Thursday, 31 July 2014

Don't bind your hands Argentina

It really is long past time that Argentina dealt with the hangover of the ridiculous peg they under took in the last millennium.

In other areas the law has evolved to realise that debt that cannot be paid will not be paid, and a formal wind up procedure is available in every civilised state that ensures that both creditor and debtor take the necessary cold baths as soon as possible and as quickly as possible so that economic progress is not stalled.

And in other areas of international law it is recognised that a prior parliament cannot bind a future one if the will of the people is behind the change. So treaties can be torn up, and alliances changed.

But apparently not so in the area of state debt owed in a foreign currency. There both the sensible nature of bankruptcy and the right of self-determination by the people doesn't seem to apply.

While that is the case, no sovereign state should ever borrow money in a foreign currency. Not ever. It should immediately repudiate or redenominate any that exist and constitutionally bar itself from undertaking such a practice at any time in the future.

And that is what Argentina should do now. Clear the deck permanently so that it can move on.

There is never any need for the state to get involved in issuing foreign currency debt instruments in the free floating era.

A clever state understand that private entities that can go bankrupt can undertake those sort of actions - so the private banks and the private companies can do the foreign borrowing if they see that as appropriate for their purposes.

For very early stage developing countries, the services of the IMF may be useful in getting very basic infrastructure and a functioning modern banking system in place. But Argentina is way beyond that.

A clever state understands that exporters need to export. They need to sell their goods and services to fulfil their own profit making objectives. Unless those exporters find a way to take the importer's currency and swap it for their own currency then the deal will simply not happen and no goods will be made or shipped.

For states that are export led, they necessarily have to undertake 'liquidity swaps', or the world quickly runs out of the right sort of money to allow deals to happen. They understand that the 'liquidity' enables new deals to happen that wouldn't otherwise happen, growing the real economy at the same time as the monetary one.

The result over time is that export states tend to accumulate foreign currency assets. Some then call these 'sovereign wealth funds'. That saving is forced as a consequence of the export-led policy. The export-led policy has to go first before those savings can ever be used.

Now of course an exporter is going to try and tie an importer's hands, but a clever import nation will realise that and refuse to deal on those terms. There are plenty of exporters and they are desperate for new markets. So you hand out trade permits to those who can offer the best liquidity deal. That then avoids an eternity in purgatory being whipped by the United States, which has either lost the plot internationally or is trying to force an end to this ongoing farce depending upon your point of view.

Argentina has had a series of very bad governments making very bad mistakes. Hopefully it has learned some lessons and can move forward. We shall see.

Be strong Argentina. You have nothing to lose but your chains.

7 comments:

Philippe said...

a problem is that exporters might not want to hold the currency of a developing country, especially if it has a history of high inflation. as such they might require payment in US dollars. This poses a real problem for the importing country if it is dependent on certain exports - a problem which you can't get around by just creating your own fiat currency.

Neil Wilson said...

"a problem is that exporters might not want to hold the currency of a developing country, especially if it has a history of high inflation. as such they might require payment in US dollars."

Then they don't get to sell their goods and their own economy shrinks. Why would the exporter central bank do that when there is zero cost to itself in swapping the currencies?

This idea that you can *force* a country to use a foreign currency requires that you are a monopoly supplier and that you have an alternative where you can get rid of your goods.

Otherwise the answer is *no deal* and everybody suffers *including the exporter economy*.

Look at the rhetoric on exporting. Push exports, Push export. Everywhere you see in neo-liberalism the call is for more exports come what may.

So your assumptions are false. The exporter will try to do that, and the importer just says 'fine I'll talk to your competitor then'.



y said...

"Then they don't get to sell their goods and their own economy shrinks"

You could equally say that if a business refuses to accept home-made tokens cut out of cardboard in payment they are just shooting themselves in the foot, as they are selling less goods than they could. But of course businesses don't accept home-made cardboard tokens in payment - they require payment in real money or the trade doesn't happen.

Neil Wilson said...

"You could equally say that if a business refuses to accept home-made tokens cut out of cardboard in payment they are just shooting themselves in the foot"

You could, but if you are running an export led economy which *requires* you to obtain foreign tokens before you're allowed to inject your own currency into the economy then that is what you will do.

Because, otherwise your currency would rise against the others to eliminate your export surplus.

