The risks of the libertarian experiment
For more than a year, we’ve been talking about the risk of transitioning from a perverse financial repression scheme to a framework of greater economic freedom built upon an increasingly complicated balance sheet of the Central Bank. However, the absurdity of the past few days, even the best Netflix scriptwriter couldn’t have imagined it.
The combination of a minister willing to do anything to win an election and an outsider candidate with serious chances of winning, responding “Never, never in pesos… the Peso is crap” to an unfortunate question from a journalist about what he would recommend to someone renewing a fixed-term deposit, adds extra adrenaline to an already complicated situation. The escalation of financial dollars sped up, and the President of the Nation had no better idea than to file a criminal complaint against the candidate with the most votes in the Primaries for “inciting a run against the Peso.” Faced with this overreaction, the LLA candidate called a press conference, reaffirming what was said in Monday’s interview (October 9) and warning that “if they want to stop the culprits, they should look in the mirror”. Almost simultaneously, the Minister-Candidate requested a psychological examination for the candidates, recalling that a “drunk president led us into a war” (referring to Galtieri and the Falklands War), and, quick-witted as always, Milei responded by demanding an economics exam to assess the suitability of lawyer Massa to be the Minister of Economy.
The anything-goes nature of politics is taking unpredictable turns; putting numbers to this nominality is literally science fiction. We’re not just talking about lifting currency controls anymore; today, we’re talking about “dollarizing without dollars” in a short span hyperinflation.
If the path to dollarization is credible, the only contract hedging the transition is the financial dollar in its various forms. However, the increasingly stringent restrictions to access it operate with growing force every day, creating an infinite demand for financial assets and goods against pesos that are dwindling in value. Debt contracts in pesos trading above par lose significance if the threat is credible, as even those linked to the official dollar rate, which are essentially contracts in dollars payable in pesos, would post facto be worth the same as the rest of the dollar-denominated debt (currently at 27 cents). The uncertainty about the management of the Leliqs (short-term central bank securities in Argentina) and consequently, the deposits if a scheme of this nature is implemented, is triggering a run within the system itself, from fixed-term deposits to transactional accounts. There is also a run within the funds, not only towards the most liquid assets (T0) which also include fixed-term deposits but towards those with private dollar-linked instruments, whose subscriptions are literally closing.
Even assuming that Baglini’s theorem will come into play and dollarization was nothing more than a campaign strategy (similar to Menem’s huge salary hike and the “Productive Revolution” in 1989), triggering a run and accelerating nominal values in the face of double-digit monthly inflation is not the best idea to kickstart a stabilization program. As we have been saying, such a program also needs to be accompanied by reforms aimed at bolstering systemic productivity and agreements ensuring governance.
The room for gradualism that existed in 2015 is no longer there. A shock is needed to correct the distortion of relative prices “in day zero” and establish a credible anchor that allows progress in the aforementioned areas. The question is not whether what comes next will be a shock or gradualism but whether it’s a “controlled shock” (to avoid overreacting with the peso interest rate and establish compensatory mechanisms to negotiate the de-indexation of spending) or an “uncontrolled shock” that escalates nominal values permanently and/or forces the breaching of contracts.
The comparison with the chaotic transition in 1989 between the Raúl Alfonsin administration and Carlos Menem’s, which we have been discussing in our reports, is becoming increasingly relevant. Not so much due to the initial conditions, but because of the irresponsibility of both parties in pushing the election to the limit. Today, there is currency control, not a formal exchange rate split as there was back then; the starting indexation is much lower today; the financial system does not have hidden losses (“pufos”) on the balance sheets that require rediscounts; fixed-term deposits are made for one month, not seven days as back then, and 30% of the deposits are still transactional, compared to less than 5% at that time. The current starting pointt (with nuances) is more similar to the period before the “Rodrigazo” when Celestino Rodrigo decided to correct relative prices (dollar, rates, and fuel) with a shock, assuming he controlled the labor agreements and coordinated a change in the inflationary regime that lasted more than 15 years with inflation rates above 100% annually (several times above 300% annually). It also differs from the situation in 2001 when the rigid exchange rate rule and the absence of a lender of last resort in the face of external shock (especially after Brazil’s devaluation) led to the corralito (economic measures to freeze bank accounts and deposits) and default.
Speaking in the third person (as an analyst and not a candidate with serious chances of winning), Milei stated that this crisis was a perverse combination of the three that occurred in the past: 1975 (Rodrigazo), 1989 (Double Hyperinflation + Bonex Plan), and 2001 (Corralito and Default). If he wins and effectively moves forward with accounting dollarization without actual dollars after a rapid lifting of currency controls, he might end up personally coordinating (in the first person) a perverse combination of these three crises, giving a distinctive name to the new event, absolving Kirchnerism of any blame, and allowing it to potentially rise from the ashes once again. We will see whether he is similar to Menem or the opposite of Menem.
