Opinion Sur
It is a macroeconomic exaggeration of the orthodox to propose the self-demand that countries must cancel their indebtedness. The goal should be to refinance it, including the accrued interests, aiming at not increasing its participation as percentage of the GDP. It makes no reasonable economic sense for a country with external deficit gap to set as a goal of its economic policy the financial equilibrium of public budget, which implies a (recessive) primary surplus. The real objective implicit in this proposal is recession.
The renegotiation of the IMF debt and its massive dissemination is fed by conceptual imprecisions, sometimes malicious, which help with the mixture of terms that confuses public opinion. One of them links the “seriousness” of an agreement with the IMF with the need for balancing fiscal accounts. That is, eliminating deficit from public budget.
This belief comes from the orthodox paradigm that states that inflation is exclusively a monetary phenomenon, the excess in money printing, and that the latter comes from financing all or part of the fiscal deficit with advance payments from the Central Bank to the Treasury.
In this conceptual framework, the crucial thing is to balance public resources and expenses, including the interests on the internal and external public debt and the repayment commitments. In technical terms, this implies that a primary surplus should be generated equivalent to the financial commitments of the State.
Misleading ideas
There are misleading aspects in this binary reasoning. On the one side, there is the question of whether the State has to estimate and cancel its past financial commitments as if its economic activity would end now and thus repay what was borrowed.
No private or public entity that will continue its economic activity, places on itself the demand of cancelling its debt. What it aims is refinancing its debt, including accrued interests, trying that such action does not increase the burden as percentage of the level of current activity.
The second question is that, even if it were necessary or convenient that the State met its financial commitments with own resources from a primary surplus between resources and expenses, such surplus is only attainable in domestic currency, while external commitments require a surplus in foreign currency.
There is nothing that can guarantee that, despite achieving a primary surplus, the State would count on (acquiring) the necessary foreign currency to fulfil its external commitments. For better understanding, we need to dig into the analysis of three macroeconomic gaps in a country from the periphery.
Two internal gaps
Traditional macroeconomic analysis of both private and public internal gaps comes from the original contributions of John M. Keynes more than eighty years ago, when he wrecked Jean B. Say’s prevailing idea that every offer generated its own demand, whenever offer’s value came from compensations of the productive factors that would be used to consume that offer at such value.
Here is where Keynes said, “When part of the income is saved, what happens with the unconsumed part?” Fortunately, enterprises invest by buying goods and such investment is equivalent to the families’ savings, thus, the problem is solved; if not, there would be recession due to an insufficient demand.
What did Keynes proposed precisely in the middle of 1930 Great Depression for insufficient private demand? The most obvious and logical thing, that such difference be compensated by the public gap, making the State to spend more than it collected, that is, fiscal deficit. Famous was his suggestion of hiring public employees to fill the potholes that others could make as long as they received a salary to spend.
What happens with the private gap in the Argentine economy? The situation is as follows: the majority of enterprises prioritize currency substitution of their surpluses as well as high-income families save in dollars while 40% of the population is under the poverty line.
It is more than evident that this private gap is mainly recessive and that the only way of compensating this tendency is making the public gap deficit measured by the primary result of the budget reach a similar magnitude as the private one, especially by restituting consumer purchasing power to those who do not have it. This is preferred rather than covering prior debt commitments of the State and thus leaving the quality and efficiency of public spending for a second discussion.
The external gap
Up to here the traditional Keynesian contribution, which did not take into account the phenomenon of an economy of the periphery open to the world as a reality of that time or a situation for the central countries.
In these cases, those of countries that do not print the currency used in international transactions and, thus, must obtain currencies from their economic relations with the rest of the world a third gap appears (the currency gap). Because those countries must export more than what they import with a surplus value that allows them to meet the remittances of profits of international enterprises located in the country as well as the external debt commitments both private and public and even the conversion to dollars of economic surpluses of most of local companies.
