At the center of the eye: the debate on the role of the Central Bank

In a complex and unstable scenario, the priority of the monetary authority is today to contain the dollar and expectations; what is the impact of the recent measures announced by the Government and how the discussion takes place, beyond our country, on the work that these entities should do

The economic dynamics of the country have it, once again, at the center of the scene. The Central Bank of the Argentine Republic became a key player in a complex scenario, marked by the fall in dollar deposits, the rise in the exchange rate, inflation at very high levels and the decline in reserves, which led President Mauricio Macri to lift the exchange controls he had previously rejected. With interest rates above 85%, a monetary program with the IMF with multiple patches and a recession from which the exit is not seen, the maximum monetary authority faces a panorama with diverse uncertain horizons.

"It is not normal for a presidential election to generate the level of uncertainty and volatility we have seen in these two weeks," said Guido Sandleris, president of BCRA on Monday, in a testimony that reflects that he is focused on the most immediate. Since the beginning of the crisis, at the end of April 2018, the dollar rose more than
185% -the retail value of the currency went from $ 20 to $ 57- and the economic activity collapsed, in a process that was accentuated after the electoral defeat of the Government in the PASO. The process, in turn, left two presidents, Federico Sturzenegger and Luis Caputo, on the road and opened the doors of the Reconquista 266 building, in the Buenos Aires downtown, to Sandleris, the 61st holder of this entity in just 84 years. A six-year fused charge that jumps at each sway in the local economy.
The Central's priority is today to contain the dollar and curb expectations, to avoid a greater impact on inflation. As reflected by the latest Survey of Market Expectations (REM), which is published by the monetary authority itself, economists believe that the rise in the price index will exceed 55% this year. "We will continue to do everything in our power to contain nominal volatility and sustainably guarantee the stability of the financial system," Sandleris said, following the increase in the exchange rate that followed PASO and forced the recalculation of the sheet. route. The entity maintained its restrictive policy, which took the reference interest rate beyond 85%.

"In this context of such political uncertainty, the exchange rate is the most effective anchor for containing expectations, and the most effective way to achieve the objective is to have interventions. They beat any other instrument available to the Central Bank," defines the economist Gabriel Caamaño, partner of the consulting firm Ledesma.

In this context, the Central tried to handle the situation with intervention in the futures segment, sale of treasury currencies and regulations that forced banks to part with dollars. In a scenario of high volatility and dollarization, with savers demanding foreign exchange at bank branches, the Government was forced to file its dogmas and put new controls on capital flows. It established the need to manage a prior authorization for financial institutions to turn their profits. And he urgently appealed to a scheme to limit dollarization, which includes restrictions on purchases by companies, a limit of US $ 10,000 per month for individuals and the obligation to liquidate foreign exchange for exporters.
"It is clear that this level of interest rates or a reduction like the one we see in the level of reserves is not sustainable, but it is logical that it occurs in a context of crisis. Those that are being taken are crisis measures to stabilize the situation." , says Martín Kalos, chief economist at Elypsis. And he adds: "At some point it has to happen that an economic policy with a productive look of medium and long term has to be diagrammed, so as not to always be seeing how to lower the rate until a new collapse of the crisis comes, as happened in September last, in March of this year and now. "

The focus of the Central Bank, the Government and the opposition is placed on the reserves. The drainage does not yield and responds to different causes: interventions in the exchange market, the cancellation of debt securities and the repo loan with foreign banks, the fall in the dollar value of the
swap with China for the depreciation of the yuan, the discontinued auctions of US $ 60 million per day on account of the treasury and the outflow of deposits from savers, which gave way after the peak of the beginning of the week. After the balance of US $ 68,747 million on July 18, they began to fall and at the end of this week they remained at US $ 50,949 million.

With seven weeks to go before the presidential elections, the number that everyone looks at is that of the "net" reserves of the Central Bank, which defines the agency's margin of action to deal with market dynamics. "To the total of reserves it is necessary to extract the current liabilities that could be realized in a year and, eventually, you would not have them", explains Caamaño. The amount of net reserves excludes US $ 7500 million that the Treasury has deposited in its account of the BCRA, the more than US $ 14.600 million of the deposits of the deposits in dollars of the financial system or the positions in futures, among other items.
"The managed flotation is a valid technique, but within a context. We must seek greater stability, because if you do not lose the use of the tool. For a while you can, but then the basis is what is done in terms of policy economic and political in particular, "says Daniel Marx, who was director of the BCRA between 1987 and 1988, about a dynamic that marks the current Argentina, where the post-PAS financial tension also moved at the pace of approach and break between Macri and Alberto Fernández. After the measures adopted by the Central Bank, the week ended with stable stability variables and an unknown question about the future of the dollar and reserves.

A history of instability

The figure of the Central Bank as the governing body of the financial system is relatively recent in the global economic context. Its origin, however, dates back several centuries, at the beginning of capitalism in Europe. "The central banks begin to appear in the 17th century. The first were private management agencies created by private banks that issued some paper money, but in many cases were born to lend money to each country's treasury," Kalos explains. "This dynamic lasted basically until the end of the gold standard and the first postwar world, and began to change after the great depression of 1929, when the world began to notice the shortcomings of monetary policy and its influence on the economic cycle," he adds .

