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Prat-Gay and Fallon: The decision not to
reappoint Prat-Gay as Argentina's central
bank governor came as a complete surprise.
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This year, for the first time, Euromoney has presented its award for central bank governor of the year to someone who isn't a central bank governor (see Euromoney September 2004). At the end of September, two weeks before the IMF/World Bank meetings, the mandate of Argentina's Alfonso Prat-Gay expired and president Néstor Kirchner did not renew it.
By Argentine standards, Prat-Gay had a good term. As he said, when receiving his award from Padraic Fallon, chairman of Euromoney Institutional Investor: "When we took office in December 2002 we had a lot of ambitions, the main one being to make it to the end of the term – this being a country whose central bank is only 68 years old and has had 48 governors along the way."
Nevertheless, the abrupt decision not to reappoint him came as a complete surprise. There was certainly no hint that he was doing a bad job: his peers have nothing but praise for him, and there was no scandal associated with his departure. "It violates the spirit of the charter," says Siobhan Manning, Latin America strategist at Caboto. "You're supposed to reappoint these guys unless there's an egregious defect."
Analysts say that if Prat-Gay had any defect, it was to refuse to sign on to the unorthodox economic plan of the Argentine government. It was well known that he cherished his independence, and was demanding a say in the composition of the bank's board.
"Alfonso felt that to build the credibility of the institution he needed a more independent board, while the government wanted to stress the commonalities with the finance ministry," says David Sekiguchi, chief emerging markets economist at Deutsche Bank.
Prat-Gay is said to have serious misgivings about the way the government is approaching debt restructuring, and wanted to ensure that the central bank was as far removed as possible from the policies of Kirchner and his finance minister, Roberto Lavagna.
Kirchner, on the other hand, might have become frustrated that the head of his central bank was widely known to oppose central tenets of his administration's economic philosophy. When Prat-Gay's mandate came to an end, Kirchner replaced him with Martin Redrado, the deputy foreign minister, a man most analysts consider unlikely to assert much in the way of independence.
Preserving continuity
Kirchner is understandably keen to play down any notion of profound disagreements over policy. He told Euromoney: "The change at the central bank is because the term of the current officials and governor of the central bank is ending on September 23. We are fully supporting Argentina's institutional development. All we have done is to change an official in order to preserve policies, because the current governor didn't want to stay on. We hope that Dr Redrado will act along the same lines."
Prat-Gay himself, choosing his words carefully, says that "basically the president and I have different views of what the role of the central bank should be".
The disagreement was not about monetary policy: there is every expectation Redrado will pick up where Prat-Gay left off, and stay on a path of low inflation with a weak peso. As Prat-Gay said himself at the award ceremony: "...I can say that we have never had a single interference from the Kirchner administration on monetary policy."
Rather, the difference was more philosophical – about the degree of independence that a central bank should have. Mohamed El-Erian, emerging market fund manager at Pimco, sees two systems emerging in Latin America. In countries like Mexico and Chile the governments take pains to strengthen and respect institutions in general, continually increasing central bank autonomy specifically. In countries like Venezuela, on the other hand, "institutions become part of the political process", he says. "In Argentina, there is a conflict between economic necessities and political realities."
Kirchner is certainly at a point in his administration where he is feeling it necessary to consolidate political power. Railing at foreign creditors and the IMF can't keep his popularity at high levels for ever, especially when the economic rebound slows.
Recently, Kirchner has been patching up his relationship with Peronist party heavyweight and former president Eduardo Duhalde. Finance minister Lavagna is a hold-over from the Duhalde administration, and, says Satz, "Redrado is a Duhalde man and will play by their rules". Expect many fewer objections from Redrado than from Prat-Gay, for instance, to Lavagna's plan to pay down Argentina's IMF debts out of central bank reserves rather than tax revenues.
If there is any upside to this, at least in the short term, it is in having the central bank governor and finance minister clearly singing from the same songbook during what is likely to be one of the most crucial episodes in Argentine economic history – the debt exchange offer.
In the medium term, however, says Lacey Gallagher, Latin America analyst at Credit Suisse First Boston, "this solidifies the prospect that the central bank will remain under the control of the ministry of economy and Kirchner".
Market reactions
Yet Prat-Gay did achieve a lot in his short term: to see that, one has only to look at the reaction of the markets to his removal.
The peso and the bond markets sold off when the news was announced on Friday September 17 but by Monday afternoon they were basically back to where they started. In a mere 20 months, Prat-Gay had evidently succeeded in building an institution that was stronger than himself personally, and in which the markets had a large degree of faith. That's unprecedented in recent Argentine history, and only serves to confirm Euromoney's decision to give Prat-Gay the central banker of the year award.
There was even a short handover period, in which Prat-Gay held meetings with his successor – something that would be a matter of course in most economies but which has never, to Prat-Gay's knowledge, happened at Argentina's central bank.