Argentina As A Model For Greece
An interview with Miguel Ferreyra
Miguel Ferreyra de Bone is a finance professional and guest lecturer of Macroeconomics at the Universidad del Salvador in Buenos Aires, ARG, from which he has a degree in Business Administration and Commerce. During the course of his studies, he also completed coursework at the University of Vermont focused on International Economics and Latin Markets. Presently, he is engaged in research at Universidad del Salvador to determine an appropriate discount rate for investments in emerging markets.
His current and past work experience includes an economist position at Ámbito Financiero, the leading financial newspaper in Argentina, an advisory role at Banco Galicia, the largest private bank in Argentina by AUM and as a commodities analyst at both Cargill and Ledesma. He also collaborates with Global Risk Insights as an economic analyst focused on Latin America. He is well versed in the economies of South America and how they impact the global markets.
Erico Tavares: Thanks for being with us today Miguel. As we’re seeing this Greek tragedy unfolding, it occurred to us that should they decide to leave the Euro Argentina might give them some ideas of what to do next.
As an Argentinean economist and professor focused on the Latin American markets, can you please share with us some of the factors which have led to the very repressive foreign exchange regime currently in place in your country?
Miguel Ferreyra de Bone: A dramatically overvalued exchange rate, where the Argentinean Peso had been pegged to the US dollar at 1, faulty fiscal and economic policies and a huge expansion in debt – both public and private – led to a sovereign default in 2001.
During the 1990s the debts just kept on piling up to pay for all sorts of expansionary policies. Eventually new debts had to be issued just to pay the interest of the prior debts, at which point the whole situation became unsustainable. This is somewhat similar to what happened in Greece.
In 2003, Nestor Kirchner, the deceased former President of Argentina who was also the husband of the current President, Cristina Kirchner, was elected on a promise to jumpstart the economy. He started by incentivizing industry and production and further devaluing the currency which led to a strong recovery – in fact boom times according to some analysts.
At the same time, by political decree the central bank stopped being independent, which was a feature of all the mandates of the Kirchners. As you know, there are many studies around the world that show that the less independent central banks are, the more inflation is produced. And this was the case in Argentina. The central bank is then increasingly used as tool to promote internal consumption. This has turned out to be an unfortunate decision.
ET: We remember that. Inflation actually started to pick up markedly from 2008 onwards.
Argentina Inflation Rate
MF: Right. The inflation rate started to pick up as you can see in the graph above. But at the same time there were still no problems with the exchange rate, everyone could buy foreign currency.
Actually, this is an important characteristic of Argentinians. Collectively we are the second largest holders of US dollar bills per capita in the world. We have a culture of “dollarization”, basically, because we don’t trust the Peso. This is the result of recurring economic crises over the last 50 years – pretty much every 10 years we have a big crisis… 1989, 2001, 2009-10. We are still stuck in the last crisis by the way.
So in 2007, Cristina Kirchner was elected as President, taking over from her husband, who passed away soon after. Argentina was not immune to the global economic crisis of those days and soon the new government started looking for ways to increase revenues, to pay for even more expansionary social policies: subsidies on a range of products and services for lower income families, payments for each newborn child and so forth.
Argentina is a major exporter of soybeans. In fact the entire agro-industrial complex generates a very large amount of foreign currency, in excess of 60% in a regular year. As soybean prices started to recover, the government wanted to increase the export tax from 30% to 50%. The proposed tax was almost “progressive”, meaning that when prices were high tax rates would be higher and vice versa. But producers vigorously revolted against the measure and it ended up not being introduced.
In 2010 the economy started coming off the rails, especially with the shockwaves coming from the United States and Europe. Faced with dwindling foreign reserves, the government took measures to restrict its citizen’s access to foreign currency. The excuse was that having a national currency like the Peso people would still chose to transact in US dollars. The reality is that foreign currency reserves were so low that they were incapable of sustaining the ongoing economic activity, especially after the fall of soybean prices in the world markets.
Up until that point apartments and other big ticket items were bought and sold in US dollars. And you can understand why. As uncertainty rises, the Argentinean knows that the Peso is not reliable and there’s a flight towards the US dollar. This was putting a lot of pressure on reserves. So the prohibition was put in place – for people and for companies.
These restrictions have been eased somewhat and some conversion into US dollars for savings purposes is allowed. But the thresholds, based on income levels, are very low and you always get converted at the official exchange rate anyhow.
ET: Curiously enough, the prohibition not only applied to foreign currency but also to gold. So we have the admission of the Argentinean government that gold is actually money...
MF: That is absolutely correct. You cannot buy gold as a savings / investment vehicle in Argentina today.
When the government forbade the ownership of US dollars, Euros and so forth, people started to buy gold bars instead. So once it realized that its citizens were trying to find other alternatives, the government took steps to also prohibit domestic transactions involving physical gold.
ET: That’s amazing – both in its scope and its admission. Other restrictions soon followed right?
