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An interview with Guido Sandleris, former President of the Central Bank of Argentina (2018-2019)

In 2001, Argentina’s then-president Fernando de la Rúa fled the presidential residence by helicopter amid deadly riots against the government’s response to a deep financial crisis. Argentina’s subsequent default on its sovereign debt effectively barred it from borrowing in global financial markets for years and ushered in over a decade of populist policies under the successive Peronist administrations of the Kirchner political dynasty.

Today, Argentina faces another crisis as it scrambles to avoid its ninth sovereign debt default. The administration of recently elected President Alberto Fernández finds itself in a precarious financial situation due to questionable policies of preceding governments, compounded by intermittent recessions since 2011. Meanwhile, Argentinians have become increasingly disillusioned with the government’s fiscal mismanagement, which they blame for a rising poverty rate and rampant inflation.

Earlier this year, the SAIS Europe Journal sat down with Guido Sandleris, Argentina’s former central bank president (2018-2019) under the administration of President Mauricio Macri. In the discussion, Mr. Sandleris explains the recent history of the current debt crisis and the challenges Argentina faces as it works to avoid another devastating default.

This transcript was edited for brevity and clarity.



SAIS Europe Journal:

Let’s start with the big thing right now: the current debt crisis. What would you say are the main causes? Is it a political problem? An economic problem? Both?



Guido Sandleris:

One of the things that is puzzling about Argentina is that when we look at the recent economic history of the country you see that systematically, almost every decade, we are hit with a financial crisis. Every financial crisis is due to a combination of factors. First, I believe that Argentina missed an opportunity to really change the fundamental underlying factors of the economy at a time of very high commodity prices, which are important for a big exporter like Argentina. This occurred under two Peronist governments: those of Presidents, Néstor Kirchner and then Cristina Fernández de Kirchner, his wife. Second, the Macri administration tried to correct the economic imbalances that it inherited, but it was unable to achieve growth and low inflation at the same time.

Let me explain this in more detail, when you look at the economy that former President Macri inherited, you see a large fiscal deficit, and this was something that basically was the result of increased government spending for 12 years thanks to populist policies. In Argentina, it used to be the case for many, many years that the government's expenditure amounted to approximately 25% of GDP. Between 2003 and 2015, it went up to almost 41% of GDP. Basically, the windfall from high commodity prices was used to expand government spending and not in the most productive fashion.

On top of that, you had other distortions in the economy. The exchange rate was overvalued. That made Argentina’s exports expensive, and therefore, not competitive. And it imported more than it exported, so we had a current account deficit. The previous administration had to implement capital controls and import restrictions in part to deal with that. So, by 2015 there was a fiscal imbalance, an external trade imbalance, as well as some distortions in the price of utilities. This combination, plus some mistakes that the administration made, is what led to this crisis. 

I mentioned the imbalances that the Macri administration tried to solve. If you look at where the economy was at the end of 2019, the fiscal deficit was gone. You have a balanced budget. The external imbalance is gone and some of the distortions in the price of utilities are gone. But the administration was not able to do that and at the same time usher in economic growth while keeping inflation down. That ended up costing Macri the election in 2019. We will probably see many of the market-oriented reforms that the previous administration tried to implement reversed.



SAIS Europe Journal:

What do you think are the main drivers of discontent in Argentinian society today? There's a lot of talk about the lack of mobility and being caught in the middle-income trap. Do you see that as unique to Argentina or more of a regional phenomenon?



Guido Sandleris:

Argentina is distinct from the region because I think we are in some respects, at least in the macroeconomic area, in a different situation. When you look at the last eight years, Argentina hasn’t grown. You had inflation averaging 30%. When you look at the average for the region, inflation was below 5%. Most economies also grew, though only slightly. Latin America is one of the regions in the world, alongside the European Union, that has grown the least: around 1.2% on average in the last decade, with the world average at 3.5%.

So I think that part of the discontent we are seeing in Argentina is associated with the fact that when you look at the last decade, you have an economy that has grown very little. And when you look at the last 40 years, you see an economy that in only 5 of the last 40 years had two things happening at the same time: positive growth and inflation below 5%. 

In Argentina we’re not growing because the economy is hitting the wall of financial distress almost every decade. So it's in a worse situation although the starting point is probably better because the level of income is higher than most countries in the region. When you look at what's going on in the region, I think what we are seeing is there was a period, not in the last decade but the in the decade before that, in which high commodity prices allowed most of these economies to achieve stability. And they grew relatively fast. Chile did it a bit before. Mexico did it around the same time. Others like Peru, Bolivia, Uruguay did not this last decade but the previous one. That was fantastic for the region.

Then came this last decade in which things didn't go as well.  The region went from being a relatively high growing one to one of average growth: between one and a half and 2% depending if you include Venezuela or not.

So I think that part of what we are seeing in the region is discontent because we achieved certain things, but there is still a long way to go to lift many people out of poverty, to provide a better life for the new class. Also, although the triggers of social unrest vary across countries, there are some contagious effects. Globally, we are seeing a reshuffling of liberal institutions, from Brexit to Trump in the U.S. There is an underlying current of discontent that has led some countries to vote for what I think were traditionally political outsiders into office, some of whom are implementing more populist policies. I have yet to form a good view on what's going on and where this is going to lead us.



SAIS Europe Journal:

How closely have the current administration and Argentinians in general been watching the protests in Chile in late 2019 against austerity? Has that had repercussions in Argentina?



Guido Sandleris:

One of the lessons from what we saw at the end of last year, in Chile, Hong Kong, and in countries like France, is that there is a much higher sensitivity towards austerity measures. If you look at what happened in Chile, the tipping point for the social unrest was a very, very, relatively speaking, small increase in transport prices. We're talking about a 1-2% increase.

