Sunday, June 5, 2016

Whitewash bill paves way for more debt

Finance Minister Alfonso Prat-Gay is seen talking to reporters at a press conference.

By Ignacio Portes
Herald Staff

Cash from amnesty could turn into cheap bonds, but long-term worries grow

The whitewash programme included in the mega-bill reforming pensions, revenue-sharing and taxes that President Mauricio Macri’s administration sent to Congress last week could open the door for even more debt issuing, as economists across the political spectrum are warning about the risks of increasing state debt.

Part of those loans, however, could come at one of the cheapest rates available around the globe: zero. Only some very short-term bonds in the US and other first world countries have ever offered rates below zero, a rarity in financial markets.

The reason is that the structure of the bill is such that it offers those who bring back their cash to the country’s banking system the opportunity to purchase Argentine bonds, but facing the penalty of accruing no interest on them.

The funds that come to the country through the whitewash bill before October will pay no taxes if they are used to purchase a three-year Argentine bond that cannot be bought or sold and that has no interest. Another option, available until the end of the year, will be purchasing a six-year Argentine bond, that also can't be bought or sold and that offers zero interest rates for the first two years and five percent for the last four.

Those bonds will give the government the opportunity of financing at surprisingly good conditions, a must for Macri's admnistration considering the fact that is facing a growing deficit despite having cut subsidies without jumpstarting the economy.

The pressing finances needs are made more urgent when the government's goal of cutting down the Central Bank's printing of pesos is also considered. The combination of a growing deficit, less printing and plunging tax collection figures (up by only 23 percent in May, a strong fall when adjusted for inflation) leaves just debt issuing as a way of keeping the federal state's finances afloat.

Short-term support, long-term doubts

That situation, which is replicated across the provinces, means that Congressional approval for the bill is likely.

Río Negro Senator Miguel Pichetto, a key dealmaker in the Peronist opposition which also played a prominent role in the approval of the deal with the “vulture” funds, said recently that the whitewash is necessary because the provinces are issuing debt at the same rates as third-world countries. With more dollars at home, more financing opportunities could open, he argues.

But one of the most influential debt academics in the world, Carmen Reinhart, published an essay about the country this week questioning this approach.

“While Argentina’s government clearly needs to borrow, it could go too far – not least because provincial governments are also eager to issue debt. Some estimates suggest that imminent provincial borrowing could amount to another US$5 billion of external debt. This trend would be less worrisome if provincial finances were sound and growth prospects robust. That is not the case. Already, at least ten of Argentina’s provinces face some kind of economic crisis,” Reinhart said.

“Given the key role that provincial excesses played in the crisis from which the country just escaped (a role similar to the one they played in the worst financial panic of the nineteenth century, the Baring Crisis of 1890), none of this should be taken lightly,” she argued.

Reinhart has been criticized strongly by economists such as Nobel prize Paul Krugman for being too much of a deficit hawk, but her academic work on the world's history of debt-fuelled booms which then go bust is still widely read, with Argentina's post 1990s crisis one of the classic examples.

At home, others agree about the dangers. “The government reminds me of the perinola game I played as a kid, when it said ‘take it all.’ It is taking every kind of debt it can,” former Central Bank President and Renewal Front economist Aldo Pignanelli told the Herald.

Paying pensioners - but how?

While the debt coming from the whitewash will be cheap, that will be a one-year exception. After that, the pension hikes that come with the whitewash bill will add to the state’s deficit, forcing the government to find more cash somewhere in order to pay.

“The interest rates that Argentina has to pay for debt are still very high. I’m not saying I oppose paying pensioners, I don’t, but Argentina is getting loans, provinces are getting loans, companies are getting loans and as for tomorrow, nobody knows,” Pignanelli said.

On the left, the bill has also raised doubts. According to Fernanda Vallejos, an economist closer to the Victory Front, the payment to pensioners privileges the richest among them, and the cost could be too high for ANSES to handle in a sustainable way.

Marcelo Ramal, from the Workers’ Party, does not oppose the payment to pensioners either (although he says it should be higher), but says the cash could ultimately come from a deeper reform raising retirement age that Macri's administration is already hinting at, or from selling part of ANSES’ social security agency assets.

For the coming years, financing will be primarily based on debt. But according to Reinhart, even if the Argentine government has suddenly gained the favour of financial markets, abundant finance is “precarious” and “fleeting” in nature, and the risks can be big if that support suddenly dries up. The lessons of the 2001 default, she says, should “not be forgotten. That means resisting the temptation to pile up a costly stock of high-yield debt.”

@ignacioportes