Hey, Brad, I didn't realize you're gonna be in person.
I didn't realize you're going to be in person.
I thought you're like and normally we're just disembodied voices.
Singing country tunes from some unders.
I wish, Oh my god, I did a deadlift one, two, three, so many uh barges. This isn't after School Special, except.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.
Where's the best with imposta?
These are the important question? Is that robots taking over the world?
No, I think that, like in a couple of years, the AI will do a really good job of making the odd launch podcast And people say I don't really need to listen to Joe and Tracy anymore.
We do have.
Until then. This is lots more a.
Weekly chet about whatever is on our minds.
And we really do have the perfect guests.
Do you recall the first time we talked about Argentina?
Yes, worst position of my life?
No, not at all, the worst, without a question, the worst interview I've done as being interviewed, the biggest bomb I've ever had.
Will you tell me this story.
Yes, So I was.
Two thousand and six, probably maybe two thousand and seven, two and six, I think it was two thousand and five, maybe it's two thousand and five. I was living in New York. I was more or less unemployed. I think I was doing like, you know, temp work or something like that. And I saw an ad online I forget where that the Rubini Global Economics was hiring for someone going to do economic analysis. And I was like, I need a job, and I'm kind of interested in economics.
I just stopped a job that I had working for a small portfolio management company, and so I sent an email and I'm like, I think I've studied a little economics and maybe I could do this. And I went to an office on the Lower West Side. I think it was Tribeca. Was that where it was Brad somewhere road?
Maybe it was the north of Tribeca.
Okay, it's like there's a warehouse off to the west of soho.
I met with Brad. I was applying for the job I met with Brad. I knew actually in advance of this interview, that Brad was interested in Argentina specifically, and all the problems that it had, and I tried to cram the day before to learn something about Argentina, and I think the first question Brad asked me something about how you know, what would some policy prescription I'd have
for it? And you know that experience, like if you're trying to speak a foreign language that you used to know fifteen years ago and you think maybe you know it in your mouth opens but nothing comes out. Yeah, that was me.
I also know the experience of like having a bad interview in real time and you realize that it's going terribly.
Oh it's just like the mouth opens and it is like no words came out, and I'm like, well, I guess I'm going to do something else. Anyway, it worked out.
We should have hired you on the st blog alone anyway, bad business model.
Anyway, we should have recognized it.
We should have moved to meet the talent where the town is incredible.
Eighteen years later, here we are, seventeen years later, Here we are and people are still talking about Argentina.
Yeah, well we are here with Brad Setzer, a senior fellow at the Council on Foreign Relations. He's been on the show multip many times.
He's got to be c he might be the number one now.
I don't know.
I'm sure I've been eclipsed. I was out of commission for two years.
That's true.
When Brad was at a treasury there were a couple of years where we didn't get to speak. We didn't get a chance to speak to him. But it's been a lot now.
But to your point, Joe, it doesn't. It always feels like deja vu with Argentina. Like it's always it's either they've just defaulted on ball because someone decided to give them money again for reasons I don't understand, or something kind of crazy is happening. Like with Argentina, it just feels like the craziest outcome is like the one that tends to happen.
And the thing is to Tracy is that all the years years later, I actually still have no conceptual understanding of what's actually the problem with the Argentine economy. I don't understand why. You know, several years ago, I think they elected some pretty like normy reasonably centrist neoliberal president and it was like, oh, he's going to shake hands with Wall Street and here, and it didn't work, and you know, and so I don't really understand. I don't
know what Prohnism is exactly. I'm not sure anyone totally does. I don't know why there's this perpetual seeming basket case that has rapid inflation after all these years. I would bomb another interview if I were being asked any Argentina question. And I've gotten good at bsing on other topics, but even though I can't even begin to BS on Argentina.
Brad, what's your summation of the Argentine economy? Like if Joe was interviewing you for a job, what would you say.
