Trust me, we don’t want a peso this action
Argentina teaches us money, real money that can pay for real things, cannot be ‘created’ out of thin air
Argentina raised interest rates to 60% last week, an attempt to shore up the peso. It will prove to be futile. Once the numbers get that far off the chart, you must concede that it’s not the right medicine for the disease.
The peso has already lost half of its value (against the dollar) this year, and the rout is probably not over yet. The latest slide was because of a plea for a faster than planned draw-down of the $50bn IMF bailout ($15bn has already been accessed, $35bn still to follow).
Far from assuring the markets, the request has created even more panic. I would have thought that the outcome of that outcry would be obvious.
If the patient shouts out to the nurses’ station that he’d like more medicine before the next dose is scheduled, it is abundantly clear that he’s worse off, not better. Either that, or the prescribed dosage was not right in the first place. I suspect that, in the case of Argentina and any such parallel situations, it’s a bit of both.Interest rates at 60% have an astonishing effect on indebtedness. If you borrow money at 60% for five years and you are not able to service the interest, the amount you owe at the end will be more than 10 times the original amount borrowed – whereas at 10% it would “only” be a little more than 1.5 times.
The real issue, though, is not just the effect of compound interest. It is practically impossible to find any asset that can yield the kind of return required to service and repay the debt. This was the scourge of the microlending industry, which served only to provide an illusion of short-term remedy, but ultimately further entrenched the poverty of the desperate borrowers.
The crisis in Argentina is exacerbated by the even bigger inflationary challenges in Venezuela, not to mention Turkey. No emerging market will escape the contagion, and that includes us.
The problem cannot be fixed with local interest rate policy or currency support – those only seek to address the symptoms, not the causes.
If you want to play in the big league, in the global economy, you must be competitive, at least at something.
Venezuela was gifted with huge oil reserves, but if you mess with how you manage that natural resource advantage, it won’t cover your mistakes forever. Oil production in Venezuela has halved over the past five years, which has primarily been attributed to intervention of various government policies, like expropriations and price fixing, which have affected private sector producer competitiveness.Confidence drives short-term market prices, but it is fundamental performance in the real economy that determines whether an economy will prosper, or even survive, in the long term.
The first tell-tale signs of things not going in the right direction locally are when there is a reluctance by foreign capital to invest through the local currency, forcing a country to fund capital projects (and current account deficits) in hard currency. The ugly other side of that coin is that locals, in turn, start only wanting to invest in hard currency earnings. These compounding capital flows strangle the very same local industry initiatives that are required to succeed to escape the country’s economic woes.
The gut reaction to this developing problem is often even more intervention, even more populist policies, and finally, nationalism, which creates an artificial imbalance in the natural competition – which is a cornerstone of the optimal functioning of capitalism and the efficient allocation of scarce resources.
Money, real money that can pay for real things (like imported food), cannot be “created” out of thin air. No amount of such money creation, or national support, can rescue dying fundamentals.
Eventually, it may be the medicine that kills you, never mind the disease.
Only back-to-basics works. You have to get off the ever stronger, ever more specific antibiotics, at some point, and start changing your lifestyle – exercise and eat properly. We all know that.
Whichever external forces you wish to blame, it doesn’t matter. They remain external forces, out of your control. Business isn’t kind, particularly internationally, and empathy takes a back seat to opportunity.
Work out where you can compete, and then invest in and get those industries fit for the game. The capital will come, at the right price.
As the old adage in the equity markets goes – get back to work, the share price will look after itself.
Mark Barnes is CEO of the Post Office.