Latin America Advisor

A Daily Publication of The Dialogue

What Does New Leadership Mean at Argentina’s Central Bank?

Alex Proimos / CC BY-NC 2.0

Q: Argentine President Cristina Fernández de Kirchner last month accepted the resignation of central bank governor Juan Carlos Fábrega, naming the head of the securities and exchange regulator, Alejandro Vanoli, to replace him. In a speech the day before Fábrega’s resignation, Fernández had accused central bank employees of helping currency speculators. What was behind Fábrega’s resignation? What sort of central bank will Vanoli run? How will Argentina’s long-brewing currency woes play out?

A: José Octavio Bordón, former ambassador of Argentina to the United States under President Néstor Kirchner: “The alleged corruption cited by the Argentine government surrounding Fábrega’s departure did not seem to be the real motivation. The government has systematically kept its officials in office, despite denunciations and even prosecutions against them. Moreover, the government has not taken any action to initiate legal action against the removed official. The real reasons were differences on fiscal and monetary policy that the central bank leader had with Economy Minister Axel Kicillof. Fábrega’s views were closer to those of regulatory authorities that favored less government intervention in the market. Fábrega discussed these differences not only with Kicillof and President Cristina Fernández, but also privately with the productive and financial sectors, among which Fábrega received sympathy and support. The new central bank president has more in common with Kicillof’s measures and a political style that is closer to that of the Fernández administration with regard to official strategy. Vanoli has argued that central bank reserves are not intangible and can be reasonably used in order to support the government’s social and productive objectives. This government has put in place strong controls and has reduced the gap in the foreign exchange market by lowering the value of the parallel dollar. We will have to wait until the first quarter of 2015 to see if there are any changes in government policy and how the negotiations progress with the holdouts after the expiration of the RUFO clause. It is unclear whether there will soon be a reversal in the outflow of currency. The idea also exists that the change of government in December 2015 will generate favorable expectations and will lower economic trauma. What is certain is that under its new leadership, the central bank’s decisions will be strongly influenced by the government’s political needs and its economic team. The central bank’s independence is written on paper, but it is not the reality.”

A: Claudio Loser, visiting senior fellow at the Inter-American Dialogue and president of Centennial Group Latin America: “The Argentine economic saga will continue to play out for a while. No matter when it ends, the results cannot be good, and Argentina will further delay its process of sustained growth. Mrs. Fernández and her minister of the economy, Mr. Kicillof, have put together a team of close Kirchnerista loyalists–characterized by their vertical discipline and theoretical leftist ideology. Rather than following common-sense principles of economic management, they seem to be set in a rhetorical and confrontational world and want to have full control of the economy to cover-up the consequences of their mistakes. Under these circumstances, the president forced the central bank president, Mr. Fábrega, to resign. Mr. Fábrega had sought to follow a reasonable monetary policy and also tried to find a solution to the conflict with the debt holdouts, better known as the ‘vulture’ funds. The new central bank president is aligned with Kicillof, and indicated (in different words) that he will continue printing money and will introduce new restrictions to avoid devaluing, while depleting the country’s scarce foreign reserves. In the parallel market, meanwhile, the U.S. dollar is quoted about 75-80 percent higher than in the official market. The government’s economic policies have created conditions that cannot be solved in a smooth way. Probably by early 2015, if not earlier, the pressures will result in a major crisis, well beyond of what we are seeing today–unless we believe the official numbers, of course.”

A: Nicolas Parrondo, director at Cohen S.A. Sociedad de Bolsa in Buenos Aires: “Juan Carlos Fábrega had no option left but to present his resignation after Cristina Fernández de Kirchner’s public declarations. We find no other reasons than different political views regarding monetary policy behind his resignation. Alejandro Vanoli, former president of the National Securities Commission, is aligned with the economy minister. It is reasonable to expect no sudden or drastic changes in foreign exchange policy, as well as a continuation of the expansion of the monetary base.”

A: Daniel Artana, chief economist at FIEL in Buenos Aires: “Beyond the names of the economic team in Argentina, the country’s problems are simple to understand. There is an excess supply of pesos due to the money printing that is used to finance a growing fiscal deficit, and there is a shortage of foreign exchange due to the restrictions for the sovereign, the provinces and most of the private sector to get external financing at reasonable rates. The decline in the world price of soybeans and the economic problems in Brazil have only made an existing dilemma more challenging. If there is no flexibility in the external constraint, the government will be forced to opt between accepting a weaker peso (and therefore higher inflation, given the absence of a fiscal tightening), or a deeper recession that will reduce imports even more, or the use of additional central bank reserves (running a higher risk of financial turmoil early next year). The former, and so far the new president, of the central bank seemed to have chosen a deeper recession.”