Oh, well, I have a thesis. It may be a wrong thesis, but it is. It's an economy with a very small banking system, so it has difficulty financing fiscal deficits domestically. It tends, therefore, to try to borrow a lot externally, and it has a relatively small export sector, very ag based, with a lot of volatile export revenues, and it tends to overborrow relative to his export capacity. And when you can't borrow externally, it tends to print money.
So you get this combination of default inflation and periods of stability.
And all of that definitely makes sense, so when you spell it out like that, but it also seems like doesn't it apply to a bunch of country like, you know, not a very depthful domestic financial system. Commodity exporters so obviously exposed to very volatile like aren't a lot of countries in this predicament, And why is it seen like Argentina specifically. People think it theoretically can get out of it, but it just can't. It seems to just keep tripping over itself.
Well, I think actually, compared to most other commodity exporters, like commodity exports is a share of GDP aren't all that high. It's just there's very few manufactured exports, so it's a relatively low level of commodity exports relative to the size of the economy. And I think people tend to think that because it's a relatively big economy, it can support more debt. Man it can given these constraints.
So that's kind of my my thesis. But you know, there are there are countries around it that are have commodity dependent economies. They are more mining, less.
Ag but a much bigger export base and less debt, and they've built up over time monetary policy credibility in a way that you know, boringly, and Argentina has not very clearly.
Okay, so this feeds into my big question here, why do people keep giving Argentina money? Because this is like a joke in the market. And I think I tweeted this once but the distracted boyfriend meme, you know, turning away from defaulted Argentina bonds and looking at more Argentina bonds. And also I didn't realize this, but Argentina is the IMF's biggest creditor.
Now, which well they owe more to the orry. Let me restay that they were the biggest creditor, will be in a very different situation.
The biggest debtor. But you know what they say about debtors, if you're big enough, you kind of enough.
I guess they're plenty big enough.
Okay, So why do they keep getting money?
Well, actually, Argentina didn't get money for a long time after their two thousand and one two thousand and two default. They didn't eventually do a restructuring. It took a while, and then after they did the restructuring, there are a lot of holdouts and they really didn't regain market acts for a long period. And then you know, Joe's right, I mean a centrist relatively a center right really maybe more right than center right. President was elected President Machli.
He brought in a bunch of Wall Street bankers to run his economic team, and they had a clear theory of the case that Argentina had under borrowed. They would settle with the holdouts. They would go out and raise a certain amount of bonds that would cover fiscal deficits associated with tax cuts, like a very conventional center right to write agenda finance with external foreign currency borrowing. And they went out and they did a lot of that.
But apart from that one borrowing spree, which was big, like forty fifty billion and maybe more in two years, Argentina really hasn't had access to external bond markets. But then, you know, the IMF saw a group of non parentist reformers struggling and it gave them a structure reform. They were, you know, they are going to backing certain structural reforms. Mackri was friends with Donald J. Trump and they came from real estate development families. He got a big IMF loan.
But then the current government, they the previous government had borrowed so much from the IMF, they've not had access to new money. They clearly don't have access to the bond market. Their bonds have been trading in you know, between twenty and forty cents on the dollar ever since the twenty twenty restructuring.
So obviously we want to talk about the theoretical economic agenda of the president elect, and is talk about dollarization just real quickly before we sort of get to the present moment. What failed about the Mockery plan? Like when he you know, as you say, it sounded sort of normal on paper and standard maybe you know, conservative government staffed with Wall Street friendly tych Why didn't that put the country on a new path.
I think he just borrowed too much.
In a conservative version of the same old problem.
I mean, I think if you were going to fund a big tax cut, his thesis was, as you would, you know, provide the sugar before you do the tough structural re form. The sugar was a round of tax cuts, and they were going to slowly phase in spending, protecting social spending. So the first effect was a bigger deficit, fully financed by external foreign currency borrowing and the market and I guess the Mocker government overestimated their capacity to sustain a higher level of external debt and sort of
things went downhill. I there was, you know, the standard cyclical fluctuations which made it hard to bring the fiscal deficit back down, and they were reluctant to do brutal cuts because they thought they would lose the election. And if they lost the election, we'd be back in paranism. We would surely have a default. But it ended up adding clearly like one hundred billion to Argentina's external debt in a four years.
