How and when the financial crisis ends – 07/08/2018

By Marcelo Etchebarne

Attorney. The Public Debt Specialist

Alexander Hamilton, First Secretary of the US Treasury, argued that the public debt, to the extent that it was not excessive, would be a blessing that would fund the infrastructure of his country.

more than a year we say in international congresses and other forums that the financial plan of the national government has been executed by Minister Caputo and his team with extraordinary skill but at the cost of an increase exponential of the national public debt to finance current expenditures. We warn that the economic plan has not considered the foreseeable shocks emerging markets, which have historically had a very significant impact on access to our country's funding. Most likely, the economic team has always considered and prepare to be able to access IMF badistance in such a case, but perhaps did not expect it to do it soon.

Expect to collect about $ 30 billion a year from the market. three or four years to fund the excessive spending of the Argentines seemed a utopia however commendable the intention is to avoid an adjustment that affects especially the poorest. Recall some episodes of the last two and a half decades: Tequila 1995, Southeast Asia 1997, Russia 1998, Brazil 1999, Internet bubble 2000, Turkey 2001, subprime 2008-2009, Tapering 2013, Greece 2015, to name a few crises

Brazil and Mexico, whose economies are much larger, have only sought half of this amount in the years that have pulled the most money out of the market and do not have it. have not done in the following years. At a non-deal roadshow in Mexico at the end of 2016, investors warned him that there was no more appetite for his obligations despite the fact that his financial plan only planned to raise just over $ 4,000. The successful exit of Pemex on the market then opened the door to the sovereign.

Two of the central elements of this emerging-market crisis have been anticipated by the current US President, which is in keeping with his election promises: a trade war and tax cuts for North American companies. Americans who repatriate capital. The rate hike was also predictable, although they are still similar to those of early 2013 when Ben Bernanke, former chairman of the Federal Reserve, announced in his statement to the US Congress his intention to start reducing his balance ( tapering), which sparked capital flight into emerging markets. Janet Yellen, his successor, has set a schedule that is currently being implemented and that will reduce the Fed's balance of $ 50 billion this year and therefore comments from Jay Powell (current Fed Chairman) at Congress in May pbaded unnoticed for the market.

In the course of the year 2018, emerging market investment funds were badly hit, especially in Argentina, after a very profitable year in 2017. Your profits, however, are measured year by year. Due to the accumulated losses in the year, some large funds completely dismantled the most risky positions (Argentina) and will be inactive until 2019.

In Argentina, the problem is exacerbated because there are no external or internal buyers. Foreign investors who must liquidate portfolios do not find any counterpart and there is no limit on the low or the containment on very high volatility.

But in the face of the pessimism of investors there is a consensus on the solvency of emerging markets in general where the fundamentals are solid. Therefore, it is expected that there will be significant redemptions of bonds by issuers who take advantage of the exit of their paper from the market with their excess cash flow. They are expected to contribute between 30 and 40 billion US dollars in the market in 2018. (Two centuries ago, Hamilton bought US Treasury bonds to boost domestic public credit)

It is also possible that President Trump warned his bellicose language (in a few months he went from calling "little rocket" to the president of North Korea to be in hugs).

If all of this happens, it is highly likely that the high volatility indices The current emerging market markets will establish after the summer of the northern hemisphere and the prices are recomposed in a relevant way as it occurred in 2013.

The situation of Argentina is more complex . Most likely in the coming months the values ​​will stabilize with other emerging countries, the volatility will be reduced and part of the fall will be shortened in an unstable equilibrium. The government does not need to access the market in 2018 and the IMF, as in other cases, will be lax this year compared to targets that will be exceeded due to the effect devaluation. 2019, on the other hand, presents a more unpredictable scenario.

In the market, they wonder if Argentines understand that they can not live with other people's money for many years. All have seen how thousands of Argentine fans have flooded Russia thanks in part to the dollars that the IMF has contributed lately (the import deficit of tourism services is still exorbitant). It was a very bad image for investors.

They also wonder if the political leaders of the ruling party and the moderate opposition understand the seriousness of the problem and whether the corresponding reforms can be ordered to the country's accounts or if the left will win the next election and repudiate the debt. Everyone is clear that the IMF's badistance has been the last bullet to avert a major crisis and that after the IMF there will be more money to cover the budget and pay accumulated debt in dollars.

Some think that president Macri disjunctive without exit. If he seriously attacks the problem, he loses the elections and the market collapses again in a dead-end spiral. If you do not order the macroeconomic variables, you win the elections but the result for the market would be just as bad as it would worsen the current situation having increased the debt exponentially in a very short time and without having of rest.

But it's a fake The dilemma and Argentina are facing only one possible path and consist in organizing their public accounts as quickly as possible, which requires a broad consensus of society and political leadership. If the right steps are not taken now, the IMF's goals will not be achieved next year, which could impact future disbursements, leading to a more severe crisis that will force a messy solution that will always affect the most vulnerable. [19659018] [ad_2]
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