MF: Yes, two others in fact. The first was that any foreign companies were forbidden to send dividends abroad, including to their home countries. As a result, all multinational companies must leave their dollars in Argentina. It’s a very difficult situation for them.
The government also implemented tight controls over imports. Again the logic was to prevent the flight of currency out of the country. And so the government started to control imports one by one, a process which is very difficult and highly bureaucratic. Any company wanting to import equipment and raw materials for instance must fill out a lot of paperwork, present it at the right government office and then the import will either be authorized or not. In certain cases this can take months.
We have many problems where the imports are not authorized and there are ships at the port that cannot unload for days. The cargo can go bad, trades become unprofitable and so forth. And why? Because that’s a way for the government to restrict currency flight out of the country.
ET: Then there was also the nationalization of Repsol YPF.
MF: Again, same logic. Argentina became a net importer of petroleum products (17% of the overall imports are energy related and only 6% of the exports belong to the oil sector) and these were weighing heavily on the balance of trade. So they took this unprecedented step and nationalized Repsol’s stake in YPF. Curiously we still have a big trade deficit in this area…
ET: And what has been the result of all these policies?
MF: The ones that have impacted us the most in our daily lives were the import restrictions and the prohibition to buy foreign currency.
As a result of the latter a black market for US dollars has emerged, the “dollar blue” as it is known, managed by a small by influential number of people. People talk about there being 50 or so companies that handle this – illegally of course, working in the shadows of the economy. This is nothing obviously nefarious, by the way. Most often you go to a normal store like a shoe shop and you are taken to a small room at the back.
ET: Presumably the government knows about this but needs to let some steam off the pressure cooker…
MF: Yes, it is well known that the dollar blue goes up when the government “forgets” about the issue and it goes down when it wants it to go down by threatening traders with police actions…
ET: In fact, all the financial newspapers in Argentina publish the two exchange rates, the official and the blue, side by side…
MF: It is there because it is very important for the Argentinian to know the value of the two. It’s actually an important economic indicator for the people.
I should also add that when Argentinians travel abroad, they must also pay a 35% tax on all the purchases they do abroad. If you pay $10 for a coffee in New York, you must pay an additional $3.5 to the government after you return home. There are some offsets to this depending on your income and certain thresholds but it just shows how far this policy has gone. In fact few people take advantage of this because as a lot of the economy is transacted in the black market, and few people want to show their real earnings to the government in order to get this refund.
ET: What about the tourists going to Argentina? It’s evidently a wonderful country and many people want to go there. How do they do it?
MF: The tourists bring their own currencies and for them it’s very advantageous. The dollar blue rate is at about 13.5, compared to an official rate of 9.1 or thereabouts. So they are getting around a 33% discount! It’s like the country is on sale for them.
But for Argentinians these restrictions are terrible. We don’t have a transparent system, the economy is not functioning well. People for the most part do their purchases using cash only, things like houses even.
ET: In which cash currency? US dollars?
MF: Houses for the most part are sold in US dollars. But the housing market had a big fall as a result of these restrictions. If you did not have dollars before, it is going to be very hard to buy a house today. You might get a mortgage, but nobody will want to sell you an apartment for, say, 600,000 Pesos. Why? We have an unofficial inflation rate of 28% per year, so that money will lose a lot of value. A year later you will have lost around a third of your purchasing power.
ET: And where is this inflation coming from? Not from abroad given all these restrictions…
MF: The central bank is following a very expansionary policy. They print money to promote consumption. There are subsidies for everything: public transportation, electricity, gas, airfares, train fares and the like.
A person in Buenos Aires today pays 3.5 Pesos to go from one end of the city to the other. That is 38 cents! This is incredible. Most economists say that the real price of that ride should be at least 10 Pesos to be comparable to other countries in the region and given the cost structure of the company. So the difference of those 10 Pesos in real value and the 3.5 paid by that person are printed by the government.
We even subsidize football / soccer in Argentina. Have a look at “Futbol Para Todos”. The government pays and subsidizes all the matches on public TV. In most other countries it’s the private companies who sponsor that; here it’s the government. There are only a small amount of private ads. And we are talking about an enormous amount of money for this, about US$295 million in 2014.
The level of subsidies is incredibly large, even when the economy is doing poorly – as a result of these policies and the fall in international commodity prices, which has also affected other producing countries like Brazil.
And why? We have a populist government, which has been known to misreport the official statistics. They even stopped publishing the poverty indicators in Argentina. Imagine that. So we no longer know how many poor people there are. They even misreported the inflation rate, claiming it was about 10% per annum up until a year ago or so. Since then the IMF has put pressure on the government to stop playing funny games with statistics, so now the official statistics are closer to 26% per annum. So there was a 16 percentage point shift, ostensibly, by official decree.
The Argentinian economy today is sustained by consumption alone.
ET: That’s just incredible. And if you are an exporter, your costs are rising fast because of the inflation rate. But you are not getting compensated by the official exchange rate. In other words your real exchange rate is appreciating quite strongly, which must be severely squeezing your profit margin...