I shouldn't laugh, but it's something grim, opit.
I mean it was.
It was a stunning spree of external borrowing. And you know, they didn't want to let the currency weaken too much because were worried about inflation. So the current account was not helping them, and so you know, I think they just borrowed too much. To be honest, you can fund tax cuts if you can fund them domestically, but funding them with external dollars when you're a dollar constrained economies risky.
We're recording this on November twenty ninth, and I feel like I have to caveat the conversation with the exact date, because things move fast in Argentina. And in fact, I'm looking on the Bloomberg terminal now and it looks like the new president, Javier Millay, has just picked his economies are and it's someone who I think wasn't the front runner like a week or two ago. Anyway, we wanted to talk to Brad about dollarization, and I don't know
much about this process. I am very willing to admit, you know, I think it's happened in like Panama and Ecuador. But can you talk generally to begin with, like what does dollarization actually mean?
I think you can think of dollarization as two things. One is just a buyback of your own currency. People have currency in circulation bills. You buy them back and you give them dollars. Euroisation in the Euro area becomes the legal currency that settles all transactions. If the dollar is the legal currency settling all transactions, then debts that were previously in your local currency also have to be redenominated in two dollars. So the second component is a
redenomination of debt in two dollars. And so you combine those two things. Dollars have replaced currency in circulation, dollars are legal tender, and your debts are in dollars.
You dollars.
What's the problem that you're actually trying to solve.
Usually you're trying to solve a problem of inflation that you're trying you basically need to tie your hands. It's like Odysses going through the straits with the sirens, you know, lashing himself to the mass and will not be tempted to print money. You have no capacity to print money. So if you want to spend money, you got to raise money. You know, you're you have to raise hard dollars to fund domestic spending.
It sounds like you need money to do this as well, though, like the idea of your you know, replacing your existing currency. So I guess in this case the Argentine peso with the dollar, like you would need dollars in order to do that.
That is a very important insight chasing, thank you. That is one of the problems that Argentina faces. They're trying to dollarize and the central bank is out of dollars, which is is an interesting theoretical problem.
So this new incoming president, Tamil he said he he wants to dollar rise. He's also talked about getting rid of the Central Bank. Of course, we don't know what he's going to do, and it's possible that he sort of ends up governing the country as a sort of standard.
Well, he's kind of going back and conservative.
You know, center right Latin American president. As you know, often countries go back and forth between left and right. Like I get that impulse actually, which is that you know, if your country has a pattern of just printing too much money historically, then you solve the problem by essentially throwing away the printing price. There's literally no way Argentina can print dollars dollars for pretty stable. Is there a path to doing that given the lack of dollars?
Not unless a generous benefactor we're willing to lend Argentina a bunch of dollars.
Is it the IMF again?
Sorry, well, I don't think the IMF is actually willing to provide the dollars. I mean, I think the IMF believes that it needs to finally get a little money back. But you know, conceptually, it could be the IMF, it could be the United States, it could be the private Argentines who have a lot of dollars offshore who band together and provide a generous loan. But Argentina doesn't actually have the capacity to pay very much interest on the dollars at borrows, given how much is paying on this
existing dollar debt. So there are some real challenges coming up with the dollars, which is probably why Malay is at least you know, the last I had read he's said the dollarization is a goal, is you know, he said, it's something that doesn't need to be accomplished on day one.
They're not going to, in the first instance, shut down the central bank, and their first move, supposedly last I saw, was going to be, as you know, Joe suggested a sort of standard but harsh fiscal consolidation budget tightening, which is also just a reflection of reality. At this point Argentina is it cannot finance its fiscal deficits right now.
