What Sturzenegger thinks about devaluation

Julio Burdman

Trust and Team, the two Ts of central banker and Macri

“Devaluation is imminent,” everybody said, but only President Mauricio Macri knew the pace of our peso’s depreciation. Nobody really wanted devaluation this time. The domestic-market industries, the trade unions and banks feared the recessive effects of a sudden devaluation. And even agribusiness was waiting for a reasonable price to start exporting. No need to say that public opinion rejected it. Everybody agreed, nobody wanted shock policies concerning our currency. But Macri has not opted for “gradualism.”

From an orthodox economist’s point of view, monetary devaluation is a purely economic matter, that should be approached with technical manners. Orthodox economists believe that the market fixes the exchange rate, and therefore all devaluations are market-driven. But that is not true. More often than not, devaluations are triggered by political drivers. If your neighbours devaluate and take you by surprise, you have a coordination problem in your region. If your markets force you to devaluate, it may be because you don’t have the strength or the will to stop them. If you blame your predecessor, or one of your subnational governments, you might have a governability problem. When you are in office, and enjoy enough political support, you have the power to regulate — to some extent at least — who are the big winners and the big losers of your economic decisions.

That devaluation is a tool of weak governments is not my personal opinion, but something written by Federico Sturzenegger, the current Central Bank president, in 2010. In a research paper on currency regimes written together with Eduardo Levy Yeyati and Iliana Reggio, “On the endogeneity of exchange rate regimes,” that was published in the European Economic Review, Sturzenegger says that political strength and currency stability go together, and among other things, they stress the role of political “credibility” to explain the ability to sustain monetary regimes.

Therefore, Sturzenegger is not a hardline conservative monetarist, like Milton Friedman and his fans and descendants (including the famous Captain Engineer Alvaro Alsogaray, former Economy minister to Arturo Frondizi and founder of the conservative party UCeDe). Friedmanists strongly believe in the material bases of currency: sooner or later, devaluation occurs when you print too much money. Simple as that. On the contrary, Sturzenegger and his fellow colleagues are conservative institutionalists, and they believe that the political variables also play a role in the value of a given currency. So, if Sturzenegger is consistent with what he wrote some years ago, he will do his best to maintain the pace of devaluation under control. Because he is aware that the political costs that Macri will pay if everything goes out of control might be irreversible for his economic plan.

According to Sturzenegger’s research, the political costs are not those that a politician pays to his/her electorate. Those are, precisely, the costs that a populist doesn’t dare to pay and that’s what makes the populist a fiscally-irresponsible, dangerous chap. In this case, the political costs are those that the President pays to the market. So, if Macri cannot demonstrate to the market that he is able to control the pace of devaluation, and is taken by surprise with a sudden drop of the peso, there is no credibility and, as a result of that, no monetary policy (and no economic plan).

The same applies to other recent decisions. When Macri told Argentine business leaders that he won’t tolerate “abusive price increases,” or when he abuses his decree powers to name two Supreme Court judges, he is also talking to the markets. He wants them to earn money but he is asking them to respect his office. That’s how, for Sturzenegger (and for Macri), trust works. The prospect of dollars entering the system allowed for the cepo to be liberated, while waiting for agribusiness to start selling. For that to happen consistently, agribusiness must also believe that Sturzenegger is able to control devaluation. Otherwise at some point they won’t sell (waiting for the dollar to blow out of Sturzenegger’s hands). Trust and Team, the two Ts of Sturzenegger and Macri.

Publicado en Buenos Aires Herald el 18 de diciembre de 2015. Versión publicada aquí.