Again against the defect wall | The recent d …

A new phase of the mega-devaluation has thrown the economy into a Debt Unsustainability Scenario; Now without the possibility of avoiding it. The uncontrolled issuance of bonds during the first half of the period, which included a hundred-year-old madman led by then Finance Minister and now reappeared, Luis Caputo stretched the ability to refund. The exchange parity shot up to 63 pesos and no apparent ceiling, despite attempts to appease it with the political messages of the triumphant opposition, defined an unavoidable situation. Do nothing and expect an uncontrolled defect or accept that today the debt is unpayable and begin the complex process of an orderly restructuring.

The aftermath of the PASO outbreak causes a longer recession and an even more pronounced decline in the economy. So with a huge dollar liability and a gross domestic product in devalued and declining pesos, the most used ratio to badess the solvency level of a shot at a critical economic point.

At the end of last year, the debt-to-GDP ratio was 86.2% and the situation was already marginal. A tentative estimate today places it above 100%. That is to say, the total public sector debt is equivalent to the product. Under current conditions of instability, this indicator is more likely to continue to deteriorate than to improve.

How the debt problem is solved is a fundamental factor in the political destiny of the next government and the economic outlook from 2020..

Insolvency

L & # 39; indicator Debt / GDP It shows how much production of goods and services a year would be needed to repay the debt. For developed countries, it is a significant ratio, but it is not essential to badess the strength of their economies. For this reason, several record numbers exceed one hundred percent without generating too much concern in the world of global finance.

On the other hand, for peripheral countries that are indebted and dependent on external financing, this is a relevant, although not unique indicator for the badessment of solvency. Provides an approximation on what is the repayment capacity of the debt of this economy. The more the debt stock will be cumbersome compared to the wealth generated in a lower year, the higher the level of solvency.

The deterioration of this indicator of macroeconomics has increased in each round of the megaevaluation. The first took place in December 2015, the second last April and the last one started last Monday. Parity has risen by an impressive 570% (from 9.40 to 63.00 pesos) until now from Macri's government. In future operations, a dollar of nearly 80 pesos is agreed for the end of November, which, if it were to materialize, would represent a 750% increase over the four years of another neoliberal experiment.

The solvency loss of the economy stems from the decision to engage a frenzied debt from the first day Macri occupied the Rose House. The coup de send was capitulation at the foot of the vulture funds, when the then Finance Secretary, Luis Caputo, accepted all the conditions without negotiating. This erosion of solvency continued with the total deregulation of the foreign exchange market and the unrestricted opening to the entry and exit of capital, which opened the door to an exchange rate. very unstable. Continue with an economic policy that has led to a prolonged recession.

The macro-economy has received a debtafter a major social effort of years of net cancellation of external commitments, to leave her bankrupt. And he did it in just two years. Since then, he could only survive thanks to the mbadive loan from the IMF, backed by Donald Trump's United States, with the illusory desire to put an end to Peronism's return to Casa Rosada.

Debt

The finance secretary reported that Total debt (pesos plus dollars) as at April 30 amounted to $ 334.289 million. With the exchange rate adjustment of these days, the product estimated by the IMF at the end of this year (with a decline of 1.3%) of $ 477,743 million fell to about 330,000 million dollars. The decline will be greater because the economy will fall at least twice compared to forecasts. JP Morgan, one of the most powerful allies of the macrismo financial sector, has recalculated its estimates to a 2.3 percent drop for this year.

The macrismo did not let pillar weaken the structure of the debt, since also increased dollarization of total stock. It was 67% at the end of 2017 to reach nearly 80% today. This means that a devaluation hits Treasury accounts very heavily, requiring a larger tax effort (more pesos to get dollars) to meet the interest and principal maturities.

The currency adjustment liquefies the portion of the debt in pesos when it is measured in dollars, without changing the portion issued in foreign currency. Since GDP is fully denominated in pesos, the devaluation impacts it by falling sharply and heavily in dollars. Thus, in the ratio between public debt and product, in dollars, the second component is reduced more than proportionally to that of the debt (pesos plus dollars), which ends up aggravating the solvency ratio.

The trajectory of this indicator during the macro-economy is as follows: it started with the Kirnerian heritage at 37.6%; in 2017, it had already increased to 54.6%; soared to 86.2% by the end of 2018; and now it's one hundred percent. In almost four years of Alliance government Let's change the signal that warns about the fragility of the economy facing debt maturities, which has almost tripled.

MFIs

In these days of supervision and definition of what to do on the foreign exchange market, ordering the head of the central bank, Guido Sandleris, to intervene when he sells dollars, the IMF again stumbled with the same stone. As usual he was wrong in his projections of the Argentine economy, among them on the way that the solvency ratio of the debt would have.

The latest report from the technicians in charge of the Argentine economy – the fourth published last month – ensures that after reaching 86% of GDP in 2018, "the federal government's debt is expected to begin to decline in 2019 and fall at around 60% of GDP in the medium term. "It indicates that as a percentage of GDP, the federal government's debt has risen from 58% in 2017 to 86% by the end of 2018.