Bret. You know you mentioned earlier the Argentina economy is sort of characterized by a small banking system. Would dollarization help with expanding the financial system in the sense that like maybe you're encouraging more faith in the money and that would translate into more willingness to actually put money into bank deposits, and then banks would be able to lend more.
So there are two I think offsetting effects. One is, at least in theory, there are a lot of dollars in circulation in Argentina, a lot of dollars locked up in safe deposit box. The black market, well it's black market, plus you know some wealthy Argentines just rather than trusting the banking system. You know, have a certain number of dollars in Miami and a certain number of dollars under
the mattress. So there are dollars in circulation, the black market, there are dollars under the mattress, and then there are offshore dollars in the offshore banking system. Conceptually, some of those dollars could migrate into the domestic banking system, which would expand the deposit base, allow the banks to lend more. They have to lend more in dollars, and they could
conceivably provide more dollar financing to the government. So that's kind of EFFECTA effect B is that you really don't have a lender of last resort, so you know, banks are in the business of maturity transformation, particularly if you don't have a printing press if you don't have your own central bank. So if depositors ever want their deposits back, you have to provide them with dollars cash.
So either you get those.
Dollars from your central bank again the central bank doesn't have dollars, or you have to hold as assets a lot of offshore dollars. So it tends to have offsetting effects. If it worked, it could bring money into the banking system. If it doesn't work, you will have converted a bunch of peso deposits into dollars. People will show up and ask for their dollars back, and the banks will be unable to honor those dollar promises, and you'll end up with a frozen banking system.
Are there other ways besides dollarization, in which I mean because you're trying to solve an institutional problem, and you know, I love the analogy of tying yourself to the mast, and so you don't have the temptation to do an Are there other examples, either historically or around the world where countries solve the institutional problem of essentially self constraint other than sort of dollarization, which seems kind off the table without the.
Dollars, so you can do various forms of pegs which are just sort of softer.
Yeah, but you know, but.
You can always break a peg.
You can always break a peg. You can do various you know.
But again, you can always undollarized too.
It's hard to it's harder to undollarize, but you know, it's conceptually, I mean, remember Argentina got off a currency board, right, which was supposed to be the.
Is a board in a peg basically the same thing a board as you fully.
Back all currency and circus relation with.
Dollars or whatever your peg do.
So you anyone who has a peso could get a dollar and those dollars are available at the central bank. Now, it doesn't solve the problem of a lender of last resort to the government or to the banking system, but it means like every peso is backed by a dollar at the central bank. So it is more constraining that respect. You know, a peg is a function of credibility, and if you're really, really really committed to the peg, and if you have a really tight budget, you could conceivably
make it work. But it's basically ultimately it hinges on fiscal discipline.
I mean, it kind of goes back to being boring.
Tracy, I'm just looking on the terminal. You know, you mentioned the new finance minister. Huh the title our colleague Sebastian Boyd who wrote it one of a great colleagues, Milaipics, architect of Argentine borrowing boom to run economy. And then if one of the capudo was the financial minister for Mauricio Mockery and ran the negotiations with bondholders that paved the way for a return earn international markets in twenty sixteen.
So this just proves my point that like the craziest outcome is always like what's going to happen with Argentina. What's the scorecard for dollarization in places where it's actually happened. So I mentioned Ecuador and Panama, and I see like different interpretations of the success of those programs. So some people look at Ecuador and say, well, Ecuador growth is
still relatively sluggish, whereas Panama has boomed. But with Panama, it's hard to kind of disentangle the factor of the Panama Canal and having like an offshore financial center and things like that. So how would you evaluate the success of previous dollarization programs?
