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Micro behind Macro. The risks of uncoordinated management


Resumen Ejecutivo

Micro behind Macro.
The risks of uncoordinated management

Coordination Urgency
How does the lockdown impact the different sectors?
The impact on companies’ revenues
The impact on fiscal revenues
Salary payment capacity
Quantifying the fiscal package
First indicators of March-April activity

The costs of the economic policy, characterized by continuous trial and error, start to show early impacts. The spike in the exchange gap takes place before making effective the enormous monetization to finance the fiscal hole that would add between $800 MM and $1 B in the next two/ three months, which amounts to half the monetary base. Delayed debt negotiations after having paid US$4 B since the incumbent administration took office ends up in a “game of chicken” in which given the starting proposal, the chances to obtain the majority to prevent the default become constrained and increases the probability of a swap with holdouts, putting spokes in the wheel in the stabilization of the demand for pesos in the coming months.

Each day of lockdown, the economy operates between 35% and 40% below the previous level, which means that even if the local down were lifted, the drop in GDP would be 3 p.p.  larger than that we were considering in our previous scenarios. If no majority is obtained to trigger the Collective Action Clauses that would enable a swap without holdouts and the lockdown is extended, the economy might fall by 7% on average in 2020, consistent with the 13% plummet since it started to fall in 2018’s 1st Q.

Such a destruction of GDP and in such a short time generates a huge disruption of the economy and the payment chain that cannot be fully made up for by economic policies even in developed countries where fiscal and credit packages are the odd one out. Much less so in a country like Argentina with no currency or savings, and no credit.

Clearly the political side should step in to prevent a breach of the social contract and preserve the production structure with the looming world in mind. This involves strengthening a minimum income in those sectors worst hit by the lockdown and preventing the bankruptcy of viable companies in a non-lockdown context. It calls for political fine-tuning in the coordination, over the transition, of the distributive struggle ahead and not only the compensation of costs paying the same salaries with transfers from the Government and/or with bank loans within a context where the sole available financing is the Central Bank’s. It also calls for the huge coordination of political, credit, and monetary policies with the purpose of generating a sterilization instrument that allows absorbing part of the overflow of pesos that, even when handling the fiscal side cautiously, will surely take place in the coming months. In other words: it is necessary to take care of microeconomics without wreaking havoc on macroeconomics.

The dynamics are so strong that some spontaneous moves to distribute the costs, with no coordination of the national government, are beginning to take place. A few provinces are announcing a temporary salary cut in the face of the collapse of collection, while others are threatening the national government with the use of quasi-currencies if the Treasury does not finance the fiscal hole. The private side also shows moves unthinkable just a month ago. A significant number of unions agree to temporary nominal salary cuts in order to preserve employment (crisis prevention processes and/or layoffs provided for in the employment contract law). However the lack of coordination meant that some of these agreements failed when the Nation announced the payment of a part of the wages via REPRO in the face of the infeasibility of banks lending money for salaries to those companies “in trouble” even with the implementation of state guarantees also financed with the Central Bank’s transfers.

The combination of monetary financing to the Treasury (which has just started) in addition to the attempt to flood banks with liquidity to finance the line of credit announced by the Minister of Production also caused the peso rate to collapse in the remunerated accounts and in the wholesale time deposits that flooded the private swaps market and literally financed the spike in the exchange gap. Despite the Central Bank’s attempts to withdraw liquidity (it absorbed LELIQs and PASES for $560 B in the last 10 days), and made some additional moves to encourage the increase in savings rates (among others by increasing the rates of PASES and eliminating mutual funds reserves), they hardly reacted and continue to be negative. It is imperative to find a mechanism that in the face of the looming flood of pesos, it guarantees that the interest rate on peso savings makes up for inflation. This is not compatible with expanding credit, much less so without banks taking part.

In the last few weeks, we have written and sent out memos with our analysis of the debt and monetary dynamics. In this report, we focus once again on the costs in the real economy generated by social distancing measures, and their debris across the economic system, including the payment chain and the distributive struggle that makes itself felt.


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