On Sunday August 11, Argentina’s right-wing president Mauricio Macri suffered a landslide defeat in the primary elections against the progressive-opposition ticket of Alberto Fernández and Cristina Fernández de Kirchner. During Macri’s presidential term the Argentine economy suffered a serious blow with the most visible indicator of the more than 566% devaluation of the Argentine peso from when Macri entered office until today.
The principal impacts of this economic crisis in Argentina have been felt by the working class and marginalized sectors in Argentina. Thousands have lost their jobs, the prices of food and public services have increased while wages have decreased and the number of people without homes has increased exponentially.
Before the results were announced Sunday, the peso was worth 45 to the dollar, but by Monday morning after Macri’s defeat had been announced, rumors circulated that the peso had devalued another 33% resulting in the rate of 60 pesos to the dollar. Some reasoned that the dive was because the markets feared that the progressive candidates would be unfriendly to finance capital or that the markets preferred Macri. In order to understand the true reasons behind the latest chapter in what has been four years of currency devaluation and economic crisis in Argentina, Peoples Dispatch spoke to Argentine economist Emiliano López, a researcher with CONICET (National Scientific and Technical Research Council), professor at the National University of La Plata and a member of Tricontinental Institute for Social Research.
Peoples Dispatch: During the government of Mauricio Macri the Argentine peso has devalued more than 566%. What are the principal factors that contributed to this devaluation?
Emiliano López: The problem of the devaluation of the peso has distinct motives in Argentina. On one hand we have the motive that has to do with the real economy, of how much is exported, what role Argentina has in the exportation of some goods and services, particularly with food. And in this area there is always a lot of pressure from the exporting sector in Argentina that supports devaluation. This sector benefits from the successive devaluations.
Argentina has always had a very vulnerable role in the global market. It is a very subordinated role that has to do with the global prices of raw materials that are exported, because Argentina is an exporter of raw food materials. So this factor that the prices are not controlled by the country itself means that the country is always subject to the ups and downs of the prices of the goods that Argentina exports.
The large exporters that hold economic power always try to exert pressure so that the peso loses value. This has been a constant in the history of Argentina. Every time there are good conditions in the international market in raw materials, the different exporting companies, usually big transnational exporting companies, pressure for this devaluation. Today they say it is necessary for the peso to lose value to be more competitive. This idea of greater competitiveness hides their true intention which is to improve the ability to profit with the exportation of goods to the global market.
On the other hand there is the financial factor and here is where Macrismo, the policies of the government of Macri, has generated terrible conditions for our country, a tremendous financial vulnerability that has to do with the no-control or the elimination of all of the controls on capital, on all of the mobility of finance capital.
There were some regulations during the prior government of Cristina Fernández on finance capital, but these regulations were dismantled by the government of Macri. This deregulation allowed for the entrance of speculative capital. and what they do basically is enter with dollars, turn those into pesos, buy very profitable stocks in Argentina with those pesos, and then convert them back into dollars. That’s where the devaluation process happens, when they flee with these dollars to a financial asset or even the US or another central country or market.
This is a common practice of big speculative capital on a global level, invest in the emerging economies to generate greater profit in the emerging country and then leave with foreign currency, or in “global currency” which we can say is the dollar. Then, run away with it to a “safer” economy.
This is the mechanism that has been used notably in the last couple of years in the country, and this is why the currency has not only devalued 50%, but actually when Macri took office the rate was 9 pesos to a dollar and last week it came to 60 pesos to the dollar. So the devaluation is very significant. This is the most significant effect the dollar has had in Argentina recently where there is a long history of devaluations. However, the accelerated rate of the devaluation in the past couple of years is a product more of this second, regarding the deregulation of finance capital than the first, related to the exporting sectors.
How do you explain the entrance of speculative capital from outside to Argentina? Basically what Macri’s government did was offer some financial assets with an extraordinary profitability. We have the highest interest rate in the world. Before, the interest rate for financial investments was around 40%. Today the interest rate for the letters of the Central Bank that are called Leliqs and are bonds of the Central Bank, is 75%. This is a yearly interest just for investing in this financial asset and it is a very high level of return.
The most interesting aspect for investors that invested in these activities, which is now exclusively banks, is what were called the Lebacs which lasted up to the first half of 2018. These investments had an extraordinary profitability that had a mechanism of monthly expiration so every month there was a payment which was the capital of this investment and additionally the interest rate. With this, a great amount of interest was generated which the national state had to pay and it caused a significant de-financing of the national state.
When the IMF makes an agreement with the government about the austerity measures, they do not keep in mind this factor, even though is one of the biggest expenditures of the government. The biggest expenditure of the government today has to do with the debt, foreign debt and domestic debt, principally to big companies and banks that have invested in these assets that are short term speculative assets.
The mechanism to maintain this high level of profitability is to transform these pesos obtained in the country in an investment with a high interest rate to dollars and escape with them outside the country. This is the principal financial mechanism that I commented on before. This specifically has to do with the 4 years of government under Macri, where there was an exacerbation of the devaluation in the financial sphere.
PD: Many alleged that Macri tried to stabilize the exchange rate of the peso to favor his candidacy and Juntos por el Cambio. Is this true? And how did he do it?
