The magnitude of the recession leads to a consensus on the inevitability of expanding spending and financing it with issuance. Is an inflationary pump coming?
One of the unthinkable effects of the coronavirus epidemic is the unexpected closure of the “crack” in the economic debate Argentinian. Incredible as it may seem, these days the differences between opening and protectionists, liberals and interventionists, lovers of fiscal balance and recalcitrant Keynesians are disappearing.
The most striking point is that of the monetary issue to finance the next big fiscal hole. There is practically no economist who does not admit the need for strong government intervention to put a brake on the fall of the economy, and given the country’s credit situation, this must be achieved on the basis of an expansion of public spending.
Even before the epidemic, the economic team was warning – above all, in its reports to the creditors of the debt – of the difficulties to achieve fiscal balance during the mandate of Alberto Fernández. But now the picture has changed in such a way that clarification is not even necessary: the latest estimates from private consultants speak of the fact that, due to the coronavirus, at least two additional points of fiscal deficit must be considered for this year.
But there are reports that speak of a worsening of those numbers, given the magnitude of the crisis that may come if the epidemic paralyzes the economy for a prolonged period.
The truth is that, until now, the aid measures announced by the government – such as the extraordinary payment to the monotributistas and the reinforcement of the AUH – have involved some US $ 1 billion. But many are perceiving that this effort may be only the first part of the crisis.
Aid for merchants who are unable to pay rent for their premises is currently being analyzed, massive aid is being prepared for the vast informal sector of the working population that does not receive wages, and the idea of a sharp drop in collection is being accepted. tributary.
“Public accounts came in deficit and this shock will worsen them significantly. The issuance of pesos is the instrument that will have to be resorted to almost exclusively,” warned a report by the Argentine Institute of Fiscal Analysis (IARAF), which reports finger on the sore: the risk that the crisis will lead to runaway monetary issue.
Internal pressure to emit
From sectors related to the Government there is talk without euphemisms about what is to come. And the pressure is particularly strong from hard kircherism. For example, Alfredo Zaiat, one of Cristina Kirchner’s leading economists, wrote a column with the expressive title: “Coronavirus and crisis: the recipe is to issue and more public spending.”
The article hints at a tacit criticism of the “market friendly” signals sent by Martín Guzmán at the start of his administration, with the measures aimed at containing spending. “It is not time for orthodox free market lovers or lukewarm measures. There is a risk of an economic collapse that requires extraordinary measures on all fronts”Zaiat argues.
The argument of this line of expansion of spending is that in a time of economic recession the risk of the monetary expansion being transferred to prices is diluted.
And it is, in fact, something that the Central Bank is thinking about. In his recent interview with iProfesional, Miguel Pesce He recognized – even before the quarantine – that the needs of the Treasury would force the BCRA to provide assistance through monetary expansion.
“We know that we are going to have to finance the public deficit because there is a situation where the Government, in transit to seek the sustainability of its debt, has a limited capacity to place new debt,” said the head of the Central.
And, specifically on inflationary risk, he added: “What we want is that this monetary expansion does not work as a driver of the inflationary process and we believe that this is not happening, among other things because the level of activity and factor occupation is very low. So there is room for there to be a boost in demand no need for increases of prices”.
The consensus on “the little machine”
But perhaps the unusual thing about this moment is the fact that the sector that has historically defended fiscal balance and that warns against unsupported monetary issuance has changed its vision.
“This is a time when the discussion does not have to be ideologized. Now it is not about being market friendly or not, we all understand that we must help and that it is time for regulators to intervene. The truth is that there is no other alternative to give the ‘little machine’ and help the informal population “, says without hesitation a manager of one of the first-line foreign banks, when asked by iProfessional.
He affirms that the big banks do their part, by implementing credit lines for health service firms and small companies with cash difficulties, and he is resigned that there will also be lobbying by “rogues who had good liquidity and will now abuse the situation with special requests “.
His forecast regarding the monetary expansion to come is that the inflationary impact will not be seen in the short term. “The stand is so impressive and the spending capacity so limited that I cannot imagine a rise in prices, rather it reminds me of January 2002; what I do believe is that there may be distortion of relative prices, with a rise in food “
But he believes that the challenge for the government will be to reabsorb the mass of money in circulation once the worst is over. “I do not think it is easy to raise interest rates again, but they can resort to reserve requirements, the Central Bank has the tools,” he argues.
