Speaker 1: Hey, Brad, I didn't realize you're gonna be in person.
Speaker 2: I didn't realize you're going to be in person.
Speaker 3: I thought you're like and normally we're just disembodied voices.
Speaker 4: Singing country tunes from some unders.
Speaker 1: I wish, Oh my god, I did a deadlift one, two, three,
Speaker 1: so many uh barges. This isn't after School Special, except.
Speaker 3: I've decided I'm going to base my entire personality going
Speaker 3: forward on campaigning for a strategic pork reserve in the US.
Speaker 2: Where's the best with imposta?
Speaker 3: These are the important question? Is that robots taking over
Speaker 3: the world?
Speaker 1: No, I think that, like in a couple of years,
Speaker 1: the AI will do a really good job of making
Speaker 1: the odd launch podcast And people say I don't really
Speaker 1: need to listen to Joe and Tracy anymore.
Speaker 2: We do have.
Speaker 3: Until then. This is lots more a.
Speaker 1: Weekly chet about whatever is on our minds.
Speaker 3: And we really do have the perfect guests.
Speaker 1: Do you recall the first time we talked about Argentina?
Speaker 2: Yes, worst position of my life?
Speaker 1: No, not at all, the worst, without a question, the
Speaker 1: worst interview I've done as being interviewed, the biggest bomb
Speaker 1: I've ever had.
Speaker 3: Will you tell me this story.
Speaker 2: Yes, So I was.
Speaker 1: Two thousand and six, probably maybe two thousand and seven,
Speaker 1: two and six, I think it was two thousand and five,
Speaker 1: maybe it's two thousand and five. I was living in
Speaker 1: New York. I was more or less unemployed. I think
Speaker 1: I was doing like, you know, temp work or something
Speaker 1: like that. And I saw an ad online I forget
Speaker 1: where that the Rubini Global Economics was hiring for someone
Speaker 1: going to do economic analysis. And I was like, I
Speaker 1: need a job, and I'm kind of interested in economics.
Speaker 1: I just stopped a job that I had working for
Speaker 1: a small portfolio management company, and so I sent an
Speaker 1: email and I'm like, I think I've studied a little
Speaker 1: economics and maybe I could do this. And I went
Speaker 1: to an office on the Lower West Side. I think
Speaker 1: it was Tribeca. Was that where it was Brad somewhere road?
Speaker 2: Maybe it was the north of Tribeca.
Speaker 4: Okay, it's like there's a warehouse off to the west
Speaker 4: of soho.
Speaker 1: I met with Brad. I was applying for the job
Speaker 1: I met with Brad. I knew actually in advance of
Speaker 1: this interview, that Brad was interested in Argentina specifically, and
Speaker 1: all the problems that it had, and I tried to
Speaker 1: cram the day before to learn something about Argentina, and
Speaker 1: I think the first question Brad asked me something about
Speaker 1: how you know, what would some policy prescription I'd have
Speaker 1: for it? And you know that experience, like if you're
Speaker 1: trying to speak a foreign language that you used to
Speaker 1: know fifteen years ago and you think maybe you know
Speaker 1: it in your mouth opens but nothing comes out. Yeah,
Speaker 1: that was me.
Speaker 3: I also know the experience of like having a bad
Speaker 3: interview in real time and you realize that it's going terribly.
Speaker 1: Oh it's just like the mouth opens and it is
Speaker 1: like no words came out, and I'm like, well, I
Speaker 1: guess I'm going to do something else. Anyway, it worked out.
Speaker 4: We should have hired you on the st blog alone anyway,
Speaker 4: bad business model.
Speaker 2: Anyway, we should have recognized it.
Speaker 4: We should have moved to meet the talent where the
Speaker 4: town is incredible.
Speaker 1: Eighteen years later, here we are, seventeen years later, Here
Speaker 1: we are and people are still talking about Argentina.
Speaker 3: Yeah, well we are here with Brad Setzer, a senior
Speaker 3: fellow at the Council on Foreign Relations. He's been on
Speaker 3: the show multip many times.
Speaker 1: He's got to be c he might be the number
Speaker 1: one now.
Speaker 3: I don't know.
Speaker 4: I'm sure I've been eclipsed. I was out of commission
Speaker 4: for two years.
Speaker 2: That's true.
Speaker 1: When Brad was at a treasury there were a couple
Speaker 1: of years where we didn't get to speak. We didn't
Speaker 1: get a chance to speak to him. But it's been
Speaker 1: a lot now.