If you look at what happened during the Macri administration, as I mentioned, there were huge distortions in the price of utilities and transportation. When you were heating your house for a month, like my apartment for instance, that would cost as much as a croissant and a coffee. There were huge distortions. During the Macri administration, those distortions were corrected, and I think that should be given some credit. If you look at gas prices, they increased by over 100%. Electricity also increased on a similar scale. Of course, if we put together fiscal austerity and these kinds of measures, they don't make a government popular. I think the strategy of the government (the way in which it was done) allowed Argentine society to be able to weather those increases.  They were painful for many people, but without the kind of social disruption that we’ve seen recently in other countries.

However, there is what I would call "austerity fatigue" in the country. In the initial months of the Fernández administration, they relaxed the fiscal stance but less than what many expected. Fernández adjusted public pensions but he also delayed utility price hikes. He has tried to achieve fiscal consolidation without threatening stability. Of course, I think that what has been going on in the region, and in the world, is affecting how policies have been shaped in Argentina.



SAIS Europe Journal:

Since you mentioned Vice President Cristina Fernández de Kirchner, there's an interesting dynamic in the government now where she represents the far-left populist wing of the Peronist party and President Alberto Fernández represents the center left. Recently, she appears to have preempted the government (and the president) by saying she wants Argentina's creditors to take a haircut. Do you think this was a tactical play on the part of the administration or is this evidence of the center-left vs. far-left dynamic in this government and will that be tenable?



Guido Sandleris:

I think it's a combination of both things. I agree with your description; Alberto Fernández is more moderate than Cristina Fernández in terms of economic policy and the negotiation strategy. I think what we are now seeing is Alberto Fernández and his economic team calling the shots. I think the Peronist government understands that the IMF doesn't take a haircut. Instead what they do is postpone some of the payments, and perhaps lower the interest rate below the market rate. So I don't think it is significant if Cristina Fernández is trying to push President Fernández into any one position by saying these things.



SAIS Europe Journal:

President Fernández has said there is no way the government will pursue austerity policies despite what the IMF has requested. Is that because of the midterm elections next year or do you think it’s rhetorical – part of his tough bargaining stance that will soften as the two sides work towards a deal?



Guido Sandleris:

When you look at what the Fernández administration has done in the first couple of months, you see that they relaxed the fiscal stance but not too much. They introduced some measures on pensions and increased some taxes. In a sense, the road that they’ve chosen on the fiscal front in the initial months is one that doesn't say, "we are going to spend like crazy." It says we are going to try to keep it more or less as it is.

Perhaps more worrisome is a recent statement by the economy minister, Martín Guzmán, who said the country would go into a primary surplus only in a few years. That came a bit as a surprise. I think the fiscal front has been the Achilles’ heel of the Argentine economy. Systematic fiscal deficit has forced Argentina to do one of two things in the past: when there is financing, it borrows. When there is no financing, it prints money, which leads to high inflation. That process has led to a roughly once-a-decade financial crisis. So I think that one of the things that will be crucial is that this administration is able to continue with the fiscal consolidation of the previous administration. If we achieve that – if we have two very different parties with very different views of how the economy works but can still agree on the fiscal front – I think it would be a big step forward.



SAIS Europe Journal:

Typically, when you see the IMF come into a country, it opens the floodgates for foreign investment. Has that been the case in Argentina? Do you think the multiple defaults have been a hindrance to sustained foreign investment?



Guido Sandleris:

No. In Argentina, it didn't happen. I don't think the reason is the history of the defaults. I think it's something that goes deeper in which the history of default is just one symptom of the lack of political consensus on some basic issues. If you look at Peru, Uruguay, Chile, or Colombia, even Bolivia with the recent unrest, you see economies where macroeconomic policies are more or less consistent. So, although the political system might be in a crisis, you don't observe a complete disruption of the fiscal economics. You don't observe inflation spiking, or a huge depreciation of the currency. We still need to achieve that in Argentina. That is, I think, the biggest challenge for Argentine political leaders is to be able to achieve consensus. Once that consensus is there, we will be able to move on to more interesting questions. How do we grow? How do we make ourselves more productive? Most countries in the world have been able to reach this consensus. We haven't. It's insane how a presidential election in Argentina can cause the amount of disruption that it causes. That doesn't happen in other countries in which the political system is in a worse state of crisis than ours.



SAIS Europe Journal:

Argentina has been in ongoing negotiations with the IMF and we’ve seen widespread anti-austerity protests in recent months. How do you think these negotiations are going to shape the future of Argentina?



Guido Sandleris:

The IMF is not popular in Argentina. They are the ones who come in and lend to a country when it has lost market access. In exchange, they impose some conditions on reforms that they think would be good. People tend to resent that. Another issue with the IMF that may make it unpopular is that it tends to be bureaucratic. When you are making policy with real-world consequences, having to wait for 10,000 committees of the IMF to approve something is a bit frustrating. But I think that the IMF plays an important role in the world economy. 

Argentina is a big debtor of the IMF right now. (Former President Mauricio Macri brokered Argentina’s $57bn deal – the biggest in the IMF’s history - originally set to be repaid by 2023). I think negotiations between the Argentine government and the IMF will continue, and it’s likely Argentina will not have to start making payments until next year. So it's likely that those payments will be postponed until a new program is in place by next year.



SAIS Europe Journal:

By next year?



Guido Sandleris:

Maybe earlier. For sure, the payment deadline is before next year, but my guess is that the government will try to roll that payment over. So the way you go forward is with a new program. We are already seeing some negotiations with the Fund. I think that the process of the debt restructuring might benefit from some IMF involvement. So maybe we’ll see some progress before next year.



SAIS Europe Journal:

Thanks for your time. A lot to watch in the coming months.



Guido Sandleris:

Yes. My pleasure.








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