There’s a country that always, always, always
appears in the headlines of international newspapers for two main reasons: soccer and
economic crises. The problem, my friends, is that lately, these
headlines are having more to do with crises than with football Of course, I’m talking about Argentina. This is hard to say, but Argentina is a country
that seems as allergic to reforms as it is addicted to crises. When everything seemed to be going well, 2018
suddenly became very complicated– so much so that Mauricio Macri’s government has
been forced to ask for a “bailout” from the International Monetary Fund. Wait, a bailout? In Argentina? Again? Well, yes… you heard that right. Argentina, the country of tango is back on
the ropes. Listen up. April and May of 2018 haven’t precisely
been good months for Argentina. In just a few weeks, the peso was depreciated
by 20%, going from an exchange rate of 1 US dollar for 20 pesos to a 1 US dollar for 25
pesos. But… You know what? This isn’t surprising. Since the beginning of 2018, Argentina’s
currency has depreciated by 25%… And we extended the time to the last 5 years…
could you tell me how much the Argentine peso depreciated? Well… by no less than 80%. Now, make no mistake, the plummeting exchange
rate isn’t the problem… but the consequence. See, my friends, Argentina’s real problem
lies in its addiction to public spending… And I’m not saying that public spending
is slightly higher than they can afford… they have such a high public spending rate
that Argentina simply cannot afford it. (AUDIO: “In the last 57 years, we’ve spent
53 years with the State spending more than they collect, that is with a fiscal deficit,
during those 53 years we had 4 huge crises. Now we’re fighting to avoid a fifth one”.-
José Luis Espert, economist and author of the book “The Devoured Argentina”) But… wait a second… I know what you may be thinking… Simon, what the hell does public spending
have to do with the peso’s depreciation? Well… much more than you think. Let’s go through it step by step. Argentina is facing a triple time bomb: it
has a huge external deficit, a huge public deficit and 250 billion dollars of external
debt. Of course, as you can imagine… both the
deficit and debt have to be paid… And here’s where the first big problem appears: Years and years of protectionism, devaluations,
hyper regulation and very high taxes – Because Argentina is one of the countries with the
highest business taxes on the entire planet–All of this has stopped the industry, and the
Argentine economy in general, from being competitive… and has caused capitalists to flee the country
long ago in search of refuge. Sounds logical, right? Well, the result? Since there’s no “money” at home… Argentina has become very dependent on foreign
financing. According to the Institute of International
Finance, most, almost 64% of Argentina’s state and corporate debt is denominated in
dollars and other foreign currencies. That’s why both the volume of Central Bank
reserves and the exchange rate are very, very important. Of course, on the one hand, they need to pay
for imports and deal with debt payments… But… since Argentina has a negative external
balance–that is, it consumes more dollars than it gets… it needs someone to lend them
those dollars. It needs investors to bring money to the country. And, my friends, if investors don’t lend
that money because they don’t trust the country… then Argentina has a problem, a
huge problem. On the other hand, if the peso depreciates
then… obviously, it loses value… and, folks, let’s be honest, nobody wants to have
their savings in a currency that devalues so quickly… What do you do in that situation? Well, you rush to exchange all your pesos
for a “stronger” and more “stable” currency… And that’s exactly what Argentines are doing,
which is causing the peso to collapse even more… and for the reserves to be consumed
much faster. But… okay, having said this. Let’s take a look at the government. See, both Néstor Kirchner and especially
Cristina Fernández de Kirchner, the two previous presidents of Argentina, they liked to spend
quite freely… When they came to power in 2002, public spending
was equivalent to 23% of the GDP, when they left… it was more than 40%. But you’re surely wondering… what did
they do with all that money? Well basically… they hired public employees
– To win votes, you know – and multiplied subsidies. Thus, for example, in only 13 years, public
employment soared by 60%. To give you an idea of how extreme this was, today 35% of Argentine employees work for the goverment. And get this. In seven provinces there are even more public
workers than private workers. Crazy! And of course, my friends, given that the
government didn’t have enough money to pay for all this well… year after year they
registered a huge public deficit. However… as you may know… the Kirchners
couldn’t go to the international markets, first because their investors didn’t trust
them, and second because the country was already in default… And, of course, if you don’t pay, obviously,
investors don’t lend you money again. So, what do you think they did? Exactly! They used every populist politician’s favorite
machine: the money printing machine to pay public expenditures with new pesos. That and establishing a currency cap, which
means limiting the amount of money that Argentines could take out of the country… so they wouldn’t
eat up their dwindling reserves. And the question is, what happens when these
policies continue? Well… inflation soars due to all the new
pesos in circulation… and foreign investors, of course, don’t want to come near you. And so, it was in these circumstances that