Speaker 3: But to your point, Joe, it doesn't. It always feels
Speaker 3: like deja vu with Argentina. Like it's always it's either
Speaker 3: they've just defaulted on ball because someone decided to give
Speaker 3: them money again for reasons I don't understand, or something
Speaker 3: kind of crazy is happening. Like with Argentina, it just
Speaker 3: feels like the craziest outcome is like the one that
Speaker 3: tends to happen.
Speaker 1: And the thing is to Tracy is that all the
Speaker 1: years years later, I actually still have no conceptual understanding
Speaker 1: of what's actually the problem with the Argentine economy. I
Speaker 1: don't understand why. You know, several years ago, I think
Speaker 1: they elected some pretty like normy reasonably centrist neoliberal president
Speaker 1: and it was like, oh, he's going to shake hands
Speaker 1: with Wall Street and here, and it didn't work, and
Speaker 1: you know, and so I don't really understand. I don't
Speaker 1: know what Prohnism is exactly. I'm not sure anyone totally does.
Speaker 1: I don't know why there's this perpetual seeming basket case
Speaker 1: that has rapid inflation after all these years. I would
Speaker 1: bomb another interview if I were being asked any Argentina question.
Speaker 1: And I've gotten good at bsing on other topics, but
Speaker 1: even though I can't even begin to BS on Argentina.
Speaker 3: Brad, what's your summation of the Argentine economy? Like if
Speaker 3: Joe was interviewing you for a job, what would you say.
Speaker 4: Oh, well, I have a thesis. It may be a
Speaker 4: wrong thesis, but it is. It's an economy with a
Speaker 4: very small banking system, so it has difficulty financing fiscal
Speaker 4: deficits domestically. It tends, therefore, to try to borrow a
Speaker 4: lot externally, and it has a relatively small export sector,
Speaker 4: very ag based, with a lot of volatile export revenues,
Speaker 4: and it tends to overborrow relative to his export capacity.
Speaker 4: And when you can't borrow externally, it tends to print money.
Speaker 4: So you get this combination of default inflation and periods
Speaker 4: of stability.
Speaker 1: And all of that definitely makes sense, so when you
Speaker 1: spell it out like that, but it also seems like
Speaker 1: doesn't it apply to a bunch of country like, you know,
Speaker 1: not a very depthful domestic financial system. Commodity exporters so
Speaker 1: obviously exposed to very volatile like aren't a lot of
Speaker 1: countries in this predicament, And why is it seen like
Speaker 1: Argentina specifically. People think it theoretically can get out of it,
Speaker 1: but it just can't. It seems to just keep tripping
Speaker 1: over itself.
Speaker 4: Well, I think actually, compared to most other commodity exporters,
Speaker 4: like commodity exports is a share of GDP aren't all
Speaker 4: that high. It's just there's very few manufactured exports, so
Speaker 4: it's a relatively low level of commodity exports relative to
Speaker 4: the size of the economy. And I think people tend
Speaker 4: to think that because it's a relatively big economy, it
Speaker 4: can support more debt. Man it can given these constraints.
Speaker 4: So that's kind of my my thesis. But you know,
Speaker 4: there are there are countries around it that are have
Speaker 4: commodity dependent economies. They are more mining, less.
Speaker 5: Ag but a much bigger export base and less debt,
Speaker 5: and they've built up over time monetary policy credibility in
Speaker 5: a way that you know, boringly, and Argentina has not
Speaker 5: very clearly.
Speaker 3: Okay, so this feeds into my big question here, why
Speaker 3: do people keep giving Argentina money? Because this is like
Speaker 3: a joke in the market. And I think I tweeted
Speaker 3: this once but the distracted boyfriend meme, you know, turning
Speaker 3: away from defaulted Argentina bonds and looking at more Argentina bonds.
Speaker 3: And also I didn't realize this, but Argentina is the
Speaker 3: IMF's biggest creditor.
Speaker 4: Now, which well they owe more to the orry. Let
Speaker 4: me restay that they were the biggest creditor, will be
Speaker 4: in a very different situation.
Speaker 3: The biggest debtor. But you know what they say about debtors,
Speaker 3: if you're big enough, you kind of enough.
Speaker 4: I guess they're plenty big enough.
Speaker 3: Okay, So why do they keep getting money?
