The case of false fiscal deficit

The scam of the “uncontrolled fiscal deficit” is just a poor excuse to continue cutting off rights.

By Axel Kicillof *

At this point, no one can turn a blind eye to the fact that Macri’s government is implementing a classic orthodox adjustment program. Nor can anyone deny that he has decided to use the alleged “heavy legacy” received from Cristina as an excuse for his economic plan. Of course, what has been happening in the first two months in office contrasts sharply with what was promised during the campaign. For example on 17 November in the program of Jorge Rial, he promised: “We will not devaluate, that is a lie.” Or when a newly assumed Prat-Gay, on December 12, said: “Argentina is in good condition (…) there are no emergencies (…) We have been left a complicated legacy but it cannot be compared to other times in this country”, as he denied any plans to  “overwhelm” with “a series of measures”.

In Argentina’s history, major adjustment plans were always preceded by a serious and obvious economic crisis. The proposals were inevitably to make a big sacrifice to get out of a big mess. So finance ministers became famous with phrases like “we have to get through the winter”; “Who bets on the dollar, loses”; “I spoke with my heart and they answered me with their pockets”; “Convertibility will bring more than six decades of growth and prosperity in Argentina”; “Whoever deposited pesos will receive pesos, whoever deposited dollars will receive dollars.”

The little detail is that Macri’s government did not receive an economy in crisis, far from it. Not that I am the one to say it –since I have a personal investment in this as former minister of economy – , but it is what absolutely each and every private consultant show. During 2015, Brazil’s economy contracted by nearly 3 percent, for instance. But for Argentina 2015 was not a recession year. According to consulting Ferreres, the economy grew 1.7 percent, industry and investment 1.1 1 percent. For the IMF, growth was 1.5 percent. That is, the economy was not stagnant or falling, even for critics of the government of Cristina. Neither suffered an inflationary acceleration. Moreover, all private consultants recognized that inflation had been falling sharply since 2014. According to Elypsis, in the comparison January-November 2014 with the same period in 2015, inflation had fallen from 31.4 to 18.2 percent, a marked downturn of 13.2 percent. Statistics from the City of Buenos Aires showed the same, as inflation went from 33.6 percent in 2014 to 19.7 in 2015, the slowdown was 13.9 in a year. Even the Congress IPC measured 33.5 percent to 20.4, a decrease of 13.1 percent.

On December 10, reserves were at 25 billion dollars, after making in October the largest payment of the decade: 5.9 billion dollars from Boden 15. Nestor Kirchner in 2003 received 11 billion reserves and it took him 3 years to get them to 25,000.

In short: no increase in unemployment or decline in activity or accelerating inflation, not drastic fall in reserves. The crisis is not seen anywhere. But Macri and his orthodox economic team were determined to apply their economic policy adjustment at all costs.



One addition to this huge marketing construction: the fiscal deficit. Many times in the history of Argentina there had been deficits and insolvency of the Federal Government. This leads to late – if effective at all – payment of pensions, state salaries, money to provinces. None of that was the case. By contrast, after taking office, the government of Macri began to fulfill his campaign promises “forgiving” taxes on concentrated sectors such as soy producers, or mining companies and subsidizing others, such as oil. Clearly, there were no cash flow problems. Therefore, the pressing fiscal deficit became plainly a huge lie, to justify the adjustement policy Macri would implement anyway, as recognized by Prat-Gay himself in his second press conference on January 13.

For starters, the finance minister said the 2015 budget deficit, – measured by global standards – reached 2.3 percent of GDP. That level of deficit is a poor excuse for his plan, and is hardly alarming. In fact, having deficit has been the normal condition of all countries at this stage: according to the IMF, out of 188 countries only 18 had financial surplus, and 34 had primary surplus in 2015. Countries like the United States, Brazil, Spain, Japan, United Kingdom they had more deficit than Argentina.

The percentage of fiscal deficit was calculated using the usual standard methodology followed by every country in the world, from the IMF Manual. But in his press conference, Prat-Gay decided to use a different methodology, of his own invention.