So yeah, I've spent more time thinking about Ecuador than Panama. I would tend to think that Panama's success is a function probably less of the canal and more of being an offshore financial center and the Panama papers, and a set of less savory aspects of contemporary globalization, which are probably they are facilitated by doing business and dollars. I mean, presumably some Argentines have their offshore dollars in banks and Panama with Ecuador. Look, Ecuador has stuck by dollarization, so
in that narrow sense it has worked. The banking system has not imploded, there have not been runs, Ecuador has not grown especially rapidly compared to its Andean peers that have not dollarized. You know, Colombia, Peru, Chile have generally outperformed Ecuador and Ecuador rather clearly, and this is I think an important principle. You know, dollarization doesn't end the risk of default, and when oil prices go down, Ecuador
still regularly defaults. So there have been multiple defaults after Ecuador dollarized, So I think the record is a little bit mixed. Certainly, if you can pull it off having your own stable currency which you can use to denominate bank accounts and most of your own borrowing. It's a better clearer path to disability, particularly.
If you have a limited export base.
In theory, if there were some generous borrower, rich Argentines who wanted to repatriate their money to facilitate the transition. Is there an estimate of how many dollars the country would need in order to dollarize at some reasonable dollar peso conversion?
Oh yeah, wait, can I just tack onto that? How does it actually work? Because my understanding is there's like there's multiple like extraget rates currently in the economy. There's like the gray market currency conversion, and then the official rate. It seems tricky.
So yeah, there's a blue the blue dollar, which is the the black mart market rate, which is you know, like I think it's about it at one thousand, the official rates three point fifty, so like a little bit of a gap, and then there are special rates. So Argentina has this problem that exporters would like to convert their soybean exports into pesos at the black market rate,
they are unwilling to convert at the official rate. So at various points in time, Argentina gets desperate for dollars and it basically gives a special rate to various sectors of the economy to try to pull money in.
But the two key rates.
Are the black market rate, the blue Paesel blue dollar, and the official rate. I think at the official rate, getting rid of the monetary base, which is probably insufficient, that leaves you no dollars to back the banks, no dollars to cover your dollar debts. The central Bank actually has a lot of short term payso bills, which are a really big problem no matter what, particularly if you
dollarize at at too high of a rate. But you could take out the monetary base with about twenty billion dollars. Now you do have the problem that at the current or exchange rate, the short term financial liabilities of the central bank are like sixty billion, and so it's you know, you would probably be unable to pay the central bank liabilities and so you would have to restructure there. If you devalued, you can kind of lower that cost a bit, but again you need extra dollars beyond what it takes
to get rid of the monetary base. Because the government has to pay all of its domestic debts in dollars. The government has to manage fluctuations in monthly revenues in dollars. The banks have to handle demand for if anyone wants to pull money out of the bank, they have to have dollars available. So it becomes you need a buffer. And so I think realistically.
You need like fifty fifty billion something like that.
Yeah, so, I know we've been talking about.
Fifty billion and a debt restructuring and a debt restarction.
Got it well, without the debt restructuring, it was really realistic anyway. No, I know we've been talking about dollarization, but could you get a situation where like there's unization you do that?
Well, Malay is so keen, so fond of the Chinese sign. I mean he is kissing and making nice but sure. I mean, Argentina has an eighteen billion dollar swap line with the PBOC. I think they've used at least five maybe, you know, I think maybe that's gone up in the past few weeks.
We don't know.
So if the PBOC we're willing to extend that swap line, you know, swap line is you know, Argentina puts pesos un deposited in China, the PBOC puts you on in the bank account of the Central Bank of Argentina. You could provide enough yuan to allow U yuanization if you so desired. You would have to yuan eyes all of the debts, not dollarize them. And then you know, Argentina would still owe a lot of dollar debts on its external bonds. It would owe SDRs back to the IMF.
So not all of his liability structure would be wan eyes, but it is possible. It would be slightly strange because you know, the one is not freely convertible in China. But if you have enough you want in Argentina, you can solve that problem.
Well, so I just want to say thank you for coming in. And I do think now I could at least be ask my way for about ten minutes, and then Argentina.
You would have been highlight. You would have been higher.
