Taxing the financial income was a mistake Macri Massa
Taxation of financial income was a mistake
The Central Bank must show that it can stop this bank run, says economist Aldo Abram. The second mistake of the BCRA was to assist the Treasury instead of simply fighting inflation. "In this the little credibility that is left to him is played", emphasizes the expert. The goal scheme is outdated. It is urgent to rescue the weight.
Despite the warnings, the government did not see the storm coming. The investment funds that disarmed their positions in Lebacs and massively turned to the dollar after the entry into force of the financial income tax for external holders, ended up shredding the most important axes of the economic program. After this banking run inflation goals are something like a myth, an outdated scheme.
There are those who, like Aldo Abram, an economist and Executive Director of the Libertad y Progreso Foundation, see the growing danger in case the crisis is not overcome quickly. "It is key that the Central Bank regains confidence, and that the peso be strengthened," he warns in the face of the uncertainty of a market that does not win for shocks.
With the manual under his arm, the expert does not hesitate to draw the way forward: the BCRA must fight with the interest rate and sell as many currencies as necessary. What will come next is still a gamble.
-What is your reading of the situation that exists around the foreign exchange market?
-In principle we are paying the consequences of past decisions and some mistakes that the Government has made. The fact of having assumed this management with a state almost bankrupt and with a Central Bank that was in the same conditions, and still undertake the path of gradualism, evidently that meant moving away from the precipice of the bankruptcy of the country very slowly. The cost of that is that any external wind could throw us back to the precipice. It is logical that when in the world they begin to think that a strong wind can rise, we pay the consequences.
- The main error was to have applied the financial income tax to the holders of Lebacs abroad?
- Without a doubt, the implementation of the financial income tax was a big mistake. Our political leadership, the government and the opposition turned a deaf ear to the recommendations that came from other economists, many of whom advise companies and investors. They know how they move and they already announced that a bullfight could occur if that tax came into effect.
-The Government did not see it coming?
-I think that at the time the Government prioritized that the labor reform came out and admitted to putting this financial income in the package, something that was not in the official project. If they did not do that, if they did not accept, the tax reform did not come out, it was not approved otherwise. Today we are paying all the consequences. It is not only the fact of having a bank run, a great pressure, but also the fact of losing credit. It's not free for billions of dollars to go out of the system. It's like the economic body is losing blood constantly and that hemorrhage does not stop.
-What was the other mistake?
-The Central Bank, having assumed in the current particularities, on the verge of bankruptcy, with a currency without credibility, had to work to recover confidence. There was a trap to impose the use of the peso as currency. It should have been prioritized to work on the confidence effect, on the solvency of the peso. That, clearly, was not the priority. Beyond the successful exit from the exchange rate, the priority of the Central Bank was spent more to issue to maintain and finance an excessively large State.
DEFICIT FISCAL
- Was the Central Bank deconcentrated from its main task, which is to control inflation?
-The Central Bank could have told the government that the issue of the fiscal deficit was not their problem. I'm going to meet the inflation goals and that's it. Over there, with the 2016 goals it was more complicated because of what the impact of the exit from the exchange rate meant, but those of 2017 were not difficult to achieve. And achieving those, neither would have been those of 2018, initially scheduled at 12%.
-But the aforementioned independence is not such.
-What has been seen so far is a Central Bank that holds an exchange rate when it is going down because the Government brings a load of dollars of debt and sell them in the domestic market. But when you have to use reserves to defend the value of the peso, delay. There was already a run between May and August of last year, before the PASS, but that was for electoral reasons, and then the Central intervened. By then the peso had already deteriorated and that's why inflation was very high in the second semester. In January it happened again and the peso lost 18% of its value. At the end of January, the recalibrated Central Bank target, which was taken to 15%, was already breached.
-The Government raised rates again, bringing them to 33.25%. Is that still the way?
