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Argentina's Return To Financial Markets Comes With A Price

Man in front of a house of currency exchange in Buenos Aires.
Man in front of a house of currency exchange in Buenos Aires.
Rubén Lo Vuolo

-Analysis-

BUENOS AIRES — A system of financial markets is a way to ensure the ready fluidity of all the assets that constitute economic wealth. Implementing the system requires "financial products," which are meant to adequately represent that wealth, directly or indirectly.

Thus, all the wealth that is "fixed" in the production process enters circulation as liquid capital (and even serves to make payments for transactions like fiat money). Stocks, negotiable debt papers and public bonds circulate in the financial markets in lieu of the patrimony of firms and states. Even the the capital of the work force enters into circulation, for example through pension funds.

This is the specific way in which the "abstract" power of financial capital turns into "material" power over production and work. Financial operators thus acquire the power to define each day the value of wealth in the economic system. How is this determined? Through daily pricing on the financial markets. What does it depend on? On conventions the operators establish in their daily practices. In other words, wealth is worth today what the financial operators say it is.

Thus the value of a firm can multiply or divide itself without any big change in its productive processes, sales levels or market share, and simply because market operators decide its value must rise or fall. The same way an underdeveloped country can be classified as "emerging" and its bond values rise because of a change of government or of exchange policies, or because mere expectations determine that it has become a good place to do business and will pay good returns.

For this to continue functioning, there needs to be a constant increase in financial assets for trading and selling. Liquidity (or a financial asset's ability to become money), is the way the financial community can assure its independence and power for moulding the overall economic process. Liquidity allows risk to be distributed, money to be lent to those who need it, and trading to take place on current and anticipated prices of assets.

Macri's responsibility

The more "financial" a country's wealth, the more power financial operators have over its fate. Experience shows that when financial capital starts controlling productive capital, it forces it to function in line with the logic of the minimal acceptable rate of return. The entire system must then adjust to the pressure of short-term profitability imposed by financiers. Assets that don't pay must be liquidated, allowing the cash squeezed out of them to be used elsewhere.

The new Argentine government, led by President Mauricio Macri, must have already known much of this when it triumphantly announced the country's return to the financial markets after the long reign of the Kirchner governments. In fact, many of the adminstration's key members are experts in the games played on these markets.

We may say that the impressive bond issues and onerous capitulation to creditors are a confirmation of the failure of our debt payment strategy, confirming the power of financial operators and exposing the limits of a dependent country's capacity to defy them when its policies are inconsistent. There is nothing to celebrate here and a lot to learn for a society that keeps repeating its frustrations.

The previous government (led by Cristina Fernández de Kirchner — 2007-2015) was largely responsible for these frustrations, because it fueled public-sector debt and failed to use certain opportunities to alleviate external dependency. It provoked a financial calamity that greatly weakened Argentina before the world's decisive financial actors.

But the current government also bears responsability for Argentina's predicament with its so-called "way out" strategy and insistence on the supposed benefits that financial revenues and foreign capital will provide. What the Macri administration hasn't explained is why the market remedy will work now when it has not in the past, either here or in other countries with similar problems.

In the economic regime presently taking shape, firms and the state must once more work with an eye on the country risk, interest rates, maximizing dividends and profits, payment and refinancing of growing debt, and daily changes to the rules of operators that are ever-ready to liquidate everything and take their cash. In fact, they are doing it now with the revenues assured by the Central Bank and treasury, in an economy with a rising inflation rate.

One sees no incipient policies here to protect those already harmed by the previous policies, who must now adjust themselves again to wealth distribution policies that favor financial revenues. In financially emerging countries, the weakest actors are, sooner or later, bound to be overwhelmed.

*Rubén Lo Vuolo is an economist and academic director of the Centro Interdisciplinario Estudio de Políticas Públicas.

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