Where do you see the Argentine economy being headed? The trend of the Argentine economy is absolutely clear. It is perfectly possible to strengthen and to reinforce this trend.
In September last year, when we presented the budget to Congress, our forecast for GDP growth was 3% for this year. At the end of 2002, we decided to modify this forecast to 3.6%. Now I cannot give a precise number, but we are still increasing the forecast. Some private companies, for example Morgan Stanley, now have a forecast of 4.5%, and Santander Group has a forecast of around 5%.
What is important is for us to prepare the best departing point for the new administration. Maybe we are facing the possibility of having the most orderly transition in power of the last three or four transitions in Argentina.
Have you started to talk to their economic teams? In a preliminary way. The candidates just started their campaigns a few weeks ago, and they are still trying to develop their own themes. But all the information is prepared to be given to all the candidates, and it is very clear that all the candidates will receive exactly the same: the same treatment and the same kind of information.
If you were advising one of the candidates on economic policy, and you were installed as finance minister on May 25, what would your priorities be? I think that it is extremely important to maintain fiscal stability. We are now in our eighth month in a row with a primary surplus. In Argentina, compared with the last decade, that is an extremely good performance.
It is extremely important also to maintain all the social programmes, because the economy is not just economics. It must also pay attention to the social situation, for ethical reasons if you want, but also for economic reasons. It is not desirable to have people rally in the street. You have some information concerning the number of rallies in the last year. It’s a very important indicator. That’s why, in the transition, it’s very important to maintain these programmes.
The programmes are completely financed up to the end of 2003, and part of 2004. There is no financial reason to interrupt that.
It is important to continue the normalization of the financial system, because this recovery is a recovery without any kind of credit. If you are thinking about long-term growth prospects, the financial system is absolutely essential. We are working very hard on that – we will take some measures before taking office to create better conditions for the banks to start to lend, finally.
Do you think banks could start lending money this year? Yes, I think it could happen this year, precisely because of this decree.
One of the first things that the new administration is going to have to do is once again to negotiate with the IMF. Presumably that will be even harder for the new administration than it was for you. What do you think the Fund is going to demand? I don’t know what they are going to demand, but on my last trip I tried to convey the message that it is very important for the new administration and the Fund to avoid a repeat of the same kind of requirements that it would be impossible to fulfil.
After the negotiation, I do not need to negotiate any more, the agreement is there. We will fulfil the agreement. I feel absolutely free to convey this message to the Fund: pay attention. If you do not want to change your opinion with this government, OK, don’t. But with the new administration, you must change your message. You must recognize the progress made by the Argentine economy during the last period, and to start from a new beginning with realistic requirements, not just with things that are completely impossible to be accepted – if they are accepted, they will not be fulfilled, clearly.
Is there another case of an economy like Argentina where in a year where the GDP decreased by between 10% and 11%, and, after four years of recession, it was possible to repay in net terms to the multilateral institutions $4.5 billion, 3% of GDP? You will not find other cases like that. In the middle of this situation, the country repaid 3% of GDP. You want 5%, that was impossible.
To put that amount in perspective, all the social programmes, which include 2 million heads of household, amount to $1.3 billion. That means that we put three times more into repaying the debt, in net terms, than into social programmes. That’s why the treatment was so unfair. They can repeat this with the new administration, or they can avoid that. I hope they could be prepared to avoid that, for two reasons. First, someone conveyed this decision to them, for them to think about. The second one is right here [Lavagna points behind him, to the square where most rallies end up], and that is a new factor that you cannot ignore. They must think about that. They cannot require some kind of fiscal efforts that are impossible to be accepted by the population. It’s not a theoretical discussion about if you must or must not have x surplus. The problem is limits imposed by the social and the political reality.
Where would you put those limits? In the case of Argentina, I will not state a figure, because I will not create any kind of conditionality for the new administration. But I was prepared, and I did that in the letter of intent, to accept that now, this year, we will have a 2.5% of GDP primary surplus, and an additional significant effort would be necessary. If you ask me if this means that we will have to reach 6% like Turkey, no, certainly not. A significant effort, but not 6%. Not even 5%. Not that.
Will there be anything left over to pay bondholders after you’ve paid the international financial institutions? We need to renegotiate with the private sector. What is necessary is to create the framework in which the net requirements of the IFIs will be compatible with some programmes to start a repayment to the private sector also. That is clear. And let me say that this is also the only reason for the private sector to accept the privilege of the multilateral institutions. From the legal point of view, you know very well there is not any kind of privilege. The only reason is that these institutions can help the country to recover quickly and to give some financing that makes more likely the possibility of repayment to the private sector. If not, we will face the situation we faced in one case in London last year, when a private creditor was prepared to start a court case asking why Argentina was paying to the IFIs and not paying to the others. The only reason the private sector will accept is if the IFIs create a condition for rapid growth that will create better conditions to repay to the private sector. But if the idea is that you will have to give all your primary surplus and all your money to the public sector, that would be impossible. The private sector itself would not accept this kind of behaviour coming from the IMF.
Is it possible to work something out with the private sector and the IFIs where the IFIs keep their preferred creditor status and do not take a haircut? It is possible. It is very difficult to think that the multilateral institutions will accept a haircut and a very explicit haircut. Maybe the timing, the amount of new credits, could be changed. For the private sector what is clear is that we must present a menu of options. We have 300,000 retail investors in Italy, more or less the same in Germany, and something around 35,000 in Japan. Of course these individuals have a different behaviour than mutual funds and things like that. That’s why we must present a menu, in some cases including haircuts, in other cases including just a reduction in rate of interest, in other cases a longer period of time, and why not a mixture of all these things. And you give the creditors the opportunity to decide which one of menu items is more appropriate for their interests.