MF: That’s exactly right. At the official exchange rate Argentina is not competitive in the world markets. In South America we have lost a lot of market share for that reason. The exporters are the ones demanding for a strong devaluation of the Peso. Some analysts suggest that it should be closer to 12 to regain some momentum, and we are at 9.1.
Therefore Argentinean products are too expensive. There are exporters who can’t even cover their costs. The dairy industry is no longer profitable. And the exporters of soybeans are also suffering, so they have stopped production. The smaller producers have to rent their fields to the larger producers because they just can’t make money without the benefits of scale.
ET: Based on what you described it seems there is a bifurcation in Argentinian society depending on who’s on the receiving end of these policies. Industry, exporters and commerce all seem to want a change more aligned with market principles. On the other hand there must many lower income people who want to keep this system going. Will there be a change coming?
MF: In October we will have Presidential elections. President Kirchner is in her last term, as according to the Constitution she can only be elected for two terms.
There are basically two frontrunners based on the current polls: Daniel Scioli, the candidate from the Peronist Party, Kirchner’s party which is currently running the country, with about 35% of the vote; and Mauricio Macri, the current Mayor of Buenos Aires, which is running to the right of Scioli, with about 30% of the vote. The rest of the votes are spread among many candidates, so it is likely we will have a second election between these two candidates, and I can’t predict who will win then.
Scioli was the Vice President during President Nestor Kirchner’s term in office, so he is deeply involved with the current policies. Most likely there will be no change if he wins. In fact his Vice President is closely aligned to the current President Kirchner, who as a result will remain politically involved behind the scenes. So they will likely maintain very high government subsidies as well as the current central bank policies.
Macri is known as a more pro-business politician. He proposes a gradual adjustment to more market-oriented fiscal policies. He is very popular amongst his constituents, residents of Buenos Aires, winning two times with around 60% of the vote, and has done a good job at running the capital city, according to his voters.
It is hard to call the election. However, about 30% of Argentinians are in the lower income classes. This is a sure vote for the current government, who keeps on promising even more aid and subsidies. This is a big number – and of people who generally vote with their pockets. You know, education is still a problem in my country, where 7 out of 10 kids don’t finish high school. So with these dynamics it is hard to change course. But it could happen.
ET: Well another country that decidedly needs to change course is of course Greece. Which brings us to the key question: could Greece adopt Argentina’s currency model should they leave the Euro?
Both countries are structurally very different of course, with Argentina being a major exporter and natural resources producer, while Greece is largely an importer (albeit relatively strong in tourism). But there are some striking similarities: both have or had to cope with a gigantic amount of debt unlikely to be repaid; both have citizens who deeply mistrust their governments; the ownership of foreign cash in each country is very high (“foreign” in the case of Greece meaning Euros if the Drachma is adopted); both have sizeable parallel economies; and external creditors have proven to be very impatient. They even use the same colors in their flags! What’s your view on this?
MF: I think that if Greece were to leave the Euro things would get very complicated for them. First, they lack the actual capacity to print a new currency, as stated by their Finance Minister. But OK, this is a technicality.
More importantly, they would be going back to a much more devalued national currency, similar to Argentina where people mistrust the Peso and would likely want to store their savings in a much more credible currency like the Euro, which will still be widely used in neighboring countries. If the government were to do this, in my view this would be a bad decision and make it much more unlikely that they could repay their debts in any currency.
ET: Sure, but this also happened in Argentina and eventually they negotiated a big haircut…
MF: Yes, there was a big restructuring of the debt. This was the hallmark of the first Kirchner government, as well as his fight against foreign creditors. On the whole Argentina restructured something like 93% of its debts.
So Greece has no choice but to restructure its debts and adopt a more sustainable fiscal policy. We heard that they just asked for another €50 billion over the next three years, but this money will likely never be repaid – even less so if they were to leave the Euro. And what would they do with all the cash Euros still in circulation in their country?
ET: Presumably do the same thing as the Argentinian government did, take them away in exchange for an artificially inflated local currency.
MF: Yes, and this would create the same very unhealthy situation as we have in Argentina. Why? If people start storing value in a foreign currency, in this case Greeks using Euros, this will create a huge lack of transparency and affect normal trade flows and transactions. And we know that the parallel economy in Greece is already quite large the way it is. So imagine an exponential version of that. It would be a very difficult period for Greece.
And the last thing they need is a mass of tourists stripping away the assets of the country for very little. They need a strong currency that can keep its value.
ET: OK, but if they stay in the Euro it will not be easy for them either.
MF: That’s right but in my view Europe must agree to make concessions. Just imagine the fees they will start paying if the current IMF default is not resolved. So something must be done. Creditors need to manage their expectations. Greece must raise taxes, manage spending, basically implement all the policies prescribed by the IMF and Eurogroup, but the creditors also need to be flexible.
Both parties must make concessions in order to reach some type of a mutually beneficial agreement. And so far we haven’t seen that.
ET: Miguel, thank you very much for your thoughts.
MF: Thank you. All the best.
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