of
• 13:18
  Speaker 1: que in Europe not too far down the road. So
• 13:22
  Speaker 1: global monetary conditions are changing, you know, and that is
• 13:25
  Speaker 1: important for emerging markets because the cost of capital goes
• 13:29
  Speaker 1: up and people then start, you know, thinking on whether
• 13:32
  Speaker 1: investing in emerging markets may make sense or not. That's
• 13:35
  Speaker 1: a systemic, you know, shocked to emerging markets overall. And
• 13:39
  Speaker 1: then we have you know, higher volatility in the system.
• 13:41
  Speaker 1: You know, actility was very low for a long time
• 13:44
  Speaker 1: and all of the sudden spiked in February and it
• 13:47
  Speaker 1: has come down, but it's far mobility in the now
• 13:50
  Speaker 1: that it was in the past. And then you have
• 13:52
  Speaker 1: geo political issues, right. You have your political issues in
• 13:55
  Speaker 1: Asia that are you know, we'll see whether they get
• 13:58
  Speaker 1: resolved or not. We have the political issues in the
• 14:01
  Speaker 1: Middleities that are affecting many countries, right. I mean that
• 14:03
  Speaker 1: in particular effects Russia, Turkey, Israel, the whole me least
• 14:08
  Speaker 1: countries that we invest in as as emerging market investors.
• 14:11
  Speaker 1: And then you have the uncertainty brought upon by you know,
• 14:15
  Speaker 1: trade policies in the US. You know what will happen
• 14:17
  Speaker 1: with NAFTA, what will happen with other you know, trade
• 14:21
  Speaker 1: treaties around the world, and you know what will happen
• 14:24
  Speaker 1: with sanctions in different countries. I'm going to push back
• 14:28
  Speaker 1: just a little bit Federica on the global monetary conditions. Now,
• 14:32
  Speaker 1: It's true the FED is continuing to raise rights. It's
• 14:36
  Speaker 1: true the ECB has been clear that it's winding down. QUI.
• 14:41
  Speaker 1: Yet both institutions have been extremely transparent for some time
• 14:47
  Speaker 1: about what they're doing, and these changes are well advertised
• 14:52
  Speaker 1: and pretty gradual. What are we missing here? I agree
• 14:55
  Speaker 1: with you, But you know, think about what has happened
• 14:57
  Speaker 1: with the ten uere you know yield in the US, right,
• 15:01
  Speaker 1: I mean it's up sixty basis points so far this year.
• 15:05
  Speaker 1: It went up twenty five by points in January, twenty
• 15:07
  Speaker 1: basis points in February. You know, that is a shock
• 15:10
  Speaker 1: to the system. Right, it's basically the bond yields in
• 15:13
  Speaker 1: the longer end of the curve in in in the US,
• 15:16
  Speaker 1: and also booms that actually started affecting emerging markets in general.
• 15:21
  Speaker 1: The other shocks also, you know that we're unexpected to
• 15:25
  Speaker 1: some extent, have to do with the tax police in
• 15:28
  Speaker 1: the US. You know, repatriation had a tremendous impact on
• 15:31
  Speaker 1: library I mean it was not the only cous on
• 15:33
  Speaker 1: why library went up, but library rates, you know, went
• 15:37
  Speaker 1: up almost a hundred basis points in the past, you know,
• 15:39
  Speaker 1: several months. And that affects the appeal of carry trades
• 15:44
  Speaker 1: in emerging markets. I'll give you one example, Brazil, right,
• 15:47
  Speaker 1: Brazil carry uh what I mean by that is buying
• 15:51
  Speaker 1: the Brazilian currency, you know, the reality and financing that
• 15:56
  Speaker 1: with libral. You know, three quarters ago the car on
• 16:00
  Speaker 1: that trade was around six to seven percent. Nowadays is
• 16:04
  Speaker 1: less than two and a half percent. Right, Why because
• 16:07
  Speaker 1: on the one hand, central bank in Brazil has been
• 16:10
  Speaker 1: cutting rates. On the other hand, live or went up.
• 16:13
  Speaker 1: So this impact actually had and it has been spread out,
• 16:17
  Speaker 1: you know, across emerging markets, particularly in countries that actually
• 16:21
  Speaker 1: have inflation rates that are not in the double digits
• 16:24
  Speaker 1: and you know, policy rates that are relatively low, so Russia,
• 16:29
  Speaker 1: South Africa, Brazil, even Mexico. You know a number of
• 16:32
  Speaker 1: countries now are no longer carried trades and that affects
• 16:35
  Speaker 1: the amount of resources, financial resources that these markets might
• 16:39
  Speaker 1: be able to attract. So there are being you know
• 16:41
  Speaker 1: a number of shocks out there that actually affected emerging markets.
• 16:45
  Speaker 1: Although one thing that I will still say is that,
• 16:48
  Speaker 1: you know, the fundamental macro backdrop is still very solid.
• 16:52
  Speaker 1: Global growth is a strong, Commodity prices are very supportive.
• 16:55
  Speaker 1: But you have all these other shocks that are definitely
• 16:58
  Speaker 1: you know, having an impact on on ring market asset prices.
• 17:02
  Speaker 1: So does that mean that for the time being, the
• 17:05
  Speaker 1: I m F is probably not going to see a
• 17:08
  Speaker 1: boom in countries applying for loans, at least as long
• 17:11
  Speaker 1: as the global economy is still doing all right. Yes,
• 17:14
  Speaker 1: I mean, I will, I will actually be surprised if
• 17:17
  Speaker 1: we were to see, you know, a wave of problems
• 17:20
  Speaker 1: that might require them have to become a lot more active. Um,
• 17:23
  Speaker 1: you know, many of these countries I mean, and that's
• 17:25
  Speaker 1: the other side of the story, Many countries in emerging
• 17:28
  Speaker 1: markets are doing a lot better when it comes to
• 17:30
  Speaker 1: the quality of their economic policies. Well, Federica, this has
• 17:34
  Speaker 1: been a really interesting conversation and we're all going to
• 17:37
  Speaker 1: be watching Argentina very closely to see how it develops.
• 17:40
  Speaker 1: Federica County, thank you very much for joining us on Benchmark.
• 17:44
  Speaker 1: It was my pleasure. Thank you so much. Benchmark will
• 17:50
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• 17:52
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