Speaker 4: Well, actually, Argentina didn't get money for a long time
Speaker 4: after their two thousand and one two thousand and two default.
Speaker 4: They didn't eventually do a restructuring. It took a while,
Speaker 4: and then after they did the restructuring, there are a
Speaker 4: lot of holdouts and they really didn't regain market acts
Speaker 4: for a long period. And then you know, Joe's right,
Speaker 4: I mean a centrist relatively a center right really maybe
Speaker 4: more right than center right. President was elected President Machli.
Speaker 4: He brought in a bunch of Wall Street bankers to
Speaker 4: run his economic team, and they had a clear theory
Speaker 4: of the case that Argentina had under borrowed. They would
Speaker 4: settle with the holdouts. They would go out and raise
Speaker 4: a certain amount of bonds that would cover fiscal deficits
Speaker 4: associated with tax cuts, like a very conventional center right
Speaker 4: to write agenda finance with external foreign currency borrowing. And
Speaker 4: they went out and they did a lot of that.
Speaker 4: But apart from that one borrowing spree, which was big,
Speaker 4: like forty fifty billion and maybe more in two years,
Speaker 4: Argentina really hasn't had access to external bond markets. But then,
Speaker 4: you know, the IMF saw a group of non parentist
Speaker 4: reformers struggling and it gave them a structure reform. They were,
Speaker 4: you know, they are going to backing certain structural reforms.
Speaker 4: Mackri was friends with Donald J. Trump and they came
Speaker 4: from real estate development families. He got a big IMF loan.
Speaker 4: But then the current government, they the previous government had
Speaker 4: borrowed so much from the IMF, they've not had access
Speaker 4: to new money. They clearly don't have access to the
Speaker 4: bond market. Their bonds have been trading in you know,
Speaker 4: between twenty and forty cents on the dollar ever since
Speaker 4: the twenty twenty restructuring.
Speaker 1: So obviously we want to talk about the theoretical economic
Speaker 1: agenda of the president elect, and is talk about dollarization
Speaker 1: just real quickly before we sort of get to the
Speaker 1: present moment. What failed about the Mockery plan? Like when
Speaker 1: he you know, as you say, it sounded sort of
Speaker 1: normal on paper and standard maybe you know, conservative government
Speaker 1: staffed with Wall Street friendly tych Why didn't that put
Speaker 1: the country on a new path.
Speaker 2: I think he just borrowed too much.
Speaker 1: In a conservative version of the same old problem.
Speaker 4: I mean, I think if you were going to fund
Speaker 4: a big tax cut, his thesis was, as you would,
Speaker 4: you know, provide the sugar before you do the tough
Speaker 4: structural re form. The sugar was a round of tax cuts,
Speaker 4: and they were going to slowly phase in spending, protecting
Speaker 4: social spending. So the first effect was a bigger deficit,
Speaker 4: fully financed by external foreign currency borrowing and the market
Speaker 4: and I guess the Mocker government overestimated their capacity to
Speaker 4: sustain a higher level of external debt and sort of
Speaker 4: things went downhill. I there was, you know, the standard
Speaker 4: cyclical fluctuations which made it hard to bring the fiscal
Speaker 4: deficit back down, and they were reluctant to do brutal
Speaker 4: cuts because they thought they would lose the election. And
Speaker 4: if they lost the election, we'd be back in paranism.
Speaker 4: We would surely have a default. But it ended up
Speaker 4: adding clearly like one hundred billion to Argentina's external debt
Speaker 4: in a four years.
Speaker 1: I shouldn't laugh, but it's something grim, opit.
Speaker 2: I mean it was.
Speaker 4: It was a stunning spree of external borrowing. And you know,
Speaker 4: they didn't want to let the currency weaken too much
Speaker 4: because were worried about inflation. So the current account was
Speaker 4: not helping them, and so you know, I think they
Speaker 4: just borrowed too much. To be honest, you can fund
Speaker 4: tax cuts if you can fund them domestically, but funding
Speaker 4: them with external dollars when you're a dollar constrained economies risky.
Speaker 3: We're recording this on November twenty ninth, and I feel
Speaker 3: like I have to caveat the conversation with the exact date,
Speaker 3: because things move fast in Argentina. And in fact, I'm
Speaker 3: looking on the Bloomberg terminal now and it looks like
Speaker 3: the new president, Javier Millay, has just picked his economies
Speaker 3: are and it's someone who I think wasn't the front
Speaker 3: runner like a week or two ago. Anyway, we wanted
Speaker 3: to talk to Brad about dollarization, and I don't know
Speaker 3: much about this process. I am very willing to admit,
Speaker 3: you know, I think it's happened in like Panama and Ecuador.
