00:00President Mille's historic victory on Sunday in Argentine elections means he has a stronger position in his Congress and another opportunity to administer his medicine seeking economic health for a country that has been struggling for a long time. Hans Humes, CEO of Greylock Capital, is a longtime investor in Argentina.
00:19I think the entire country understands what's what has held them back for decades now. And they're willing to take a certain amount of personal pain. Now we have to see how this transition goes and what the new messaging will come if Peronism is able to prevail in October.
00:41But in the end, Peronism, the populist legacy of Juan Perón, did not prevail, at least not last Sunday.
00:55I think right now we've made a lot of money based on that election because the bonds have gone up. Their whole debt rating has gone up. You know, that election made a lot of money for the United States.
01:06What does Mille's latest victory mean for the country and for investors like Humes? This is how Humes saw the issues brought on by Mille's reforms before the midterm elections.
01:17In general, at the beginning of a pro-market president, you're going to have a lot of enthusiasm. Unfortunately, you know, depending on how this one goes, people might start sensing a patent pattern that there's after the burst of enthusiasm and the rally in markets, that something happens where they run into some social resistance or whatever.
01:43The feedback I got from sort of my lower middle class friends who are Argentine was many of their friends who are really enthusiastic for change started looking at this and saying, oh, this is the same thing we normally have to do.
01:59They either give up or they start turning away from Mille. And they put up with a lot of pain.
02:04Runaway inflation has been a burden for businesses as well. Businesses like the textile manufacturer that David Kim runs in Buenos Aires.
02:12Runaway inflation is a game. We really know how to deal with because inflation in Argentina started in, I think, 1970 or something like that.
02:27And we've had inflation, and we've had inflation, double digit inflation for many years.
02:36It is very difficult because you need to calculate the costs every month.
02:42And sometimes you have to, when inflation is very, very high, you have to increase the prices maybe once or there has been some times when they have to make increases more than one time a month.
03:00Everyone that comes to Argentina and we explain all these crises and what happens politically and economically and the taxes and the new regulations, they say we are crazy to stay here.
03:12We are used to this. We will be here working in the textile business for many, many years.
03:19I think the business owners in Argentina deserve a medal because it's a very challenging country.
03:30It wasn't just President Mille who had a lot at stake in the Argentine elections last weekend.
03:35President Trump had his Secretary of the Treasury, Scott Besant, establish a $20 billion swap line for the country
03:41and spent something over $1 billion in the currency markets to support the peso.
03:47Fabio Natalucci became CEO of the Anderson Institute for Finance and Economics
03:53after serving at the IMF as Deputy Director of the Monetary and Capital Markets Department.
03:59At this point, there are three plans that have been discussed.
04:03One has been a swap line of about $20 billion established by the Treasury with the Argentina Central Bank.
04:09There's been reports in the press of FX intervention, so outright purchases of pesos and sales of dollars.
04:17And then there is a discussion of another about $20 billion that Treasury seems to be working on with the private sector,
04:24presumably to provide some more longer-term funding.
04:27This is what's in the press at this point.
04:31How does a swap line work?
04:33You can use the Fed as an example here.
04:35During the financial crisis they establish, or during COVID, they establish a swap line with the other central bank.
04:41The way it works is the Federal Reserve, vis-a-vis central bank of another country,
04:46they swap, say, dollars for the currency of the central bank at a specified exchange rate of some date.
04:54And those swap lines can go from one day to, say, three months maturity.
04:58And then in maturity, they swap back the Fed received dollars and provide back the foreign currency at the same exchange rate.
05:07The only report I've seen in the press has been outright purchases.
05:11Outright purchases by Treasury, that's a different exercise.
05:14Essentially, they go in the market, they sell dollars, they buy Argentinian pesos in this case.
05:20But then, at this point, you own the Argentinian pesos.
05:23So you are completely facing the risk of devaluation of the pesos in terms of investment.
05:30Traditionally, there are a few examples in the past where some of this intervention has been done.
05:36Traditionally, with advanced economies.
05:38So, for example, in 1998, there were purchases of yen by the U.S. authorities via the Federal Reserve Bank of New York, traditionally.
05:46In September 2000, there was a coordinated effort by the Federal Reserve and a few other advanced economy central banks to purchase euros.
05:58And then, lastly, in 2011, March 2011, during the earthquake in Japan, when the U.S. authorities, they sold yen.
06:07Those are all advanced economies central banks.
06:10In the case of the euro, this was a coordinated effort among different central banks to intervene in the market.