Export led countries need to export, or their economy shrinks/fails to grow. Where else are they going to go within the policy constraints? What would you prefer to do - fight amongst competitors, or have new green fields opened up by your central bank doing 'liquidity operations' where you can earn relatively more of your own currency?

Look around you. Read the documents. Export, export is the neo-liberal mantra.

When you look at the evidence foreign tokens move towards the central bank of export led nations. That is how the dynamics work - no matter how you dress it up with sovereign wealth funds and the like.

Look at the swap facilities set up by the Chinese.

It costs a central bank *nothing* to buy up foreign tokens.

The clever importer would therefore offer trade deals to the export country that could offer the best central bank liquidity swap facilities with its own.

"But of course businesses don't accept home-made cardboard tokens in payment"

Nobody ever does. Everybody has to be able to use/receive the money that they want or the financing arm of the transaction fails and the whole deal falls through. The customer has to be able to use their currency, and the supplier receive their own. Or no-deal.

But if you have a central bank undertaking liquidity operations then those cardboard tokens can be offloaded and you get the currency you actually want.

That's how it works internationally. There is always a sink for cardboard tokens, because there is no cost in accepting them. They will never be used again anyway - at least not while the 'export led' policy is in place.

The barrier to the quality of the token is very low indeed - hence my point about the IMF loans to create a central bank system.

y said...

if you were running a large international company, would you rather be paid in US dollars or in Zimbabwe dollars?

Lets say you did accept Zimbabwe dollars (when they were still being issued), you would probably only do so with a view to selling them asap in exchange for a better currency (or assets denominated in a better currency).

If all exporters who accept Zimbabwe dollars only did so with a view to getting rid of them asap, you could end up with a situation in which the currency is in free fall vs other currencies (which would result in even higher inflation).

You might say that a lower exchange rate for the currency would result in more exports, thereby stabilising the exchange rate. But that didn't happen in Zimbabwe.

This is an extreme example, but it illustrates the point that governments have to manage their currency to maintain a degree of international confidence in it, if they want foreigners to accept it and to hold it.

This means that there can be limits to how much you can buy with your own printed currency, if your country is fundamentally dependent on imports.

Managing the currency might mean fiscal restraint, or higher interest rates, as a way of maintaining a reasonably stable exchange rate.

This is less of a problem for advanced economies, but it could be a binding constraint on developing economies, depending on their circumstances.

Neil Wilson said...

"If all exporters who accept Zimbabwe dollars only did so with a view to getting rid of them asap, you could end up with a situation in which the currency is in free fall vs other currencies "

And there is your mistake. Because if that falls, then yours goes up to infinite against it *and you lose your export market on which your economic prosperity depends*. So it never goes back into circulation. It is saved and buried - to maintain the market.

I don't understand why you can't see this. There is no Deus Ex Machina here from a single 'export sector'.

It's very simple. For you to have access to a market if you are an export led country you must save in the target country's currency. Or you can't export more than they export in aggregate on a real adjusted basis.

So that is what happens - forced saving to maintain a market. Which is *exactly* what the Chinese are/have been doing.

The exporters want to export, and like all salesmen they will find a way of making the trade happen - including bringing in support from the government. It's a form of vendor financing - which is very common indeed.

This appeal to 'developing nations' is a complete non-sequitur that does not prove your argument one little bit. Particularly Zimbabwe where it was a known supply side failure that caused all the problems and nothing to do with overseas trade.

The developing nation should take the same stance. Competing exporters with the best liquidity swap offer get the trade deal. Otherwise we'll ask the Chinese, etc. to bid. It's not a matter of confidence. It's a matter of trading vs. not trading for those export hungry nations who want access to a new market.

You have not shown that doesn't work, other than by appealing to a monopoly or cartel operation between nations.

If you believe China, Russia and the US won't take the option of a trade deal from a nation - possibly to the exclusion of the others - then you are simply not operating in the real world.

PeterMartin said...

Good Post Neil. A few years ago there were all sorts of nutty theories about the USA invading Iraq because Saddam Hussein pricing his oil in Euros rather than dollars.

I never really understood why it made any difference. Neither the buyer nor the seller care about the currency, nor the issuers of those currencies, providing the price is right. The buyer can change from one currency to another prior to payment, and the seller can do the same afterwards.

The only problem would be if the deal was of such magnitude that it could change the value of a relatively minor currency. So, from the buyer's perspective, it would make sense to specify the buyer's own currency.