-The Central Bank has to set an interest rate that is attractive and has to sell all the dollars necessary to defend the value of the peso. But at the same time it must carry out a contractive monetary policy. If not for a window emits pesos to lower the rate, and the pesos go through the window of the dollar. So nobody will want to have pesos. Until Friday of last week, the Central Bank had an incoherent attitude. You have to show that you can contain a bullfight, stop gradualism. The little credibility left to the Central Bank is at stake.
- It would have been useful to have some type of regulation to screw to the capital swallow? The government dismantled it in January of last year.
-The entry of capital allows the country to have more financing and more consumption and investment. That is all good. The regulation is like saying that I cut my hand in case I make a club, in case I steal, just in case. The question is who is generating all this. The mistakes are made by the Government.
HIGH INFLATION -
Did the corrida shatter the inflationary program?
-If the Central Bank allows the peso to park in these securities, stay here and not recover, unfortunately inflation will be higher than last year. That will occur due to this weight drop. One error that is raised today by some economists is that you should not raise the rate. We must do what is necessary to recover credibility. It is true that credit is reduced, but it is conjunctural. In the long term, confidence is restored and credit returns. Thus the perception of risk is phenomenal, nobody will want to invest in Argentina. Without trust we are lost.
- The scheme of goals is outdated?
-The inflation targeting system has been buried for some time. To have goals, the priority must be that, inflation, and for Central it was not. Technically, there were never any inflation targets in Argentina. The Central Bank is now playing what little credibility it has left.
- Would it be feasible to revoke the law that taxes financial income? Could that be the political solution to this issue?
- The law is already, this game is played. Now we must show that despite this outflow of capital, the relocation that has to be given can be given with a stable currency. That is the key. There is a lack of credibility and confidence that there is a Central Bank that can allow the economy to rearrange itself. This without a monetary collapse, with loss of value of the peso. Who will want to have a weight in Argentina? If we continue on the path of discredit, the fall in confidence will be such that it will not serve us in the future to have a currency in which to back us up. That is called having to change currency. Today there are some who evaluate the possibility of the dollarization of the economy. I think that is still avoidable.
Restoring trust is key to the monetary system. But who is going to want to have a weight in Argentina? The economist asks.
There you have it ........
The Central Bank must show that it can stop this bank run, says economist Aldo Abram. The second mistake of the BCRA was to assist the Treasury instead of simply fighting inflation. "In this the little credibility that is left to him is played", emphasizes the expert. The goal scheme is outdated. It is urgent to rescue the weight.
Despite the warnings, the government did not see the storm coming. The investment funds that disarmed their positions in Lebacs and massively turned to the dollar after the entry into force of the financial income tax for external holders, ended up shredding the most important axes of the economic program. After this banking run inflation goals are something like a myth, an outdated scheme.
There are those who, like Aldo Abram, an economist and Executive Director of the Libertad y Progreso Foundation, see the growing danger in case the crisis is not overcome quickly. "It is key that the Central Bank regains confidence, and that the peso be strengthened," he warns in the face of the uncertainty of a market that does not win for shocks.
With the manual under his arm, the expert does not hesitate to draw the way forward: the BCRA must fight with the interest rate and sell as many currencies as necessary. What will come next is still a gamble.
-What is your reading of the situation that exists around the foreign exchange market?
-In principle we are paying the consequences of past decisions and some mistakes that the Government has made. The fact of having assumed this management with a state almost bankrupt and with a Central Bank that was in the same conditions, and still undertake the path of gradualism, evidently that meant moving away from the precipice of the bankruptcy of the country very slowly. The cost of that is that any external wind could throw us back to the precipice. It is logical that when in the world they begin to think that a strong wind can rise, we pay the consequences.
- The main error was to have applied the financial income tax to the holders of Lebacs abroad?
- Without a doubt, the implementation of the financial income tax was a big mistake. Our political leadership, the government and the opposition turned a deaf ear to the recommendations that came from other economists, many of whom advise companies and investors. They know how they move and they already announced that a bullfight could occur if that tax came into effect.
-The Government did not see it coming?
