The Ghost of La Tablita
The Ghost of La Tablita
What is the danger of maintaining a crawling peg with fx restrictions for too long?
Welcome Avatar! Gradually is almost always the precursor of suddenly in Argentina, and not in a good way. As the blue dollar rate ran from roughly $1,000 in May to $1,400 pesos at the start of July, this is a good time to go over some history of the dangers of maintaining a crawling peg for too long, especially combined with fx restrictions (cepo) which Milei’s government has not lifted yet.
Even though inflation is coming down at record speed under Milei, due to relatively high inflation at the start of his mandate and a crawling peg of 2%, the BCRA has already lost more than 80% of the competitiveness cushion it had gained after the initial December devaluation.
This implies an exchange rate risk in the event that inflation rises again, since it would accentuate the exchange rate delay. It seems the black market rate is anticipating this move.
What are the dangers of maintaining the crawling peg (2% MoM devaluation) and keeping fx restrictions in place? Let’s go over some history.
The 1976-1981 Crawling Peg: la Tablita
As discussed in Different Types of Condors, the 1970s was one of Argentina’s most turbulent decades socially and economically.
At the start of the coup d’état in March 1976, the country had been in recession for two years, and had suffered a drain on foreign reserves, much like at the start of Milei’s administration.
Isabel Perón left a dangerous increase in debt to finance the State’s eternal fiscal deficit, and once more the country was on the verge of hyperinflation.
When the military took over under Videla, the economic recipe he initially applied looked similar to the current one: devaluation, increase in nominal wages (but always behind inflation), concern to sustain the level of employment (austerity without layoffs) and price agreements.
The man that was called by the military to fix the situation, was Martínez de Hoz.
Videla instructed him that the economic plan had to:
“[…] take into account, beyond all orthodox rigor, the war against subversion that was developing, since it acted as a backdrop that dominated the entire national scene.
This meant the impossibility of applying a shock policy as someone recommended […] and putting into practice, on the contrary, a policy of gradual application that would not cause social imbalances, taking into account that in the revolutionary war the "priority objective is the support of the general population.”1
When Martínez de Hoz was incorporated as Minister of Economy in the Junta government, he quickly announced a “Reorganization Program for the National Economy”.
The 8 most important points of his economic program were the following:
Price liberation, lifting of price controls;
Initial devaluation and free exchange market but with a crawling peg;
Deregulation of imports;
Removal of export tariffs;
Deregulation of rental prices;
Elimination of subsidies and social plans;
Deregulation of salaries, and
Increasing the debt level with the IMF by taking on more credit.
This all looks very compelling, but as we’ve seen in the Videla quote above, all this had to happen gradually. As we will see, gradually is almost always the precursor of suddenly in Argentina, and not in a good way.
The initial devaluation of Martinez de Hoz favored the agricultural sector, which grew strongly for two years and improved the trade balance. The updating of public service rates, then in the hands of the State, reduced the enormous fiscal deficit.
In 1976, an agreement was signed with the International Monetary Fund (IMF) that included the creation of a single and free exchange market. Having managed to avoid hyperinflation, reverse capital flight and begin the rebuilding of reserves was considered a success taking into account the starting point.
But towards the end of 1976, inflation began to rise and a “price truce” was made for 120 days that was to last until June 1977, after which prices started to escalate again.
Martínez de Hoz decided to attack these increases with orthodox measures, stopping monetary, deficit and credit expansion.
To avoid the loss of business competitiveness, the Minister of Economy Martínez de Hoz launched the "tablita", which implied a programmed and gradual devaluation so that businessmen and citizens could have a sort of devaluation calendar.
The opening of the markets meant an influx of fresh Benjamins and the de facto government had allowed freedom in setting interest rates. Investors transformed those dollars into pesos and placed them in financial entities at interest rates higher than inflation and devaluation rates. The profits obtained were spectacular and allowed the investment to be multiplied in a short time.
This gave rise to what Argentines call the bicicleta financiera, also known as carry trade. The possibility of effortlessly multiplying the money invested created certainty in the business community, and also the middle class got the feeling that money could be easily generated, giving them the possibility of buying all types of domestic and imported products and raising their quality of life.
That illusion, because that’s what it was, is called the Plata Dulce (Sweet Cash) period. Salaries were at all time highs in dollar terms, and the exchange rate lagged so much that a crash was imminent. The average salary around that time spiked at $3,000 USD/month, and see what happened next:
In 1981 Martínez de Hoz abandoned the Tablita and devalued it, shortly before leaving office at the end of Videla's presidency. The new de facto president, Robero Viola, and his minister, Lorenzo Sigaut, had to face markets that were convinced that the devaluation would continue.