Speaker 3: But can you talk generally to begin with, like what
Speaker 3: does dollarization actually mean?
Speaker 4: I think you can think of dollarization as two things.
Speaker 4: One is just a buyback of your own currency. People
Speaker 4: have currency in circulation bills. You buy them back and
Speaker 4: you give them dollars. Euroisation in the Euro area becomes
Speaker 4: the legal currency that settles all transactions. If the dollar
Speaker 4: is the legal currency settling all transactions, then debts that
Speaker 4: were previously in your local currency also have to be
Speaker 4: redenominated in two dollars. So the second component is a
Speaker 4: redenomination of debt in two dollars. And so you combine
Speaker 4: those two things. Dollars have replaced currency in circulation, dollars
Speaker 4: are legal tender, and your debts are in dollars.
Speaker 2: You dollars.
Speaker 3: What's the problem that you're actually trying to solve.
Speaker 4: Usually you're trying to solve a problem of inflation that
Speaker 4: you're trying you basically need to tie your hands. It's
Speaker 4: like Odysses going through the straits with the sirens, you know,
Speaker 4: lashing himself to the mass and will not be tempted
Speaker 4: to print money. You have no capacity to print money.
Speaker 4: So if you want to spend money, you got to
Speaker 4: raise money. You know, you're you have to raise hard
Speaker 4: dollars to fund domestic spending.
Speaker 3: It sounds like you need money to do this as well, though,
Speaker 3: like the idea of your you know, replacing your existing currency.
Speaker 3: So I guess in this case the Argentine peso with
Speaker 3: the dollar, like you would need dollars in order to
Speaker 3: do that.
Speaker 4: That is a very important insight chasing, thank you. That
Speaker 4: is one of the problems that Argentina faces. They're trying
Speaker 4: to dollarize and the central bank is out of dollars,
Speaker 4: which is is an interesting theoretical problem.
Speaker 1: So this new incoming president, Tamil he said he he
Speaker 1: wants to dollar rise. He's also talked about getting rid
Speaker 1: of the Central Bank. Of course, we don't know what
Speaker 1: he's going to do, and it's possible that he sort
Speaker 1: of ends up governing the country as a sort of standard.
Speaker 3: Well, he's kind of going back and conservative.
Speaker 1: You know, center right Latin American president. As you know,
Speaker 1: often countries go back and forth between left and right.
Speaker 1: Like I get that impulse actually, which is that you know,
Speaker 1: if your country has a pattern of just printing too
Speaker 1: much money historically, then you solve the problem by essentially
Speaker 1: throwing away the printing price. There's literally no way Argentina
Speaker 1: can print dollars dollars for pretty stable. Is there a
Speaker 1: path to doing that given the lack of dollars?
Speaker 4: Not unless a generous benefactor we're willing to lend Argentina
Speaker 4: a bunch of dollars.
Speaker 3: Is it the IMF again?
Speaker 4: Sorry, well, I don't think the IMF is actually willing
Speaker 4: to provide the dollars. I mean, I think the IMF
Speaker 4: believes that it needs to finally get a little money back.
Speaker 4: But you know, conceptually, it could be the IMF, it
Speaker 4: could be the United States, it could be the private
Speaker 4: Argentines who have a lot of dollars offshore who band
Speaker 4: together and provide a generous loan. But Argentina doesn't actually
Speaker 4: have the capacity to pay very much interest on the
Speaker 4: dollars at borrows, given how much is paying on this
Speaker 4: existing dollar debt. So there are some real challenges coming
Speaker 4: up with the dollars, which is probably why Malay is
Speaker 4: at least you know, the last I had read he's
Speaker 4: said the dollarization is a goal, is you know, he said,
Speaker 4: it's something that doesn't need to be accomplished on day one.
Speaker 4: They're not going to, in the first instance, shut down
Speaker 4: the central bank, and their first move, supposedly last I saw,
Speaker 4: was going to be, as you know, Joe suggested a
Speaker 4: sort of standard but harsh fiscal consolidation budget tightening, which
Speaker 4: is also just a reflection of reality. At this point
Speaker 4: Argentina is it cannot finance its fiscal deficits right now.