Meanwhile, another notorious critic of monetary expansion, Ramiro Castiñeira, an analyst at Econometrica, also recognizes the exceptional nature of the moment.
“Those of us who are in the liberal position defend the balance in the times of fat cows, precisely so that there is the possibility of responding in times of crisis. But Argentina wasted its time spending all the financial assets, energy, etc., and when it was over, placed debt, “observes the economist.
And it gives an eloquent conclusion: “So now the pandemic finds us in a situation in which we burst all the assets and all the liabilities. And the only thing that can be done is to increase public spending, which is going to be financed with emission because there are no resources. “
Another defender of orthodoxy, the always “ministerial”, agrees in this position. Carlos Melconian, which recognizes the inevitability of resorting to “the little machine to emit” and manages to differentiate itself from the Keynesian sector with the warning that expansion must be done in a “neat, orderly and thoughtful” way.
“You have to turn on and turn off any other tap. It is an opportunity for the political class to cut all expenses to fart. The emission, in the war economy, has to be destined to health spending, not to stop production in that there is demand and money for people to rest assured that they have work and wages, “Melconian explained with his characteristic” bowling “style of discourse.
Is an inflationary pump coming?
Of course the big question is how much does this mean in terms of numbers. What will be the fiscal hole? How much will have to be issued? And what will the inflationary response be like?
And that’s where economists are very cautious. Few are encouraged to give a forecast on the magnitude of the necessary expenditure, given the uncertainty of how the health situation will evolve.
But some have done numbers as an exercise. By case, the consultant Salvador Di Stefano Remember that in Europe, where the Argentine government is looking to apply preventive measures, it has provided state aid equivalent to 10% of GDP, and that in the United States there is talk of an injection of funds in that order as well.
“According to our forecasts, At first glance, Argentina would need about $ 30 billion, a little less than 10% of GDP, Of which $ 10 billion is in a pre-approved loan from the IMF, more swap could be requested from China, and issued to correct health problems. It doesn’t seem impossible that the world will rescue us again, “argues Di Stefano in his latest report.
Some of that is already being seen, given that the Central advanced in the renewal of the Chinese swap and also the Monetary Fund It will make a credit line available, although it would be for a lower figure than the one mentioned.
As for the fiscal deficit, assuming that expenses increase 20% compared to the budget forecast and that tax revenue falls 15%, that would enlarge the red by 1.4 trillion pesos. Di Stefano calculates that if a decrease in the payment of interest on the debt were obtained, a total deficit of almost 2 trillion pesos would be reached.
In other words, that to cover that hole only with emission, it would be necessary an injection of money similar to current monetary base.
Under normal circumstances, this would amount to talking about a possible inflationary bomb. However, now not everyone agrees that this can happen immediately. And several economists point out that, in addition to the cooling of the economy, what will slow down the overflow will be the currency stock.
“All our fiscal measures, such as those of the AUH and pensions, are financed by the Central Bank. How does that impact inflation? I don’t know, but with the stocks you are more stable “, he said in an interview Marina dal Poggetto, the influential director of the consulting firm Eco Go.
In Dal Poggetto’s opinion, the government should prioritize a swift agreement on the debt issue, in order to avoid further de-capitalization of the Central Bank in maturity payments.
Among other relatively reassuring reports, the stock firm SBS it corrected its inflation forecast to 44%, a measured number given the circumstances.
“The collapse of the activity will remove a good part of the pressures on the demand side, while the delicate situation of the companies would translate into rather discrete salary increases that would also take pressure off the cost side “, SBS economists claim.
The truth is that what in other times had sounded scandalous, is now accepted as inevitable and even desirable. A strong expansion of spending financed with monetary issue came to have a patina of legitimacy when endorsed by leaders such as Angela Merkel and Emmanuel Macron.
The question remains whether the wave can be surfed or if a collapse in the demand for money will lead to a new inflationary crisis of eighty tints. But that also seems like a secondary debate.
As Castiñeira says: “The truth is that at this point we start to analyze whether we are going to have the inflation problem right now or within a year it became irrelevant. What is certain is that inflation will come, because in these situations is about producing more and not emitting colored paper. It’s manual. “
And he is sincere: “But this is a crisis where the priority is health. And the truth is that if they asked me for my opinion, I myself would advise expanding spending at this time.”
Find out the latest on digital economy, startups, fintech, corporate innovation and blockchain. CLICK HERE
Corresponsal de Argentina, Encargado de seleccionar las noticias más relevantes de su interés a nuestro sitio web NewsPer.com