Stroke my chin and take things like well, you know, dollarization has been no pantacya for Ecuador because things like that, and I sound very wise, and he's like, oh, you know, and of course we must remember that there are two exchange rates in Argentina and all these great things like that. So I will just finish this up. My last question with the question that you asked me like seventeen years ago.
And so you get the call from Javier Mila and this is brand You've been studying our economy for probably twenty plus years. You know more about dollarization and international capital flows than anyone else in the world. Please join my government as the new special advisor. What would you tell him in terms of a policy approach.
Well, I think I would tell him three or four big things.
Okay.
The first big thing is you really don't have an option to dollarize.
The first first item is your agenda is impossible.
Okay, Well, I think that's pretty much what Capudo told him as well. I mean, it really is impossible to dollarize when you don't have dollars at the central bank. I mean, technically there are a few dollars against the mandatory reserves of the banks, but those are not realistically usable dollars, and you have no prospect, no real prospect of borrowing the dollars, so dollarization is not a realistic goal. Second is, you know you have to do what you
want to do, which is titan Argentine fiscal policy. You're going to have to cut the fiscal deficit. I think Caputo wants to go to a two percent of GDP primary surplus next year.
Good.
I think that is necessary. I don't think you can do that fiscal consolidation and OSCO cut the size of government in half, which has been his other proposal. I think you have to be realistic about how much consolidation,
how much shock therapy the economy can take. But clearly directionally, you need to have a big upfront fiscal consolidation, get rid of some of the subsidies, rein in spending, whatever tax breaks that you're the last government provided at the end of it, at the end of its term that you're willing to roll back even though you want tax cuts over time, you want to strength the state. I mean, in the short run, don't do tax cuts, but execute
on tight spending, and then you have to restructure. Third, the balance sheet of the Central Bank. My friend Chris marsh who's right to blogs tweets as the General Theorist, has a great blog on this. The Central Bank has a horrible balance sheet, like really horrible. It has these long term, non traded, low interest rate dollar bonds that they are called non transferable treasury securities, but basically they're dollar bonds of consequence of loans to the government that
pay a very low interest rate. That's their main asset. Their net foreign asset position is down negative. They've borrowed more in foreign currency than they hold in foreign currency. Their main asset are these foreign currency denominated, low interest rate Government of Argentina securities, and then they borrowed a ton or issued a ton of short term Peso bills that pay these incredibly high interest rates, so they are hemorrhaging cash. Is this backdoor fiscal deficit. So you have
to do a restructuring. No matter whether you want to dollarize or just have a normal functioning central bank, you have to, you know, swap out the zero or low interest rate non transport treasury securities for something that pays
a real interest rate. So there's income coming in and you have to probably restructure these short term bills and so you have to kind of change a situation where the central bank has no income but it's paying like one hundred percent interest, and you probably can't just do that with credibility and you know, we're going to bring the interest rate down, you probably need to do a pretty hard ass restructuring. Fourth component, you know, the bonds
are trading. They've rallied a little, maybe too much. Bonds have been trading under forty ever since they were issued. In the restructuring, they're really starting to amortize in twenty twenty five. These are bonds that are clear that Argentina clearly can't pay, and I would say, you need to organize over the next year a preemptive restructuring of your
sixty five to seventy billion in international sovereign bonds. You will not be able to pay them when they come due in twenty twenty five, nor should you want to.
So that would be my structuring.
Would that be this is gonna be the last structuring, though they're really going to do it this time.
Well, yeah, I think Argentina and these smart bond investors realized that the twenty twenty restructuring was built around the wrong premise. It was built around the premise that US Treasury rates were going to be two percent forever and so therefore a five percent interest rate for Argentina would have been a reasonable rate. That is not the case
right now. So the bondholders wanted to preserve the face value of the bonds and were willing to accept a low coupon back in twenty twenty, and then they wanted relatively short amortizations, so the bond started to amortize after five years, and you just have this steady wall of amortizations for the next ten years. What you need to do is you need to do cut face, raise cubon, give Argentina another five to ten years before they have to amortize. Hard deal, but it's doable.
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