Speaker 3: Bret. You know you mentioned earlier the Argentina economy is
Speaker 3: sort of characterized by a small banking system. Would dollarization
Speaker 3: help with expanding the financial system in the sense that
Speaker 3: like maybe you're encouraging more faith in the money and
Speaker 3: that would translate into more willingness to actually put money
Speaker 3: into bank deposits, and then banks would be able to
Speaker 3: lend more.
Speaker 4: So there are two I think offsetting effects. One is,
Speaker 4: at least in theory, there are a lot of dollars
Speaker 4: in circulation in Argentina, a lot of dollars locked up
Speaker 4: in safe deposit box. The black market, well it's black market,
Speaker 4: plus you know some wealthy Argentines just rather than trusting
Speaker 4: the banking system. You know, have a certain number of
Speaker 4: dollars in Miami and a certain number of dollars under
Speaker 4: the mattress. So there are dollars in circulation, the black market,
Speaker 4: there are dollars under the mattress, and then there are
Speaker 4: offshore dollars in the offshore banking system. Conceptually, some of
Speaker 4: those dollars could migrate into the domestic banking system, which
Speaker 4: would expand the deposit base, allow the banks to lend more.
Speaker 4: They have to lend more in dollars, and they could
Speaker 4: conceivably provide more dollar financing to the government. So that's
Speaker 4: kind of EFFECTA effect B is that you really don't
Speaker 4: have a lender of last resort, so you know, banks
Speaker 4: are in the business of maturity transformation, particularly if you
Speaker 4: don't have a printing press if you don't have your
Speaker 4: own central bank. So if depositors ever want their deposits back,
Speaker 4: you have to provide them with dollars cash.
Speaker 2: So either you get those.
Speaker 4: Dollars from your central bank again the central bank doesn't
Speaker 4: have dollars, or you have to hold as assets a
Speaker 4: lot of offshore dollars. So it tends to have offsetting effects.
Speaker 4: If it worked, it could bring money into the banking system.
Speaker 4: If it doesn't work, you will have converted a bunch
Speaker 4: of peso deposits into dollars. People will show up and
Speaker 4: ask for their dollars back, and the banks will be
Speaker 4: unable to honor those dollar promises, and you'll end up
Speaker 4: with a frozen banking system.
Speaker 1: Are there other ways besides dollarization, in which I mean
Speaker 1: because you're trying to solve an institutional problem, and you know,
Speaker 1: I love the analogy of tying yourself to the mast,
Speaker 1: and so you don't have the temptation to do an
Speaker 1: Are there other examples, either historically or around the world
Speaker 1: where countries solve the institutional problem of essentially self constraint
Speaker 1: other than sort of dollarization, which seems kind off the
Speaker 1: table without the.
Speaker 4: Dollars, so you can do various forms of pegs which
Speaker 4: are just sort of softer.
Speaker 2: Yeah, but you know, but.
Speaker 1: You can always break a peg.
Speaker 4: You can always break a peg. You can do various
Speaker 4: you know.
Speaker 1: But again, you can always undollarized too.
Speaker 4: It's hard to it's harder to undollarize, but you know,
Speaker 4: it's conceptually, I mean, remember Argentina got off a currency board, right,
Speaker 4: which was supposed to be the.
Speaker 1: Is a board in a peg basically the same thing
Speaker 1: a board as you fully.
Speaker 4: Back all currency and circus relation with.
Speaker 2: Dollars or whatever your peg do.
Speaker 4: So you anyone who has a peso could get a
Speaker 4: dollar and those dollars are available at the central bank. Now,
Speaker 4: it doesn't solve the problem of a lender of last
Speaker 4: resort to the government or to the banking system, but
Speaker 4: it means like every peso is backed by a dollar
Speaker 4: at the central bank. So it is more constraining that respect.
Speaker 4: You know, a peg is a function of credibility, and
Speaker 4: if you're really, really really committed to the peg, and
Speaker 4: if you have a really tight budget, you could conceivably
Speaker 4: make it work. But it's basically ultimately it hinges on
Speaker 4: fiscal discipline.
Speaker 2: I mean, it kind of goes back to being boring.
Speaker 1: Tracy, I'm just looking on the terminal. You know, you
Speaker 1: mentioned the new finance minister. Huh the title our colleague
Speaker 1: Sebastian Boyd who wrote it one of a great colleagues, Milaipics,
Speaker 1: architect of Argentine borrowing boom to run economy. And then
Speaker 1: if one of the capudo was the financial minister for
Speaker 1: Mauricio Mockery and ran the negotiations with bondholders that paved
Speaker 1: the way for a return earn international markets in twenty sixteen.