Hence, the most important fallacy of the orthodox statement regarding the need for fiscal surplus to attend State’s external debt commitments appears.
Despite achieving such primary surplus, which would be clearly recessive, who can guarantee that with such surplus in pesos the State will be able to buy and have the necessary foreign currency to meet such commitments?
In a country with external gap deficit, setting as objective of the economic policy the financial equilibrium of the public budget, which implies a (recessive) primary surplus equivalent to the public debt commitments, makes no economic sense whatsoever, unless the objective were another. The real implicit objective in this reasoning is recession.
Which is the true objective of the fiscal adjustment?
Argentinean external gap deficit has a structural origin, potentiated in the last years by the financial appreciation in dollars of the majority of the economic agents, both domestic and foreign.
Such structural origin is the productivity difference between the primary sector (mainly agriculture and cattle) and the industrial that consequently makes imports grow at a rhythm three times higher than GDP, while exports grow at a lower rate, if they do not decrease due to larger domestic consumption.
In other words, economic growth diminishes and even eliminates external trade surplus that should cover the deficit generated by remittances of profits and external debt interests.
Here is where the true cause and justification for the orthodox insistence, including the IMF, on the fiscal adjustment lies, with an internal recessive private gap, primary surplus of the public budget guarantees that GDP does not grow, so that imports do not capture the few obtainable currency reserves and free them to meet external financial commitments.
Therefore, the true objective of the IMF and their local acolytes is that Argentina does not grow “that much” and that it can be able to repay their external commitments with more certainty.
The magical neoliberal recipe for these restrictions is to set the conditions for a massive and unrestrictive incoming flow of foreign capitals that would solve the currency shortage and demand shortfall (that is, the external and private gap), thanks to the “rain of (productive) investments.”
As those conditions are just very much higher internal rates of return than the international ones, as long as there are no high expectancies of devaluation, funds that arrive are speculative and short term that only favor local capitals flight and increase even more the external indebtedness, as it happened during in the late 90s and between 2016 and 2019.
Default or debt refinancing?
Another common conceptual fallacy is the one that presents with alarmism that the Argentine external debt cannot be repaid with these restrictions, independently of the discussion regarding its legitimacy.
Argentina does not have to set as an objective the “repayment” of its external debt; it only has to show economic solvency to “refinance” it trying that its participation, as percentage of GDP does not grow.
This means that GDP has to grow at a steady rhythm (no less than 5% annually) to not only refinance debt but also capitalize interests. This is what was done in the last debt renegotiation with private bondholders, privileging the reduction in interest rate more than capital discount; what would be desirable to obtain with the IMF, not paying it but refinancing debts with its interests at a longer term.
Another conceptual fallacy is the word default. This term is usually applied when referring to the decision of a country, for some reason, not to comply with debt commitments. An example was verified when provisional president Adolfo Rodriguez Saa announced the suspension of all payments on the public debt by the end of 2001 due to a shortage in reserves.
Failing to pay an IMF maturity is not default, but rather a delay in the repayment commitment with an international creditor, despite being the largest one. With a significant caveat: the IMF does not declare debt moratorium or suspension of payments only after several months and claims passed, neither judicially starts the execution of collection of payments.
After successive negotiations, the IMF dismisses the debtor country as member state (partner) after two years of claims and only accepts its reincorporation after cancelling the original commitments, plus interests and charges.
This situation is completely different from what happens if a country does not fulfil some of the general obligations of the external indebtedness that has international legal jurisdiction, which in such case creditors can sue for the execution of such commitments through legal actions at international tribunals.
A country does not enter in default for not paying some maturity with the IMF neither the objective should be how to repay the external debt. What we do have to avoid is that the country is forced to grow less than needed to recover just for the sole purpose of collecting more rapidly by those who came to make an extraordinary financial business associated with the defenders of the colonial neoliberalism.
Published first in CASH, March 6th, 2022
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