There is talk of an equity component, tying the coupon rate to GDP growth. That is an idea I think is practicable. It is new thinking that is important. It is evident that the repayment capacity of the country is not the same when it is having 2% GDP growth or having 5%. It is different. Why not create, from a base which is common, an additional capacity of repayment if the growth is higher?
Could Argentina redollarize? It is not clear if this is what Carlos Menem is after or not. Certainly it is not clear. I think it would be extremely negative for Argentina. The experience of straitjackets like convertibility – and dollarization would be the maximum degree of that – was extremely negative. Part of the economic problem – I will not say all of the economic problems, but a very important part of the economic problems in Argentina – is that in the last 27 years, Argentina had something like 19 years with programmes which overvalued the national money. And of course you also had no less than two or three years of major crisis after each one of these programmes ended.
Now you have a policy of a very weak peso: how long can it last? The central problem here is how quickly you will absorb the overshooting in the rate of exchange. If you try to do that very quickly, you will affect the recovery of a lot of sectors of the economy. You need to create a convergence path, but not going very quickly. Some people are saying that today we need the dollar at 2.50. I think it would be very negative. But at the same time, you see very clearly the trend. In July last year, it was at 3.85. Now it is 3.15.
The trend is clear, but it is essential to have sufficient time to make this adjustment. In my view, we must go slowly. The crucial point is to use this momentary advantage for perhaps at least two more years. On this convergence path, not without any kind of change.
Within those two years, might it be possible to cure the default? In my view, it’s possible that in the next winter in the northern hemisphere, in October or November, maybe Argentina could be in a condition to start a substantive part of the negotiation. We need six months at least to organize the work, with the assistance of Lazard Frères, and I think in the last part of the year we will be in a condition to start the substantive part of the negotiation.
We can talk to the bondholders, we can do that even before doing this organization. In fact we are doing that. I went to Europe, I went to the US, the secretary of finance went also to different places, the other secretary went to Japan, to start to discuss, to explain what the Argentine situation is. Now, to start to discuss more precise possibilities, or offers, or stuff like that, will require some additional work. But I think it’s possible to start at the end of this year.
So if I’m a bondholder, when can I expect my first coupon payment? The first thing you can do, maybe, is think about the banks, or the advisers. That is a very important point, because the banks have a very big responsibility in all this. There was no surprise about the Argentine crisis. All the technical data were in the hands of the people who wanted to understand what was happening. Since 1995, in two-thirds of the quarters, the GDP had a negative figure. It was not a new crisis. You would continue to put money into an economy where two-thirds of the quarters had a negative performance? Many companies that trade these kind of bonds made a lot of money.
So the banks bear responsibility? They don’t bear responsibility vis-à-vis the Argentine government. That was our own responsibility. But the banks bear responsibility vis-à-vis their clients.
So if I’m a bondholder, I should be blaming the bond bookrunners rather than you? You can have such a case, certainly. At least if you were buying bonds since 1995 up to now. From that moment, a lot of information was there in order to understand that something will happen somehow with the Argentine economy. You cannot continue to swallow the debt as Argentina did during all those years. It’s our first responsibility, and our responsibility with our people, but also there is a responsibility of the credit rating agencies and people like that.
What does that mean in practice? I don’t know, maybe nothing. Just to learn: maybe we must learn. One of the things I explained during my trip to the US is that the conventional wisdom says that at the moments at which there is low liquidity, countries will face different types of problem. I think just the reverse. I think the periods of high liquidity are much riskier than the others. And that is valid not just for countries, that is valid for companies – Enron and WorldCom are a consequence of that. It is valid for sectors – technology stocks generally – and it is valid for some countries. The lenders made a lot of mistakes, precisely due to the period of high liquidity. It’s very difficult to manage high liquidity. Very difficult. This is the moment in which people make mistakes. The biggest mistakes.
You know, there are some examples in Latin America. You can have the example of Venezuela: Carlos Andres Pérez having a lot of money due to the oil crisis in his first term. The second one was very different. And as you know, it finished with a crisis, with the president being impeached, and finally with very difficult consequences.
Have Argentina’s institutions recovered enough for the next government to be able to push through significant reforms? The political system is shattered. I think it will be extremely important for political parties, all the unions, businessmen, and things like that, to try to create something like a pact to create the conditions for the new administration. When you have a lot of people below the poverty line , many years of very low or negative growth, maybe you cannot wait for an additional four years of just transition. That’s why I think you can describe the reality, and the reality is this kind of fragile new administration. But you can also take into account this reality, take into account this diagnosis, to try to do something to change things. And the only way to act is precisely to try to convene all the parties and the unions and the businessmen and try to do something in order to have not just a transitional government. I think it would be very bad if you had just a transitional government. Four more years is too much. Even for the creditors.
But you can’t fix the problem of poverty in Argentina in four years. People are not asking for that. They are just asking for us to get the situation under control, to stop inflation, and to start to recover. People were very patient in their reaction. They were asking to see the light at the end of the tunnel. They were not asking more than that. And that was important for the government, and is important for the new one.
They will not face immediately a situation in which the people will require a complete change. But they will require a very clear direction, without any kind of hesitation, and without any kind of delay.
