New debt, new problems?

Buenos Aires Herald. 16 de abril de 2016.

Any classical textbook of macroeconomic theory recognizes that the existence of a wide and cheap capital market allows citizens and governments to stabilize consumption. This is not the case for emerging countries that faced high interest rates for their debts.

The main problem of emerging economies is that the volatility of consumption determines problems and inequalities between agents. These economies have procyclical fiscal revenues implying lack of funding during crises and credits during booms.

The recent agreement approved by the Senate to exit the default opens the possibility of having a new instrument that could allow improving life quality for citizens. However, only a prudent use of the instrument guarantees that in the future we will not fall into default again and continue our decline as a nation.

The launch of new bonds will reach approximately 12.5 billion dollars and will be used to pay court rulings and to restart the payment of interest arrears from the suspension of payments ordered by Judge Griesa and the Supreme Court of the United States.

Financial terms of issue are not yet known but it is speculated that they would go from five years to 30 years of maturity. It is presumed that the nominal emission rate will be about 7.5 percent annually in dollars.

Given the weak situation of Argentina in the international financial community, the agreement is convenient but expensive. On the other hand it is a better answer than continuing with the default and letting the interest grow. Another risk is that the bondholders of restructured debt reclaim all their debts ,causing a general default and worsening the situation.
But all that glitters is not gold, the lack of general equilibrium of the Mauricio Macri administration is not showing a horizon of stability that enables to solve the underlying problems of Argentina’s economy to be solved.

The fiscal deficit in 2016 will be between five percent and seven percent of Gross Domestic Product, in a context of stagflation and tax revenues dropping in real terms. On the other hand the tax burden is so high that it doesn’t allow new taxes nor the increase of the fiscal structure rates.

Believing that the new debt solves the fundamental problems of the economy can be dangerous. If the government uses the capital market to finance a permanent increase in public spending in a short term, we would be in trouble in the near future. Using the international capital market to finance current spending without structural reforms to lower the ratio of Public Expenditure / GDP would further weaken us.

Weaknesses of the agreement:

1 — The lack of a consistent fiscal rule that will generate a greater revenue effort influences the price of borrowing, increasing the risk and interest rates.

2 — The lack of an agreement with the International Monetary Fund aggravated the situation by not having cheap funds to stabilize the foreign exchange, prices and balance of payments imbalances.

3 — The monetary imbalance and increased liabilities of Central Bank could generate problems in the financial system. The Central Bank could become a unique borrower of the system and could generate a systemic crisis.

4 — The belief that the arrangement with the holdouts implies a capital inflow into our country is naive. We are in an international context of capital outflows from emerging to developed economies. Capital flows to Argentina will be expensive and scarce.

5 — Replacing the monetary financing by other interest-bearing liabilities or issuing new debt without a scenario of declining fiscal deficit would imply an exchange rate appreciation.

The return to the international capital market is very good news, but we must bear in mind that without a decrease in public spending, almost to historic levels, Argentina can’t grow again to reduce poverty, unemployment and stagnation.

Argentina needs a deep public-sector reform and a new tax system to reduce costs for businesses by improving the competitiveness of our economy. Sustaining a large public expenditure structure means that the adjustment should always be paid by the private sector.