Evidently the government tried to stabilize the exchange rate, which was already at a very high level, it had already devalued 100% the year before. When 2018 began, one dollar was 22 pesos and before this latest devaluation the peso had fallen to 46 pesos to the dollar. So what did the government do to stabilize the rate of exchange?
Basically it was a direct intervention, something that has occurred very few times in history, it was a direct intervention of the US government of Donald Trump in the policies of the International Monetary Fund. Donald Trump intervened in the negotiations between the IMF and the Argentine government, allowing the government to allocate a part of the dollars that the IMF had loaned Argentina in the “standby” loan (a loan which usually has as a condition the imposition of economic austerity policies) to use in the exchange market. This intervention allowed the Argentine government to use dollars in order to sustain the exchange rate a relatively stable rate in the face of the excessive demand of dollars in the market. When there was this excessive demand of dollars, the Central Bank intervened with these funds and was able to maintain a stable rate from last May until recently.
In some respect, they thought it would be enough to control other economic variables. For example, the domestic prices, but these continue to rise, almost at the same rhythm of the devaluation and of course related to other aspects that have to do with the prices in our country.
Here there is a very important point because the sustainability, really the only possible way to sustain this neoliberal model of accumulation in Argentina has to do with the international context with the policies of the US and the IMF. It is a blueprint that is imposed on the region in its totality with the support of the Cambiemos government in Argentina, and the government of Bolsonaro in Brazil, the government of [Sebastian] Piñera in Chile, and of course the government of Iván Duque in Colombia. This operative is giving very bad results to our people in general.
PD: On Monday, news started to come in that the peso had fallen another 33% and the dollar was now worth 60 pesos. How did this happen, and why?
EL: What happened on Monday was a combination of things. We are still speaking in the heat of the latest developments but on Sunday August 11 the government suffered a very big loss in the polls. The popular vote went with the opposition candidacy and we can observe three aspects that attributed to this devaluation.
The first aspect of course has to deal with the contained devaluation throughout the last several months. Contained devaluation means that before, the government had been intervening in the exchange market, but on Monday essentially the government decided not to and allowed the exchange rate to fall drastically. This was a move that reflected an almost psychopathic attitude.
Macri then proceeded to blame the Argentine people and the opposition that won in the primary elections for generating instability. This is basically saying that the opposition in the country is not trustworthy, and since it is not trustworthy, the markets respond like this. However in reality they are covering up the fact that since Friday of last week the national government intervened in the exchange market and Monday they allowed the exchange rate to float and then only intervened after a while. This sudden devaluation is a cause of this policy.
The second factor that we have to keep in mind is the international factor. Argentina is extremely vulnerable as I said before to the financial markets. Any incidence of change of policy, change of order, change of regime, is seen by the financial speculators as an opportunity. Basically until last week they bought a lot of stocks from the Argentine companies on the Wall Street stock market, and Monday the Argentine stock on Wall Street fell to pieces just like the Argentine bonds.
The same happened with the exchange rate that was stable and then Monday it suddenly devalued. This happens in almost all of the emerging countries, not just in Argentina, but the financial variables, in the face of the smallest change in the country, tend to move rapidly to try and have short term profits. This responds to a general strategy that basically reads the primary elections results as a high probability that the current government will not be reelected. The markets respond and attempt to have the greatest short-term profits before the change of government thinking that maybe with the new government there will be greater restrictions to enter the country with speculative capital of these characteristics.
The third important point is that in this national context, finance capital has the priority and public services are in private hands. This past year we saw the ‘adjustment’ of the tariffs for public services in dollars, and as such any change in the exchange rate impacts the tariffs for electricity, gas, running water and fuel in Argentina.
At the same time that the public service and fuel tariffs are dollarized, the government continues to prioritize the financial sector with very high interest rates, the highest in the world, which means that any productive investment is impossible to take forward because the conditions are much less profitable. There is almost no sense in making any productive investment.
What does this generate? Well the speculative capital is always thinking about financial alternatives like bonds, stocks, and the short term investments in the bonds of the Central Bank or even in the dollar, which are all profitable alternatives. With the dollar, they buy the dollar cheaply, waiting for the peso to devalue and then sell the pesos, the famous carry trade that is a common practice in many emerging currencies.
This whole operation is a very important factor to explain the devaluation because it does not have to do with sympathy or antipathy of the political opposition to the markets, but it is about the policies of Macri since he took office. If you look at the peso which started at 9 to the dollar, then jumped to 22 pesos to the dollar, then to 45 pesos to the dollar and now from 45 to 60 pesos to the dollar, this all happened during the government of Macri! It is clear that policies of Macri himself generated these conditions, the conditions for a constant devaluation of the peso. As such this third factor I mentioned, which is the most technical, rational factor having to do with a dimension of the economic policy of this government that is a pro-finance policy of financial opening, commercial opening, well this policy always has these results: a very high level of speculation with financial assets and currency.
This financial vulnerability is then expressed in the increase in food prices in our country, in the increase of public services in our country. It is also expressed in the destruction of the industrial sector, in favoring financial profit, jobs are lost every day. Everyday unemployment grows, and alongside it poverty and hunger also grows everyday. In these conditions it is expected that the people’s forces in Argentina will attempt to make a relatively stable transition without heavy costs for the working class of Argentina. This is a challenge because this government is decided that the cost of its political and economic disaster should be paid by the working class in this country.