Speaker 3: So this just proves my point that like the craziest
Speaker 3: outcome is always like what's going to happen with Argentina.
Speaker 3: What's the scorecard for dollarization in places where it's actually happened.
Speaker 3: So I mentioned Ecuador and Panama, and I see like
Speaker 3: different interpretations of the success of those programs. So some
Speaker 3: people look at Ecuador and say, well, Ecuador growth is
Speaker 3: still relatively sluggish, whereas Panama has boomed. But with Panama,
Speaker 3: it's hard to kind of disentangle the factor of the
Speaker 3: Panama Canal and having like an offshore financial center and
Speaker 3: things like that. So how would you evaluate the success
Speaker 3: of previous dollarization programs?
Speaker 4: So yeah, I've spent more time thinking about Ecuador than Panama.
Speaker 4: I would tend to think that Panama's success is a
Speaker 4: function probably less of the canal and more of being
Speaker 4: an offshore financial center and the Panama papers, and a
Speaker 4: set of less savory aspects of contemporary globalization, which are
Speaker 4: probably they are facilitated by doing business and dollars. I mean,
Speaker 4: presumably some Argentines have their offshore dollars in banks and
Speaker 4: Panama with Ecuador. Look, Ecuador has stuck by dollarization, so
Speaker 4: in that narrow sense it has worked. The banking system
Speaker 4: has not imploded, there have not been runs, Ecuador has
Speaker 4: not grown especially rapidly compared to its Andean peers that
Speaker 4: have not dollarized. You know, Colombia, Peru, Chile have generally
Speaker 4: outperformed Ecuador and Ecuador rather clearly, and this is I
Speaker 4: think an important principle. You know, dollarization doesn't end the
Speaker 4: risk of default, and when oil prices go down, Ecuador
Speaker 4: still regularly defaults. So there have been multiple defaults after
Speaker 4: Ecuador dollarized, So I think the record is a little
Speaker 4: bit mixed. Certainly, if you can pull it off having
Speaker 4: your own stable currency which you can use to denominate
Speaker 4: bank accounts and most of your own borrowing. It's a
Speaker 4: better clearer path to disability, particularly.
Speaker 2: If you have a limited export base.
Speaker 1: In theory, if there were some generous borrower, rich Argentines
Speaker 1: who wanted to repatriate their money to facilitate the transition.
Speaker 1: Is there an estimate of how many dollars the country
Speaker 1: would need in order to dollarize at some reasonable dollar
Speaker 1: peso conversion?
Speaker 3: Oh yeah, wait, can I just tack onto that? How
Speaker 3: does it actually work? Because my understanding is there's like
Speaker 3: there's multiple like extraget rates currently in the economy. There's
Speaker 3: like the gray market currency conversion, and then the official rate.
Speaker 3: It seems tricky.
Speaker 4: So yeah, there's a blue the blue dollar, which is
Speaker 4: the the black mart market rate, which is you know,
Speaker 4: like I think it's about it at one thousand, the
Speaker 4: official rates three point fifty, so like a little bit
Speaker 4: of a gap, and then there are special rates. So
Speaker 4: Argentina has this problem that exporters would like to convert
Speaker 4: their soybean exports into pesos at the black market rate,
Speaker 4: they are unwilling to convert at the official rate. So
Speaker 4: at various points in time, Argentina gets desperate for dollars
Speaker 4: and it basically gives a special rate to various sectors
Speaker 4: of the economy to try to pull money in.
Speaker 2: But the two key rates.
Speaker 4: Are the black market rate, the blue Paesel blue dollar,
Speaker 4: and the official rate. I think at the official rate,
Speaker 4: getting rid of the monetary base, which is probably insufficient,
Speaker 4: that leaves you no dollars to back the banks, no
Speaker 4: dollars to cover your dollar debts. The central Bank actually
Speaker 4: has a lot of short term payso bills, which are
Speaker 4: a really big problem no matter what, particularly if you
Speaker 4: dollarize at at too high of a rate. But you
Speaker 4: could take out the monetary base with about twenty billion dollars.