The aim was to elevate the deficit to serve out its propaganda role. What follows is a bit technical, but easy to understand.

After acknowledging 2.3 percent, Prat-Gay began a peculiar mix of addition and subtraction to conclude that – according to its own method – the deficit was 7 percent. First, he added unpaid expenses due next year, adding 1 percent of GDP. No country in the world makes this addition when calculating the deficit. Why? Because every year there are certain expenses that are paid the following year. The same happened in 2014, so if you want to “add” the costs are for next year you should at least “subtract” the payments were made in 2015 but corresponded to the previous one. Otherwise, it is a real stupidity. But since the goal was to construct a high deficit, it seems stupidity was fair game.




Fattened like that, the alleged deficit reached only 3.5 of GDP. Not a big enough figure, more creativity was in order. So Prat Gay decided to subtract all income that the Central Bank had turned to the National Treasury. As everyone knows and as reflected in the charter of the Central Bank, the Federal Government is the sole owner of the Central Bank. The bank’s profits go to its owner, the State. It is a usual procedure, for example, on 29 January this year we learned that the Buenos Aires City Bank had turned its profits to the Government of the City of Buenos Aires. (Governed by the PRO). Well, Prat Gay decided to “discount” the state revenue to max out the deficit, which artificially became to 5.8 of GDP.

Applying creative accounting, the deficit was conveniently inflated, but just quite enough. See, throughout the campaign they had repeated the magic number 7 percent to discuss deficit, they had to get to that number. Prat Gay then turned to a real finding. He added to the alleged deficit left by Cristina nothing less than … the campaign promises of Mauricio Macri! Literally.

“On the inheritance, to be completely honest and transparent, we have to add the things we promised in campaign. You know we promised many things in the campaign and we have been fulfilling them… What is the cost of those campaign promises?. Almost one and a half points of GDP. So the starting point of inheritance, plus promises, and all the inheritance added up reaches a primary deficit of 7 percent of GDP. Of course, we must go back 40 years to find this level of deficit or imbalance, or however you want to name it”.

Believe it or not. The real deficit, accepted by Prat-Gay, was 2.3 percent. But someone must have told him, “No, Alfonso, dear, we cannot recognize that number, if we had said 7 the whole campaign. Come up with something, make it happen, and get us to 7”.

The result of this game of illusion is not, however, neither fantasy nor illusion. On the contrary, it is a nightmare.

This entirely invented deficit is used as justification to fire people from their jobs, shrink the state, remove subsidies, modify the pension system and increase electricity rates. It is painful to confirm that what we said over and over again on the campaign is being carried out step by step. The scam of the “uncontrolled fiscal deficit” is just a poor excuse to continue cutting off rights.

* Congressman(FPV), former economy minister.


Economía, Gestión K, Inglés

Some simple numbers to evaluate Macri´s offer to vulture funds

An interesting article published by the official website of the Clarin Group on February 5, during negotiations with the vulture funds, revealed that according to “official sources” Macri’s government had “proposed a rebate around 40 percent on interest return to creditors” and that the strategy “aims to get a larger discount in exchange for paying cash.” Another website published exactly the same figures on the same day. Both qualified the offer as “aggressive”.

The mystery was unveiled the following day, when finally the official offer signed by Macri became public. Reality was disappointing: payment would be in cash but the “discount” came to only 25 percent. Thus, Macri´s offer is to pay in cash $ 6.5 billion on Griesa´s sentence. In one day 1.1 billion were lost, again according to official sources. True, no one was using the “aggressive” adjective to qualify the final offer anymore, although the official media did not dare to call it for what it is: “shameful”. Some might call it “generous” but generosity is exercised with one´s own money, and in this case, it is the money of all argentines. In any case, as we will prove, it would not be “aggressive” get a discount of 40 percent.

Many will remember the difficult conditions in which negotiations with the vulture funds were carried out in July 2014. The US Supreme Court had rejected the case of Argentina against the vultures, creating an enormous pressure for Argentina to pay what Griesa had determined.