Mauricio Macri came to power. (THE MACRI PLAN) When Mauricio Macri came to the
Casa Rosada he had a plan: to implement reforms little by little… commonly known as gradualism… And the truth is that they’ve been quite
successful: the business climate has been improved, some
subsidies have been reduced and, in a way, they regained the international investors’
trust. But… out of all the hard things they needed
to do, they’ve only done the easiest ones. What they haven’t achieved in more than
two years of governing, has been decreasing the public deficit or inflation. And in spite of having access to the financial
markets, the Argentine government has continued to print bills to maintain their huge public
expenditure… and that of course means more inflation. This chart shows how the money is growing,
that is, how the Central Bank of the Republic of Argentina continues to issue more and more
pesos. But… okay, you may be wondering, wasn’t
Mauricio Macri supposed to change things? Yes… but slowly. See, this all has an explanation. Macri’s team’s idea was to carry out reforms
little by little, to attract investments and make the Argentine economy grow. If the economy grew, the government would
raise more money and wouldn’t have to make cuts. Meanwhile, little by little, as they regained
the international markets’ trust, they would be able to issue a debt and thus reduce the
need to print bills. In this way, within a few years Argentina
would get rid of their deficit, inflation and would grow again. And Macri, of course, would maintain his political
capital to continue winning elections. Sounds good, right? Well, so far, more or less, things have gone
as planned. But just a moment, because that has now changed,
mainly for two reasons. First… after two and a half years in power,
it’s hard to understand how the public deficit, inflation and taxes continue to skyrocket…
gradualism has become something like racing a turtle with rheumatism. And second… because the Federal Reserve
of the United States has begun to raise interests. See, for public debt in the United States,
a 10-year bond is already yielding 3%… And of course many investors now ask themselves: If the US debt, which is supposedly the less
risky asset, gives me a reasonable return, why on earth would I risk lending my money
to Argentina, where I see no changes? Well… that’s exactly what has caused many
capitals which had begun to show interest in Argentina, to turn around. And for this reason… Macri’s government has decided to resort
to the International Monetary Fund to obtain a credit line with which to face the debt
maturities of the upcoming months and the future…. lest investors no longer want to
put more money on the table. Can you imagine if a new default occurred
before the 2019 elections? See? Everything has to do with the government’s
behavior. And if you think about it for a moment, it’s
very sensible. The patience once held for Argentina is gone. What investors and Argentine savers themselves
say is.. “Fine! If you want to spend more than you can, good
for you, but not with my money”. And not only in regard to public spending,
but many other reforms that make it easier to do business. And this brings up a key question… Is it time to abandon gradualism? (AGGRESSIVE THERAPIES OR GRADUALISM?) Folks, making reforms is never easy… but
I think it’s time for the Casa Rosada – the Argentinian White House – to ask itself a
question. Shouldn’t they try employing more aggressive
measures? Well… you know what? First let’s take a look at the historical
evidence. Which do you think has worked better, gradualism,
a calm, step-by-step change, or aggressive therapy? Well… we can see a good example of huge
transformations in the former countries of the Soviet orbit. When the communist model collapsed in 1989,
many countries employed drastic changes, almost overnight, while others opted for more gradual
measures. And you know who had the best results? Yes, the ones that made the most reforms. Countries such as Estonia, Latvia, Lithuania,
Poland and the Czech Republic opted for a more drastic change, that is, making reforms
as quickly as possible. And yes, it was hard at the beginning, but
soon they began to grow and achieved all kinds of investments, to such an extent that today
these countries, which were mostly poor in 1989, have a higher living standard than Portugal
or any other Latin American country. On the other hand, those who applied gradual
reforms… countries such as Ukraine, Romania, Tajikistan and Armenia… let’s say, things
haven’t gone so well, neither in economic nor in social terms. Anyway… folks, this is the decision that
Macri’s government has to make. Whether or not to take advantage of the IMF’s
money to carry out strong reforms once and for all… And let’s be clear, if Argentina doesn’t
fix its public deficit and stops printing bills, the future doesn’t look very good
for them. “Borrowing money isn’t good governance.” “Good governance is creating basic reforms:
in Argentina there’s an elephantine, gigantic, hypertrophied state that needs to slim down. They need to cut public spending.” – Jaime Bayly. In addition, the model simply doesn’t work:
the Argentine government had never spent so much, and despite that, it’s been decades
since there was so much poverty and so much violence. Will Macri listen? Only the future will tell. But now it’s your turn: What do you think? Should they continue with the gradual reforms
or is it time for a faster change? Leave your answer in the comments as well as in this servey.