Speaker 4: Now you do have the problem that at the current
Speaker 4: or exchange rate, the short term financial liabilities of the
Speaker 4: central bank are like sixty billion, and so it's you know,
Speaker 4: you would probably be unable to pay the central bank
Speaker 4: liabilities and so you would have to restructure there. If
Speaker 4: you devalued, you can kind of lower that cost a bit,
Speaker 4: but again you need extra dollars beyond what it takes
Speaker 4: to get rid of the monetary base. Because the government
Speaker 4: has to pay all of its domestic debts in dollars.
Speaker 4: The government has to manage fluctuations in monthly revenues in dollars.
Speaker 4: The banks have to handle demand for if anyone wants
Speaker 4: to pull money out of the bank, they have to
Speaker 4: have dollars available. So it becomes you need a buffer.
Speaker 4: And so I think realistically.
Speaker 2: You need like fifty fifty billion something like that.
Speaker 3: Yeah, so, I know we've been talking about.
Speaker 4: Fifty billion and a debt restructuring and a debt restarction.
Speaker 3: Got it well, without the debt restructuring, it was really
Speaker 3: realistic anyway. No, I know we've been talking about dollarization,
Speaker 3: but could you get a situation where like there's unization
Speaker 3: you do that?
Speaker 4: Well, Malay is so keen, so fond of the Chinese sign.
Speaker 4: I mean he is kissing and making nice but sure.
Speaker 4: I mean, Argentina has an eighteen billion dollar swap line
Speaker 4: with the PBOC. I think they've used at least five maybe,
Speaker 4: you know, I think maybe that's gone up in the
Speaker 4: past few weeks.
Speaker 2: We don't know.
Speaker 4: So if the PBOC we're willing to extend that swap line,
Speaker 4: you know, swap line is you know, Argentina puts pesos
Speaker 4: un deposited in China, the PBOC puts you on in
Speaker 4: the bank account of the Central Bank of Argentina. You
Speaker 4: could provide enough yuan to allow U yuanization if you
Speaker 4: so desired. You would have to yuan eyes all of
Speaker 4: the debts, not dollarize them. And then you know, Argentina
Speaker 4: would still owe a lot of dollar debts on its
Speaker 4: external bonds. It would owe SDRs back to the IMF.
Speaker 4: So not all of his liability structure would be wan eyes,
Speaker 4: but it is possible. It would be slightly strange because
Speaker 4: you know, the one is not freely convertible in China.
Speaker 4: But if you have enough you want in Argentina, you
Speaker 4: can solve that problem.
Speaker 1: Well, so I just want to say thank you for
Speaker 1: coming in. And I do think now I could at
Speaker 1: least be ask my way for about ten minutes, and
Speaker 1: then Argentina.
Speaker 4: You would have been highlight. You would have been higher.
Speaker 1: Stroke my chin and take things like well, you know,
Speaker 1: dollarization has been no pantacya for Ecuador because things like that,
Speaker 1: and I sound very wise, and he's like, oh, you know,
Speaker 1: and of course we must remember that there are two
Speaker 1: exchange rates in Argentina and all these great things like that.
Speaker 1: So I will just finish this up. My last question
Speaker 1: with the question that you asked me like seventeen years ago.
Speaker 1: And so you get the call from Javier Mila and
Speaker 1: this is brand You've been studying our economy for probably
Speaker 1: twenty plus years. You know more about dollarization and international
Speaker 1: capital flows than anyone else in the world. Please join
Speaker 1: my government as the new special advisor. What would you
Speaker 1: tell him in terms of a policy approach.
Speaker 4: Well, I think I would tell him three or four
Speaker 4: big things.
Speaker 2: Okay.
Speaker 4: The first big thing is you really don't have an
Speaker 4: option to dollarize.
Speaker 1: The first first item is your agenda is impossible.
Speaker 4: Okay, Well, I think that's pretty much what Capudo told
Speaker 4: him as well. I mean, it really is impossible to
Speaker 4: dollarize when you don't have dollars at the central bank.
Speaker 4: I mean, technically there are a few dollars against the
Speaker 4: mandatory reserves of the banks, but those are not realistically
Speaker 4: usable dollars, and you have no prospect, no real prospect
Speaker 4: of borrowing the dollars, so dollarization is not a realistic goal.
Speaker 4: Second is, you know you have to do what you
Speaker 4: want to do, which is titan Argentine fiscal policy. You're
Speaker 4: going to have to cut the fiscal deficit. I think
Speaker 4: Caputo wants to go to a two percent of GDP
Speaker 4: primary surplus next year.