-I think that at the time the Government prioritized that the labor reform came out and admitted to putting this financial income in the package, something that was not in the official project. If they did not do that, if they did not accept, the tax reform did not come out, it was not approved otherwise. Today we are paying all the consequences. It is not only the fact of having a bank run, a great pressure, but also the fact of losing credit. It's not free for billions of dollars to go out of the system. It's like the economic body is losing blood constantly and that hemorrhage does not stop.
-What was the other mistake?
-The Central Bank, having assumed in the current particularities, on the verge of bankruptcy, with a currency without credibility, had to work to recover confidence. There was a trap to impose the use of the peso as currency. It should have been prioritized to work on the confidence effect, on the solvency of the peso. That, clearly, was not the priority. Beyond the successful exit from the exchange rate, the priority of the Central Bank was spent more to issue to maintain and finance an excessively large State.
DEFICIT FISCAL
- Was the Central Bank deconcentrated from its main task, which is to control inflation?
-The Central Bank could have told the government that the issue of the fiscal deficit was not their problem. I'm going to meet the inflation goals and that's it. Over there, with the 2016 goals it was more complicated because of what the impact of the exit from the exchange rate meant, but those of 2017 were not difficult to achieve. And achieving those, neither would have been those of 2018, initially scheduled at 12%.
-But the aforementioned independence is not such.
-What has been seen so far is a Central Bank that holds an exchange rate when it is going down because the Government brings a load of dollars of debt and sell them in the domestic market. But when you have to use reserves to defend the value of the peso, delay. There was already a run between May and August of last year, before the PASS, but that was for electoral reasons, and then the Central intervened. By then the peso had already deteriorated and that's why inflation was very high in the second semester. In January it happened again and the peso lost 18% of its value. At the end of January, the recalibrated Central Bank target, which was taken to 15%, was already breached.
-The Government raised rates again, bringing them to 33.25%. Is that still the way?
-The Central Bank has to set an interest rate that is attractive and has to sell all the dollars necessary to defend the value of the peso. But at the same time it must carry out a contractive monetary policy. If not for a window emits pesos to lower the rate, and the pesos go through the window of the dollar. So nobody will want to have pesos. Until Friday of last week, the Central Bank had an incoherent attitude. You have to show that you can contain a bullfight, stop gradualism. The little credibility left to the Central Bank is at stake.
- It would have been useful to have some type of regulation to screw to the capital swallow? The government dismantled it in January of last year.
-The entry of capital allows the country to have more financing and more consumption and investment. That is all good. The regulation is like saying that I cut my hand in case I make a club, in case I steal, just in case. The question is who is generating all this. The mistakes are made by the Government.
HIGH INFLATION -
Did the corrida shatter the inflationary program?
-If the Central Bank allows the peso to park in these securities, stay here and not recover, unfortunately inflation will be higher than last year. That will occur due to this weight drop. One error that is raised today by some economists is that you should not raise the rate. We must do what is necessary to recover credibility. It is true that credit is reduced, but it is conjunctural. In the long term, confidence is restored and credit returns. Thus the perception of risk is phenomenal, nobody will want to invest in Argentina. Without trust we are lost.
- The scheme of goals is outdated?
-The inflation targeting system has been buried for some time. To have goals, the priority must be that, inflation, and for Central it was not. Technically, there were never any inflation targets in Argentina. The Central Bank is now playing what little credibility it has left.
- Would it be feasible to revoke the law that taxes financial income? Could that be the political solution to this issue?
- The law is already, this game is played. Now we must show that despite this outflow of capital, the relocation that has to be given can be given with a stable currency. That is the key. There is a lack of credibility and confidence that there is a Central Bank that can allow the economy to rearrange itself. This without a monetary collapse, with loss of value of the peso. Who will want to have a weight in Argentina? If we continue on the path of discredit, the fall in confidence will be such that it will not serve us in the future to have a currency in which to back us up. That is called having to change currency. Today there are some who evaluate the possibility of the dollarization of the economy. I think that is still avoidable.
Restoring trust is key to the monetary system. But who is going to want to have a weight in Argentina? The economist asks.
There you have it ........
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