The Argentine Conundrum



No, not the title of a new Robert Ludlum novel. Sorry, but my prose isn’t quite that bad. Rather, the Argentine Conundrum refers to the problem the country has over its economic statistics: Which one to lie about most? If they say inflation is high and therefore real growth is low, then they’ve got to pay out shitloads on their inflation-proofed bonds. But if they say inflation is low and thus real growth is high, then they’ve got to pay out shitloads on their GDP-related warrants. And they’ve not got enough money to pay out shitloads to anyone at all.

Bit of a bind really.

It’s worth going back a little bit to the turn of the millennium. Lots of Very Serious People saw that the Argentine economy was in the pits and that it was being strangled because it had pegged the peso to the dollar thus, by definition, importing US monetary policy into Argentina. The same VSPs seemed to think that the country should just struggle through and tough it out. Then there were the rational people who pointed to Herb Stein’s Law, that if something cannot go on forever then it won’t. And a country cannot run along in near-bankruptcy forever. The people just won’t allow it. So they declared that, as they couldn’t pay all their debts, they wouldn’t and they stiffed the people who had lent them money.

Sounds a bit harsh but it is the correct thing to do. If you’re broke, you’re broke, and there’s no point in hoping for might-have-beens. Get the debt overhang out of the way through some form of bankruptcy (difficult for a country but it happens — we call it a debt renegotiation) and try to start again with a relatively clean sheet. There are those who try to claim that what Argentina did was a blow against The Man, but it’s absolutely standard IMF-style advice. Drop the exchange rate, haircut the bonds and the banks, and carry on.

Fine: but as part of the debt renegotiation the Argentines issued two interestingly new debt instruments. One was a series of bonds that were linked to the inflation rate. Much previous borrowing had been in dollars, which was one of the problems they faced. But who wants to hold peso bonds when, to put it politely, the country has a known predeliction for inflation? Thus the answer is to pay interest on the bonds related to what the inflation rate was. The US and UK both issue bonds on the same basis. Excellent: but what happened next? There was a little divergence between what the Argentine Government said inflation was and what everyone else thought it was, to the point that the country threatened to jail economists who disagreed with the official inflation numbers:

The IMF censure followed several attempts to obtain information from Argentina that the fund deems is good enough to monitor the country’s economic performance. Fernandez has denied the official statistics are inaccurate, even though they have been disputed by the IMF, economists and politicians since 2007.

In early 2007, Fernandez’s late husband and then-President Nestor Kirchner replaced senior staff at the statistics institute, known as Indec. While private forecasters estimate that inflation accelerated in 2012 to 25.6 percent, the government’s national statistics institute said consumer prices rose 10.8 percent.

The private economists aren’t identified because they risk being fined by the government for releasing calculations that differ from official data.

The gap between the official and private inflation rates has enabled the country to save about $ 6.8 billion since 2007, according to Buenos Aires-based research firm ACM Consultores.

Interesting, eh?

But that’s not the only innovative new paper that the country issued. They also issued paper that pays out if GDP growth is above a certain level — sort of like equity in the economy. And if you understate inflation, then you’ll also be overstating real growth (for real growth is nominal growth minus inflation). Similarly, if you overstate inflation then you’ll be understating real growth, which is where our conundrum comes in. So, in order to be as well-off as possible given the mess they’re still making of the economy, which of the two numbers should they fiddle with? Inflation or growth?

Well of course, because this is a government, they’ve decided to do both:

Argentine warrants tied to economic growth plunged to the lowest since June after the government revised down 2013 data below a threshold for triggering a coupon payment of about $ 3 billion.

GDP warrants tumbled 27 percent today to 6.3 cents on the dollar at 5:34 p.m. in New York, according to data compiled by Bloomberg, after the national statistics agency said yesterday the economy grew 3 percent in 2013, below the 3.22 percent trigger.

It’s a fun game, isn’t it?

There is a larger lesson from this, other than the usual English sneering at the mess the Argentines have made of what was once the world’s richest economy. It has to do with the furor over the current Transatlantic Trade Deal, in that there’s a series of clauses stating that corporations and investors can sue governments by using an arbitration mechanism — one outside the control of the government being sued. Some take this to be a gross violation of national sovereignty, and you can think of it that way if you wish. But it’s really a way to take a government to court to compel it to obey the rules it had agreed to by signing the treaty, without changing the rules. Or, in the Argentine example, if you’ve got inflation-linked or GDP-payout bonds or warrants then someone, somewhere, has to be able to rule on whether the government is reporting either or neither of those numbers properly. And preferably that someone should be outside the court system that government already controls.

[Image via Thinkstock]