From the hand of the thought of John Maynard Keynes and other influential economists of the time, who warned about the role of money at the center of economic dynamics, countries adopted the figure of the Central Bank. That of Argentina was officially created in 1935, after the Banking Law was passed, to replace the old Conversion Box. Created as a mixed entity – with state participation and national and foreign banks – in a context of international economic crisis, it was nationalized in March 1946, by a decree of de facto president Edelmiro Farrell.
It is currently an autarkic entity within the State and plays a role similar to that of entities from other countries, such as the Federal Reserve of the United States, the Bank of England or its namesakes in Brazil, Japan or India. "Its first attribution is the legal power to issue the money with which the transactions are made; it also regulates the financial intermediation performed by a set of entities," explains economist María Castiglioni, director of C&T Asesores.
As the governing body of the local financial system, it is responsible for regulating the banking system and defining and implementing monetary policy. The amount of money circulating, the level of credit and interest rates are its main tools.
The Organic Charter, which was reformed by Congress in 2012, defines the objectives of the BCRA, a topic of debate both in the country and internationally. With extensive bibliography in both paths and a discussion not yet settled, there are those who argue that the mission of a central bank must be fundamentally to preserve the stability of the currency and the financial system. Others argue that this role is incomplete and that the monetary authority also has to deal with economic stability and activity growth.
"The essential objective of the Central Bank must be to preserve the value of the peso or, in other words, achieve normal inflation. That must be the essential and priority goal, absolutely," says Julio Piekarz, who served as general manager of the BCRA in the 1980s. "The US Federal Reserve has the dual anti-inflationary objective and simultaneously tend to full employment, but the abuse of monetary policies and our inflationary history is so dramatic that simultaneously hitting both objectives is very dangerous. For a Central Bank to do Expansive policies in the short term, in the long term or in the short term, translates into an increase in inflation and destruction of the currency, "he adds.
A different vision expresses Miguel Ángel Pesce, economist and vice president of the BCRA between September 2004 and December 2015, during the presidencies of Martín Redrado, Mercedes Marcó Del Pont, Juan Carlos Fábrega and Alejandro Vanoli. "I agree with the 2012 reform, in the sense that price stability must be maintained, but also employment and economic growth. The double mandate is the American vision, while the more inflation-focused look It is European. And even then, when Europe had a recession, the European Central Bank went out to buy assets. A central bank cannot allow prologized recessive processes and sustained levels of unemployment, especially in democratic governments, "adds the economist, who today integrates the team of economists that works with Alberto Fernández.
The discussion is part of the current agenda. Last March, in the framework of the agreement with the IMF, the Government took to Congress a new proposal to reform the Organic Charter. There the multiple mandates are maintained, but it is defined as "primary and fundamental mission" to preserve price stability, a historical elusive goal for a country that lives with double-digit inflation since 2007 and is heading to close 2019 with an index higher than fifty%.

Tensions in the agenda

Another axis of the debate is linked to the alleged independence of the agency, whose board must be approved by the National Senate. "If the fight against inflation is understood as a general economic policy scheme, what you have to ask yourself is how fiscal and income policies are articulated with monetary and financial policies, because uncoordination can cause problems," says Kalos.
"One thing is that you are independent and another is that you are autistic. There can be an uncoordination between the Central and the Treasury, because the economy is damaged," says Pesce, who lived closely an episode of tension between the BCRA and the Power Executive. It was in 2010, when the then president of the entity, Martín Redrado, refused to use the reserves to pay public debt, in a conflict that ended with its removal through a DNU.
The lack of coordination between the Central and the Treasury also occurred in the current government, which arrived with a more friendly profile with the markets and sought to defend publicly the independence of the agency. During Federico Sturzenegger's management, the short circuit occurred between an ambitious inflationary goal, which underestimated the impact of the adjustments in the exchange rate and in the rates of public services, and the fiscal gradualism that Alfonso Prat Gay executed from the Ministry of Estate. To finance the deficit, the Government appealed to the debt in dollars, in a dynamic that tended to appreciate the exchange rate and that affected the monetary policy of the Central. In that process, which took place between 2016 and 2017, the BCRA had to issue pesos to buy the dollars from the Treasury and then sterilize that issue with Lebacs, a process that generated a mountain of letters that ended up contributing to the exchange run of April 2018 and the recession that still crosses the country.
Tensions between the Executive Power and authority are not a local issue alone. The issue is boiling today in the United States, the largest global economic power. The focus of conflict between President Donald Trump and Jerome Powell, head of the Federal Reserve (Fed), is at the level of interest rates set by the monetary entity. Through his Twitter account, Trump claimed a change from the Fed and came to qualify Powell as his "greatest enemy," at the level of Chinese President Xi Jimping, with whom he has a tough commercial battle.
Independence, as Kalos points out, serves "so that there is no political pressure and abuse by the Executive Power, or an abuse in financing the Treasury with issuance. A central bank cannot be 100% foreign to the rest of the policies and what is sought is that the tools go in the same direction. "

How the key variables closed after a week in which calm was achieved

85%: The Leliq rate was 85.87% per year on Friday, a record level; It is more than two points above the last day of August

$ 58.02: It is the closing price that the US currency had on Friday; In principle, that value is an indicator that the exchange market measures were effective. The previous Friday the currency had reached a price higher than $ 62

US $ 50,949 million: It is the level of reserves currently in the Central Bank; the figure was reduced by sales to contain the dollar and by the outflow of bank deposits

Risk country: The week ended with a downward trend of this indicator, which fell 400 points in recent days and closed on Friday at 2031 points; So far in September, it decreased by 19%, although it remains at a very high level

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