The techno-bureaucracy of the Fund, which is waiting for the disembarkation of the Bulgarian Kristalina Georgieva replacing the French Christine Lagarde, who left the Argentine package with a bow to occupy the presidency of the European Central Bank, estimated that "the debt will fall to about 77% of GDP in 2019". Not only will it not go down, but it has already exceeded 100%.

The optimism of the Fondomonetaristas was based on the fact that it projected the stability of the currencieswith an increase in prices, the exchange rate would be appreciated and an improvement in the economy. For example, Fund economists said the debt would decline "gradually" to 60 percent of GDP by 2024.

This is the basic scenario they consider most likely. To cover they mentioned a negative. They noted that given the high proportion of debt denominated in foreign currencies, the possibility of an exchange rate shock is presented as a factor of "significant vulnerability". In a simulation with a real devaluation of 50%, "debt could exceed 115% of GDP"

What to do?

The debt scenarios that the next government could choose are:

1. do nothing. Paying increasing interest on debt, bet on refinancing each of the maturities of capital with the hope that with a stabilizing economy, the voluntary credit market will be reopened.

2. Default uncontrolled.

3. Restructured order.

The first option, the one sought by financiers and the network of economists in the city, is to place the economy in society. permanent tax adjustment pathway. With a heavily dollarized public debt, the ongoing mega-devaluation will require a considerable financial effort to meet the interest burden. In order to meet these commitments, reductions must be made in other items of the national budget. This adjustment will keep the economy in a vicious recessive circle This will require more adjustment of funds available to pay the debt, until it becomes socially and economically unachievable. To think that this dynamic can be avoided with a shock of confidence generated by a new government that promotes economic growth and, consequently, the increase of resources, an ingenuity that the examination of the Argentine economic history should remove.

The second possibility is the worst case.. The uncontrolled defect, as announced by Adolfo Rodríguez Saa on 23 December 2001, would entail enormous financial and economic costs as it would be realized without the necessary forecasts to begin the subsequent normalization with the local and external capital markets. Although freeing resources for debt payment allows for expansive measures, general instability and capital flight accelerated by uncertainty would throw the economy out of recession into depression.

The third scenario is the least costly for the economy and also for bond creditorseven if they have to accept a withdrawal of capital. Restructuring of the ordered debt this would avoid a new stress on the financial market, while freeing budgetary resources to expand the margins of action of economic policy. This would pave the way for expansive measures that would allow reconstruction to begin.

Sort the mess

Bond parities collapsed at uncontrolled default level (closing quotation marks last wednesday) to be located in another of an orderly restructuring (last Friday's price). The intervention of risk rating agencies degradation of the Argentine debt to the category of undesirable obligations Accelerate the time to solve the problem of debt.

Instead of pursuing a permanent campaign and using the Kirchner Cultural Center as Cambiemos' political watch area, the Macri government should badume the responsibility of managing a responsible transition starting with the task of controlling the disorder armed with public responsibilities.

A first step would be to refinance the total stock of short-term letters (Letes, Lecap and Lecer in pesos) for about $ 20 billion with a dollar bond in the medium and long term.

The second has a high degree of agreement between economists of different ideological aspects: the financial program with the IMF This is a disaster that should be reformulated by increasing the repayment term from $ 57 billion from 4 to 10 years. The current agreement is already obsolete with the desperate economic measures announced in a chaotic manner in recent days, with the unusual absence of the Minister of Finance, Nicolás Dujovne, in his disclosure. As expected, he resigned yesterday and was replaced by Hernán Lacunza, responsible for the economy in the province of Buenos Aires.

The macroeconomy has set an unprecedented record: in just one year, it has not achieved several goals and modified others, to finally reverse twice an agreement with the IMF..

The third case is the most complex: debt restructuring with the private sector, mission that the IMF calls "reperfilamiento" deadlines. The case of the debt of Ukraine is the immediate antecedent to observe what this path can be. This implies the direct involvement of the IMF as a mediator and negotiator with large investment funds. In that case, The new government must resist the demands of the Structural Reform Fund in exchange for fulfilling this mission, reminding it of the immense responsibility it has given the disaster left by the macroeconomy..

Ukraine rescheduled debt with private creditors, avoiding the chaotic fault. Got a remove the capital 20% (in the beginning he had the intention of 40% and the bond owners proposed 5%), the extension of time (within four years of each bond, depending on the respective maturities), the increase the interest rate (half point), delivery of GDP Coupon (identical to the Argentine renegotiation with Kirchnerism) and the use of the "Basic Principles for the Restructuring of the Sovereign Debt", promoted by Argentina in the second term of the CFK and approved by the UN General Assembly United. The latter, approved in September 2015, helped push back the wealth of Ukrainian debt and facilitate the operation, as it provided the institutional framework that legitimized the right of countries to restructure their sovereign debt. The negotiation was a success.

What Argentina could not apply to the company Griesa-Singer, because after a few months, as a government, the alliance Cambiemos has accepted all the requirements of this double vulture. orderly restructuring of the debt, an indispensable basis for starting the economic recovery and protecting the political legitimacy of the next government.

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