Domingo Cavallo has held public office on three different occasions, appointed each time at moments of extreme financial stress. In 1982, at the age of 35, he was briefly Central Bank president as Argentina defaulted on its foreign debts. Nine years later, he became Economy Minister and stamped out resurgent hyperinflation by creating the country’s currency board. Ten years on, Cavallo is back, this time trying to halt Argentina’s slide into default, currency crisis and political upheaval.
In August, LatinFinance Editor John Barham met with Cavallo in his cavernous Economy Ministry office. Although Cavallo looked exhausted and drawn, he has lost none of his habitual forcefulness as he fielded questions ranging from the country’s emotional state to the finer points of his plans for dragging Argentina out of crisis.
The markets doubt that the government has the strength to fully implement the zero-deficit law. Does it?
Domingo Cavallo: The government has the strength. There is unanimity among officials in the executive branch and provincial governments. There was a majority in the Chamber of Deputies and Senate for the zero-deficit law. There was a majority for the competitiveness law giving legislative powers to the executive. The majority of the population wants peace, order, tranquility and progress, although we have not yet achieved this.
How do you respond to those who say that your policies are deepening the recession?
DC: It was the unacceptable dynamic of the public debt that brought the reduction of credit to Argentina as a whole. Now we want this crowding-out to disappear. This is essential because otherwise all reactivation measures will have no effect if companies do not have access to capital. [This is] the central role of the zero-deficit law.
LF: How can you reduce the crowding-out effect, cut taxes and still comply with the zero-deficit law?
DC: We will only issue [debt] to refinance debt. Whether there is any credit available will be determined by confidence and [compliance] with the zero-deficit law. Argentine taxpayers, those who pay taxes, can buy bonds [on the secondary market and use them to pay taxes]. So those who trust Argentina will see their tax burden fall because they can pay with bonds. They are buying bonds at 50% to 60% of their face value.
LF: How do you respond to critics who say the currency board system has stunted Argentine exports and industry?
DC: Exports of manufactures have increased and so have those of [processed] agricultural goods. The idea that Argentina needs to devalue the peso to increase exports, and default to reduce interest payments, does not help.
LF: A bailout for Argentina would not overcome the problem of moral hazard.
DC: There is no question of this because Argentina maintains an adequate level of public debt and because these [loan] mechanisms are intended to ensure the central bank can be the lender of last resort. One way to rebuild confidence [in the banks] is to restore liquidity. What we are trying to do is get international support for the central bank to have room for maneuver. It is not conventional financing, but to ensure liquidity when it is necessary.
LF: To what extent does the outlook for the international economy hurt Argentina?
DC: We are in a world recession. It is hard to exit an economic depression if there is a global recession. The only positive thing is that currencies that devalued [against the dollar] are revaluing. We have [an IMF] program that we are complying with. But there have been so many rumors and advice that we default, that this forced the country risk up a lot and depositors began to withdraw deposits.
LF: The international financial community says your statements sometimes add to confusion and uncertainty, for example by changing the rules governing the currency board. How do you respond?
DC: Analysts like to see the world as it is described in textbooks. But that is not the way the world is. Argentina had a clear vision of its future from the moment of the launching of [the currency board]. Before this, it was a closed and inward looking, unstable country. Argentina has a vocation for stability and growth in the context of a global economy.