Blain: "What A Complete ClusterF**k"

Blain's Morning Porridge, submitted by Bill Blain of Shard Capital

Global Credibility Under Pressure – We’ve been Tangoed!

This morning’s headlines are screaming how Argentina and President Mauricio Macri have precipitated yet another crisis on the stressed geopolitical battlefront…  Relax. We are more than used to dealing with Argentina defaults… But, its far more complex than that.  The latest Argentina Dance Macabre is all about Global Credibility.  It’s another Massive Fail!

What does it say about the credibility of Global Institutions and Policy when Argentina’s whole market collapsed following a primary for an election in December?  Ex-IMF president, and soon to be head of the ECB, Christine Lagarde personally staked her support for President Mauricio Macri’s pro-market government when she steamrollered through the IMF’s biggest ever bailout of $56 billion for Argentina last year.

It now looks an extremely poor call on Lagarde’s part.  Macri won a mere 32% of the vote, while former president Cristina Fernandez de Kirchner won 47%.  Don’t Cry for Me Argentina indeed…  Domestic Argentine Politics have left the IMF looking stupid.

There are three major issues to consider here:

First there is the absolute predictability of what’s just happened in Argentina:

In return for the 2018 Bailout, the IMF demanded its usual pound of flesh policies: Austerity, Austerity and Austerity, spiced with inflation-targeted monetary policy, fiscal tightening, currency controls, and the keys to the Peso printing presses.  Give Lagarde some credit – she did give lip service to the people with a smattering of minor austerity mitigants in terms of gender equality and social provision.  But, essentially the IMF’s answer to yet another predictable Argentinian crisis was more of the same programme.  You know the definition of madness…

The programme did achieve some minor success: bringing down Argentina’s primary deficit and putting the trade balance in to surplus – but only because they spent IMF money supporting the peso. “Surprisingly” Austerity wasn’t to the electorate’s taste – inflation remains out of control and poverty is rising allowing politicians to exploit the widening income-gap divide.  What a complete shock!  Who could have possibly predicted an unhappy electorate would damn Macri at the polls and favour former Peronista’s from the last century instead?  (US Readers – Massive Sarcasm Alert.)

While the new Macri government was welcomed by markets in 2015 – it was immediately clear it didn’t have widespread and deep-rooted political support.  His government was perceived as a tool of global investment banks, global money and the supranationals.  The electorate went along with it for a while, but the results of “neo-liberalising” the economy were disastrous; killing jobs, creating a balance of payments crisis, devaluation, driving inflation, and yet another flirtation with default – hence the new IMF bailout.

Macri failed to deliver on his promises to the electorate: inflation wasn’t reined in, but soared to 60-70.  Instead of growth the economy tumbled into recession.  And more and more people fell into extreme poverty.  Compare and contrast with the experience of Argentina under the populist Peronistas, the Kirchners, who drove recovery in the early 2000s via easy monetary and a massive fiscal spending initiatives.  These didn’t work so well when commodities declined, recession struck the currency sagged and massive monetary corruption followed.  Argentina came close to default in 2012, and a naval vessel was actually seized by one creditor!

The Macri programme effectively went to the dogs y’day.  The laughable Argie Century Bond crashed as low as 60 y’day.  Default swaps are 40 cents upfront (pay $40mm to insure $100mm).  Short-term debt is yielding near 40%.  Argentinians voted for former leftist politician Kirchner instead, despite the widespread accusations of corruption, and the likelihood her election will simply deepen ongoing crisis.

The second point to this on-going Argentine Crisis is what does it say about Lagarde?

She is a gifted politician, a former French finance and apparently very efficient. She is not a trained central banker, but give her credit for being self-aware. She recently admitted: “The Argentine economic situation has proved incredibly complicated and I dare say that many of those involved, including us, underestimated a bit, when we started with the Argentine authorities building the programme.”

Her new job at the ECB is going to be a political minefield. She will need to draw Europe into agreement on fiscal policy support for Southern European Economies – which is a massive political issue when she’s seen as Macron’s candidate, Merkel is about to exit the stage, and the next crop of German Leader’s look crushingly incompetent in the leadership department. The Italian League has already thrown down it’s gauntlet – if they don’t get permission to start spending their way out of recession, they are going to do it anyway.

Lagarde has to balance the economic conservatism of Europe’s strongest economy, Germany, against the risks of “free-spending” other European’s creating further debt crisis. And she has to do it while holding the Euro together, dealing with consequences of Brexit, and being a distinct number 2 on the priority list for national governments. Is she up to it? 

If Lagarde thinks Argentina’s economic situation is complex, wait till she tries to balance the ECB. Her job is not to simply continue the “do-what-ever-it-takes” Mario Draghi “keep-the-Euro-going” mantras, but to actually move the European economy forward in a political vacuum. The answer is not Austerity, Austerity, Austerity – but that’s her most likely only weapon in the ECB’s armoury. There are clear parallels between Argentina and Europe – much to be learnt in how not to handle recovery in the face of populism and undeliverable political promises.

The third point to learnt from the new Argentina crisis is who leads the IMF now that Legarde is off to Frankfurt?

The European’s have decided they want their compromise candidate, Kristalina Georgieva, to lead the institution. Its always been led by a European. Rest of world don’t like that. While I’m sure Ms. Georgieva of the World Bank is an excellent candidate… I am sure there are better.  Mark Carney – Canadian and Irish. Why Not. He’s a proper banker..

What a complete ClusterF**k.