Sergio Massa has a video on his cell phone that these days he usually recommends to those who visit him on the fifth floor of the Palacio de Hacienda. The short lasts only about five minutes and records historical events, specifically linked to inflation: it deals with the challenges of Shimon Peres after his assumption as prime minister of a coalition government in Israel, in September 1984.
In addition to the war in Lebanon, according to the fragment of the Netflix documentary The Nobel who did not stop dreamingPeres had to face a “disastrous” Israeli economy. “The inflation rate was one of the highest in the world and economists warned Peres that it could exceed 1000%. Investors fled from the country’s industries. The prices in the stores went up every day.” says a voice in offwho then comments on the decision that Peres decided to make.
The prime minister called in a prestigious economic team and designed “a plan that involved heavy cuts in all sectors of society.” The excerpt from the documentary then quotes Peres himself: “I called a cabinet session, which lasted 36 hours. And I cut everyone. I cut $500 million from Defense. It was the largest cut in Israel’s history. Then I cut to Education. The Minister of Education was my best friend. It was the end of the friendship. All the ministers accepted the cuts from other ministries. Neither agreed to cut their own ministry. But I told them: ‘Either you accept it or I fire you.’ In 36 hours whoever batted an eye would cut the budget. I was criticized from all sides. But, to my great surprise, the harder I was, the more insistent I became, I noticed that there was a change in public opinion. Day by day, my polls rose against all odds. Within six weeks, inflation started to come down.”
“Israel’s inflation dropped from almost 500% a year to 16%. Peres’ approval rating was over 70%, the highest ever recorded.” closed the small piece of five minutes on the interesting documentary.
Near Massa they do not hesitate. “Inflation is going to be a shock to the government.” They refer particularly to data from July, which will be known next Thursday. In the Ministry of Economy they believe that it will be the highest rise of the year (up from 6.7% in March) and they trust the numbers that August will bring will also be bad in a context of plateauing of the economy. That same day, with new staff, the Central Bank (BCRA) could define a new rise in interest.
On the fifth floor of the Ministry of Economy, where Massa’s office is, they do not believe that there is a single cause of inflation in Argentina. They talk about supply and demand, about the level of interest rates, about international prices. Even Massa, while on Thursday announcing measures to cut subsidies and close the issuance via temporary advances from the BCRA, mentioned “bimonetarism” and the lack of dollars. They were measures without details for the market; story for Cristina Kirchner. Guzmán’s multi-causality mutated to a “comprehensive” response to the problem.
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But in the internal jurisdiction of the brand new Economy Minister, the deficit is a problem to be addressed, whose resolution has macroeconomic limitations, but fundamentally political ones. Massa knows that he will not have the green light from the opposition to raise taxes and the brake on spending will collide with the electoral needs of the Front of All.
Massa confirmed that he will meet the fiscal goal of 2.5% of GDP agreed with the International Monetary Fund (IMF). Today he believes that the deviation to meet that goal is 0.7%. “All the necessary corrections will be made”, he promised at Thursday’s press conference. It is not yet clear where the brake on spending from 12.8% to 7.8% requested by the Fund will come from. In the minister’s team they believe that the removal of electricity and gas subsidies would represent -at current values- a saving of $500,000 million (less than 1 point of GDP) in a full year. Despite the fact that there is no data on savings with social plans, close to the minister they are already working on new projections of quotas for ministries and on the 2023 budget.
The leader of the Renovating Front believes in a “constructed commitment” with social actors. Not for nothing, he has already indicated that he will speak with the Liaison Table, and that he will call the business and worker entities. Massa says he has the merit of “being able to articulate with all sectors.” Massa believes that wages will at least match inflation this year. It will be difficult to know how the bonus to retirees and improvements in family allowances will fit into your savings plan.
“Argentina has already shown that it can lower inflation without the need to dollarize, but simply by fixing the fiscal accounts. The question is why don’t we start with the easiest. Dollarizing is a complex operation. If you have a fiscal deficit and difficulties to finance yourself, because you are a country that goes from default to default, you are going to have problems. The most logical and sensible thing is for the political class, the political caste, to agree to replace the inflationary tax, a non-legislated tax, with legislated taxes and a reduction in spending”, Gabriel Rubinstein said in an interview long ago before sounding like Vice Minister number two Sergio Massa. On Tuesday the name of the deputy minister would be defined.
The exchange rate run and the terror of inflation are shared sensations both in Economy and in the vice presidency. “They gave me absolute freedom to work,” the head of the Palacio de Hacienda usually says standing on the edge of that abyss. That fear rules out a devaluation shock, they say in Massa’s team. Also a split. “There is no nominal anchor. In one day everything is shot at you, ”they say. They also deny changes in the “savings dollar” or “card” and differential exchange rates for sectors. Yes, there are likely to be tax breaks for incremental exports.
The plan, for now, is to hold out through August -as requested by Miguel Pesce- until the energy purchases end (in Economy they say that, thanks to Yacyretá and the lower need for purchases of LNG ships due to a higher temperature than expected in this time, they will go from needing US$1.89 billion to US$1.25 billion to meet energy bills). In the meantime, the field should begin to settle for the next harvest. From there will come the US$5 billion in 60 days promised by Massa. Added to that, there would be international financial support. We will have to wait for more details about the REPOs (to repurchase debt and strengthen reserves), and the negotiations with international organizations and funds.
In the 1980s, the team led by Michael Bruno launched the “Economic Stabilization Program” in Israel of the socialist Peres. He contemplated a drastic reduction of subsidies, a devaluation of 20% of the Shekel and a temporary freeze -and in ranges- of prices. In addition, salaries that, after an agreement with the Histadrut (Israeli CGT) were decoupled from inflation. The interest rate rose sharply and was pegged at an exchange rate. The Central Bank was also prohibited from assisting the Treasury. Then came a fierce adjustment of spending. In 1985, Peres signed a free trade agreement with the US. After those first steps towards stabilization there were profound structural reforms.
It is a model that knows very well, in addition to Massa, Horacio Rodríguez Larreta. “Israel shows us that in order to lower inflation, a plan supported by a great coalition is necessary,” the mayor of Buenos Aires in Tel Aviv said some time ago about the plan with orthodox and heterodox elements. “Argentina requires this type of agreement to face great transformations”, added one of the potential candidates of Together for Change in 2023.
The video that Massa recommends ends with a curious mention: despite the increase in his popularity, Peres refuses to break the collation that, at that time, he constituted with Likud. “Gentlemen, I gave you my word. I’m not going to change it.”