Wednesday, August 14, 2019

Letter 2 from Argentina

Alejandro Rodrigues writes again from Argentina (previous post)

"This  graph shows the evolution of peso denominated fixed income mutual funds. On Monday (after the elections) this funds suffered withdrawals of 6% of the total shares. Net assets fell by more as prices plummeted (-5%). On Tuesday, shares fell by 6% again but prices remained constant. On Monday, Money Market funds suffered withdrawals (drop in shares) of 16% although they didn't break the buck (on average). "

I gather from other discussions that Argentinians are trying to move assets fast to dollars. That is consistent with this drop in Peso denominated fund assets. (Though of course for every seller there is a buyer -- I wonder who the private parties (non funds) are that are buying Peso fixed income assets!)

There is an interesting dynamic here. The chance of a new regime with terrible economic policies rises. It causes a rush to dollars. People suspect that the new regime will impose capital controls.  The  government has trouble rolling over its own currency debt, as interest rates rise. That makes the fiscal situation worse.

In short, the chance of a bad government taking over can provoke a crisis that makes the chance of a bad government taking over larger. Or perhaps Argentines will break the usual electoral patterns.


  1. Hi John, I would like to add that the country faces a very weak economic situation for several years.

    GDP per capita has not increased since 2011. There was a significant drop in GDP last year (-2.5%),and in this year the situation will not be reversed.

    Only at the end of the second quarter a slow motorized recovery was glimpsed by some sectors (especially agriculture and with the industry cutting the fall) and monthly inflation rates that were decreasing in a path around 2%, but the terrible election result for the ruling party, put great pressure on a falling economy, with significant debt maturities in the short term and with bleak growth prospects, which always seems to be on the verge of another disruptive crisis.

    The Macri Administration will probably leave a positive trade balance, a small primary fiscal deficit (not the financial one), but with poverty rates(headcount ratios) of 35% and unemployment above 10%.

    If I remember correctly, in some previous post, you have commented on the problem of high inflation in Argentina, another economic topical in the daily situation of my country.

    Best Regards.

  2. "Or perhaps Argentines will break the usual electoral patterns"

    As if. Argentina has been pursuing the same failed, populist policies for a century.

    It shouldn't be that hard for Argentinians to figure out that other countries are following different policies and getting radically better results - for Pete's sake, Chile is right next door - and say, "let's do the same." Unless of course there's some deep structural or cultural barriers in the way. And until someone figures out what those barriers are and address them, there's absolutely no reason to believe that "this time it will be different."

  3. Voters in elections are poor deciders of economic policies. It is likely a matter of chance that good decisions are made that foster stability and growth. Politicians, bankers, and bureaucrats take their chances in governance. They play with society's money. What seems to work are decisions affecting small units, e.g., a family, a store, a community. Damage is limited. Above that is more like a game of roulette. You can lose, and they can win.

  4. Mercy: Let the exchange rate depreciate so much that an appreciation is expected! Then, no one will try to move locally denominated assets into dollar denominated assets. :-) The monetary problem solved, but not the real problem. Over and out.


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