The minister launched his well remembered phrase: "He who bets on the dollar will lose." Shortly after that, an unprecedented spiral of devaluations followed by inflation was unleashed.
Moral of the story: keeping a crawling peg or Tablita for too long without a floating exchange rate ends up badly.
What about the current Caputo peg?
Does all this sound familiar? That’s because Argentina’s history doesn’t rhyme, but it repeats almost 1:1.
So far, the current Milei government has been able to tick off the following deregulation items through the initial deregulation decree in December:
Price liberation, lifting of price controls;
Gradual deregulation of the exchange market with a crawling peg;
Deregulation of imports (partially);
Deregulation of rental prices;
Elimination of subsidies and social plans (partially);
Number 2 in this list is a potential headache. As we have seen with Martínez de Hoz, keeping a crawling peg for too long can cause forced devaluations down the road, and during Macri’s government (2015-2019) it became clear that putting in place a floating exchange rate in Argentina without any fx restrictions can drain the BCRA reserves faster than Brent Johnson can drink a dollar milkshake.
Autist note: you can read more about Macri’s gradual approach that eventually spiralled out of control in 2018 here:
In both cases, exchange rates had been suppressed. Martínez de Hoz had been doing so actively, and Macri had to deal with a suppressed price from before he was elected in 2015:
Current Minister of Economy Luis Caputo has denied another devaluation of the official rate or that an acceleration of the crawling peg is on the roadmap, despite an increasing spread between the blue dollar rate and the official rate:
The market anticipates an exchange rate above 4% monthly for the second half of the year. Although the economic team denies it, the market is preparing for an acceleration of the crawling peg, which is clear in the future dollar curve on Rofex which has moved upward in recent weeks:
The expected devaluation jumps 4% and 5.1% monthly for each month until the end of the year. These are levels higher than those seen a month ago, when the market expected the crawling peg to remain below 4% in all the remaining months of 2024.
Final Thoughts
Even though a lot has already been achieved by the Milei admin, many roadblocks like the fx restrictions combined with a crawling peg instead of a free floating peso, remain in place.
It is a tale as old as the love of Argentines for saving in dollars: liberating exchange conditions too fast can mean blowing up the local currency, and a return of high inflation, whereas keeping controls in place will likely deepen the current recession.
In the last 50 years we have 2 instances where things ended up badly, namely during the 1976-1983 dictatorship and during Macri’s presidency (2015-2019).
In the former it was through a deregulation of many sectors of the economy that Milei has also started, albeit at a more segmented pace. The latter in 2015 was a complete opening up of the fx restrictions and banking system without any kind of real deregulation. Basically, Kirchnerism with the floodgates open.
As you can see, it is very hard for Argentina to crawl out of the Groundhog Day loop that it has been in for the past 80+ years.
But if anyone can try to make it happen, it would be this government. Granted, Milei can only do so much without a majority in Congress and the Senate, but a key point to success is not repeating the same mistakes as Martínez de Hoz (deregulating gradually with a crawling peg) or Macri (not deregulating the overall economy but lifting only the exchange rates / fx restrictions).
Milei is taking the middle road so far, with more deregulation than Macri, without decreasing currency controls or taxes, and less gradual deregulation than Martínez de Hoz but with a similar crawling peg.
The best way forward is deregulating faster. Both Macri and Martínez de Hoz made the same mistake of gradualismo, not deregulating fast enough and maintaining the bulk of restrictions even though the plan was to take them off.
But the longer the current restrictions are kept in place, the more likely it is that another 1981 or 2018 devaluation moment will have to happen (which will cause a spike in inflation again).
One thing is certain: Argentina is never boring.
See you in the Jungle, anon!
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Translated from Spanish: “debía tener en cuenta, fuera de todo rigorismo ortodoxo, la guerra contra la subversión que estaba en desarrollo, toda vez que la misma actuaba como telón de fondo que dominaba todo el escenario nacional. Esto significaba la imposibilidad de aplicar una política de shock como alguien recomendaba […] y poner en práctica, por el contrario, una política de aplicación gradual que no ocasionara desajustes sociales, teniendo en cuenta que en la guerra revolucionaria el objetivo prioritario es la conquista de la población”. - Source
Great article!