Speaker 2: Good.
Speaker 4: I think that is necessary. I don't think you can
Speaker 4: do that fiscal consolidation and OSCO cut the size of
Speaker 4: government in half, which has been his other proposal. I
Speaker 4: think you have to be realistic about how much consolidation,
Speaker 4: how much shock therapy the economy can take. But clearly directionally,
Speaker 4: you need to have a big upfront fiscal consolidation, get
Speaker 4: rid of some of the subsidies, rein in spending, whatever
Speaker 4: tax breaks that you're the last government provided at the
Speaker 4: end of it, at the end of its term that
Speaker 4: you're willing to roll back even though you want tax
Speaker 4: cuts over time, you want to strength the state. I mean,
Speaker 4: in the short run, don't do tax cuts, but execute
Speaker 4: on tight spending, and then you have to restructure. Third,
Speaker 4: the balance sheet of the Central Bank. My friend Chris
Speaker 4: marsh who's right to blogs tweets as the General Theorist,
Speaker 4: has a great blog on this. The Central Bank has
Speaker 4: a horrible balance sheet, like really horrible. It has these
Speaker 4: long term, non traded, low interest rate dollar bonds that
Speaker 4: they are called non transferable treasury securities, but basically they're
Speaker 4: dollar bonds of consequence of loans to the government that
Speaker 4: pay a very low interest rate. That's their main asset.
Speaker 4: Their net foreign asset position is down negative. They've borrowed
Speaker 4: more in foreign currency than they hold in foreign currency.
Speaker 4: Their main asset are these foreign currency denominated, low interest
Speaker 4: rate Government of Argentina securities, and then they borrowed a
Speaker 4: ton or issued a ton of short term Peso bills
Speaker 4: that pay these incredibly high interest rates, so they are
Speaker 4: hemorrhaging cash. Is this backdoor fiscal deficit. So you have
Speaker 4: to do a restructuring. No matter whether you want to
Speaker 4: dollarize or just have a normal functioning central bank, you
Speaker 4: have to, you know, swap out the zero or low
Speaker 4: interest rate non transport treasury securities for something that pays
Speaker 4: a real interest rate. So there's income coming in and
Speaker 4: you have to probably restructure these short term bills and
Speaker 4: so you have to kind of change a situation where
Speaker 4: the central bank has no income but it's paying like
Speaker 4: one hundred percent interest, and you probably can't just do
Speaker 4: that with credibility and you know, we're going to bring
Speaker 4: the interest rate down, you probably need to do a
Speaker 4: pretty hard ass restructuring. Fourth component, you know, the bonds
Speaker 4: are trading. They've rallied a little, maybe too much. Bonds
Speaker 4: have been trading under forty ever since they were issued.
Speaker 4: In the restructuring, they're really starting to amortize in twenty
Speaker 4: twenty five. These are bonds that are clear that Argentina
Speaker 4: clearly can't pay, and I would say, you need to
Speaker 4: organize over the next year a preemptive restructuring of your
Speaker 4: sixty five to seventy billion in international sovereign bonds. You
Speaker 4: will not be able to pay them when they come
Speaker 4: due in twenty twenty five, nor should you want to.
Speaker 3: So that would be my structuring.
Speaker 1: Would that be this is gonna be the last structuring,
Speaker 1: though they're really going to do it this time.
Speaker 4: Well, yeah, I think Argentina and these smart bond investors
Speaker 4: realized that the twenty twenty restructuring was built around the
Speaker 4: wrong premise. It was built around the premise that US
Speaker 4: Treasury rates were going to be two percent forever and
Speaker 4: so therefore a five percent interest rate for Argentina would
Speaker 4: have been a reasonable rate. That is not the case
Speaker 4: right now. So the bondholders wanted to preserve the face
Speaker 4: value of the bonds and were willing to accept a
Speaker 4: low coupon back in twenty twenty, and then they wanted
Speaker 4: relatively short amortizations, so the bond started to amortize after
Speaker 4: five years, and you just have this steady wall of
Speaker 4: amortizations for the next ten years. What you need to
Speaker 4: do is you need to do cut face, raise cubon,
Speaker 4: give Argentina another five to ten years before they have
Speaker 4: to amortize. Hard deal, but it's doable.
Speaker 1: Lots More is produced by Carmen Rodriguez and dash Ol Bennett,
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