06:16President Trump did say that he thinks perhaps the U.S. made a lot of money.
06:21I guess it is conceivable it could have made a fair amount of money, depending on when it got in and when it got out.
06:26Yes.
06:27So if they, for example, got in and purchased on right before the election,
06:32and then let's say that the appreciation of the pesos post-election was like 8, 8.5 percent,
06:38again, if you apply to the $1 billion, that would be $80 million that you made right there.
06:46Now, again, that requires, though, to crystallize those gains, which means you go back into the market and sell the pesos.
06:51If you hold on those pesos for two days, where you are this morning, that was a paper gain,
06:57because the exchange rate is back to where it was essentially pre-election.
07:00So if you bought pesos and you hold on to them, you went from gains to back to essentially flat at this point.
07:08This is on the outright exchange rate purchases.
07:12The swap line, again, because the exchange rate is fixed, there is no gain or loss.
07:16Whether the United States made money or didn't, that was not apparently the purpose for the swap line or the currency acquisition.
07:23It was rather to support President Milley and the government in Argentina.
07:27Is it likely it could have supported it?
07:30I've seen, for example, speculation it relieves some pressure for a possible devaluation of the peso.
07:35Right. So, I mean, maybe we can take a step back and try to start from where the government of Argentina was trying to achieve.
07:42So as soon as President Milley went into power, they went into this shock therapy of cutting fiscal spending quite aggressively
07:48and then a large devaluation of the nominal exchange rate.
07:52And then after that, they essentially established a band, a crawling band, as it said.
07:57So the depreciation of the pesos was very controlled and very slow, if you want.
08:03Well, of course, in last year, the economy went into a recession.
08:07Inflation was very high, not of 200%, at least quoting IMF numbers that were just released at the October annual meetings.
08:15Then the forecast was for this year to the economy to sharply rebound in positive growth territory and inflation to come down.
08:23The challenge with this intervention in the spot market and the outright purchases is unless you manage to address the fundamental forces,
08:32they are driving the exchange rate, those tend to be very short relief, and historically that's how they have been.
08:38And so, historically, the people often talk about it, Tablida in Chile and Argentina, those were an exchange rate based stabilization plan,
08:47devaluation, then slow devaluation of the currency in trying to bring inflation down,
08:51and the central bank at some point, historically, has run out of foreign currency.
08:55That was the driving and fundamental forces behind that and what may have pushed the U.S. to intervene,
09:02because the central bank, presumably, central bank of Argentina, was running out of dollars.
09:08Now, the issue, the question that people have been asking is, like, why the U.S. intervening?
09:12How systemic is Argentina from a financial stability perspective?
09:17Argentina, the U.S. imports, trade with Argentina, it's a relatively small number.
09:24And so, from a trade perspective, there are other countries in Latin America that are much larger trade partners.
09:30The other aspect that makes this different than previous rescue package, that was a loan from the U.S. Treasury,
09:37was not outright FX intervention, the way we're discussing today,
09:40but also was combined with IMF, World Bank, and other multilateral developed banks' intervention package.
09:45So, the $20 billion of the U.S., plus what was coming from the multilateral development banks,
09:52went north of $40 billion.
09:53So, it was not just one country, not just the U.S. for obvious interest to intervene,
09:59it was the broader financial community that intervened there.
10:03And that was a very successful package.
10:05Mexico managed to repay very quickly, already in 1997, so two years after that,
10:12was able to start repaying and also having access back to the capital market.
10:16So, the crucial question here is going to be whether the intervention in the forms we discussed
10:21by the U.S. authorities will be enough to revert some of these fundamental forces
10:26that were pushing the exchange rate of Argentinian pesos to depreciate.
10:32And, again, from what we've seen this morning, the exchange rate seems to be almost back to where it was pre-election day.
10:38At least for now, it looks like President Mele will have the opportunity to continue his economic policies,
10:45policies that businessmen like David Kim hope will bring both stable prices and gross.
10:51I think the president is doing a great job with inflation.
10:55Inflation has come down from maybe 150% a year to 40%.
11:02That's very good for everyone.
11:06But there are other issues that maybe you don't know about,
11:11like the interest rates of banks.
11:16It's much higher than inflation.
11:18I hope there is a change here.
11:22I hope the politicians take into account that everyone is facing a difficult situation right now.
11:28The lowering of the inflation is great, but I think we need much more than that.
11:34Not only for textiles, but for every kind of industrial company.
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