If we did not, it was said that the country would fall into default as 2001, country risk would soar and creditors would ask for accelerating the entire foreign debt, including restructured debt. As we argued then, none of that happened.

Moreover, under those conditions, Argentina besieged by warnings and threats of all kinds, the vulture funds took an offer to the table. The offer was to give us a discount of 15 percent with payment in long-term bonds, instead of cash. Our government remained strong, and later on another offer was presented through third parties with an even greater discount: 30 percent and bonds. Vulgarly, they would take payment on paper slips rather than hard cash.

Why was the offer rejected?

First, we should clarify on what amount was based the discount offered by the vultures. When Nestor Kirchner negotiated with creditors overcoming default, he offered 35 cents on the dollar. Now Nestor´s was really an aggressive offer, but responded to criteria easy to understand. In a similar fashion, when the US company Enron went bankrupt, creditors received between 14 and 18 cents per dollar. In the case of Argentina, creditors had lent the country during the decade of the 90s at extremely high rates, in a sort of financial casino. Interest rates had been so high precisely because they entailed a certain risk of default. Neoliberalism over-indebted the country and then could not pay. When the default occurred, it was only fair to “share” costs. The agreement was accepted by 93 percent of creditors, who thus made sure that Argentina could pay their commitments, as duly did in the following years. As Nestor said, he had to grow in order to pay. And so it happened.

If Nestor offered 35 cents on the dollar, Griesa intends for Argentina to pay $ 4 for every dollar.

But also, keep in mind that the vultures had paid just 25 cents for every dollar, because they never lent Argentina anything , but bought titles after its default and even after the debt restructuring with the express purpose of finding a judge who would rule in their favour. 

Griesa meets that goal and gives them a profit of 1,600 percent. With the discount offered by the government of Macri it would be reduced to … 1200 percent! Nonsense.

In short, with Macri´s proposal vultures would cash in 6.5 billion when they had bet about 500 million, that is $3 for every dollar. Evidently, rather than paying for the trial of the century, the government of Macri would be validating the scam of the century.

What is the risk of paying vultures “what Griesa says”, quoting our president? 93 percent who took structuring in good faith, agreed to a 65 percent discount. If Argentina lifts its latch legislation and does pay the vultures what they ask with a small discount, it would not be at all surprising that shortly other bondholders demand the same treatment. Nor would it be unusual for another judge, more competent than Griesa, to rule that treatment should be equitable among creditors, hence multiplying all the debt of Argentina by two or three. Therefore, the only agreement with vultures that does not compromise the country’s future is for them to accept the same offer that 93 percent of creditors did. It is by no means a bad deal. Considering the interest accrued over the years, vulture funds would receive a 300 percent gain over what they actually paid for the bonds.

It is worth quoting the opinion of an “expert” who in 2013 filed a brief as amicus curiae supporting Argentina at the US Justice against the decision of Griesa: “How fair can be for the vultures (holdouts) to get a better deal, even one penny more than what has already been distributed (93 percent)?.”

The author of the paper is none other than the current finance minister, Alfonso Prat-Gay, who back then criticized any arrangement that were to recognize for vulture funds more than for the restructured creditors. Today he claims otherwise, but he was right back then: overpay is not fair nor convenient and it is extremely risky.

Probably the reason for such an unfavourable negotiation for Argentina is Macri´s undisguised hurry to reach an agreement, which is not exactly a good negotiating strategy. The more desperate he looks, the more they ask from him. Vultures, however, know and can wait. The sad thing is that the rush to negotiate stems from a much deeper and risky reason: Macri´s plan seems to be to indebt the country again. Maybe that’s why he appointed many officials of foreign banks. Taking debt again is now possible precisely because after 12 years of effort, Argentina has reduced its debt stock so drastically. With work, with industry, with growth, with inclusion, without debt. Keeping those rights up it seems to be, for some, a heavy legacy.

* Former Minister of Economy and current congressman for the FPV.