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An election year with no rest to expand spending

2023-03-30T09:32:01.733Z


Domestic factors exacerbate the negative potential of the complex external scenario. After four decades without inflation, the world once again suffers the scourge of the sustained rise in the price level. The response of the central banks is to raise their monetary policy rates -while withdrawing liquidity from the market-, seeking to increase the opportunity cost of consumption and, thus, slow down aggregate demand. Along these lines, the Fed raised its monetary policy rate by 4


After four decades without inflation, the world once again suffers the scourge of the sustained rise in the price level.

The response of the central banks is to raise their monetary policy rates -while withdrawing liquidity from the market-, seeking to increase the opportunity cost of consumption and, thus, slow down aggregate demand.

Along these lines, the Fed raised its monetary policy rate by 4.5 percentage points in one year, while the ECB did the same with an increase of 3.5 points.

The impacts of this measure are beginning to be observed on the profitability and balance sheets of different companies.

Although the rate hike impacts the entire economy, some sectors show more problems than others in the new scenario, among which venture capital operations and technology companies stand out.

And of course, the entities specialized in financing these sectors are also particularly affected.

The fall of Silicon Valley Bank and Signature Bank, as well as the problems faced by First National Bank, fit into this context.

These are banks that were particularly exposed to the venture capital sector and to the fall in prices experienced by fixed-income assets in the process of raising rates.

On the other hand, banks that diversified their portfolio better, with more stable clients, less exposure to treasury bonds and a greater share of variable rate loans, felt a very different impact on their balance sheets.

On the other hand, in the midst of its own battle against inflation, the eurozone also found problems in its banking system.

However, the origin of the crisis faced by Credit Suisse is much earlier than the financial noise in the United States;

It is not explained by poor interest rate risk management, but is the product of years of mismanagement, and the deterioration of the reputation of this entity.

The uncertainty that this event recently began to spread to Deutsche Bank, which, although it has good levels of liquidity and solvency, is now facing the market's own fears in this scenario.

Despite their different reasons, the coincidence of these events fuels a global climate of mistrust.

The authorities' response was correct;

In the case of the United States, we see that the Federal Reserve quickly came to support all deposits, beyond the insurance provided by the system, in an effort to dispel doubts among depositors.

However, the transfer of funds from regional banks to the main financial entities could not be avoided, while some savers chose to allocate their resources to the demand for treasury bonds.

The probable concentration that the financial system will suffer -as a result of the decision of depositors to move to larger entities- and the lower lending capacity that the system will face -since part of the deposits will be used to demand US Treasury bonds- will affect the aggregate demand This is precisely the final objective of the contractionary monetary policy carried out by the Fed. In other words, the financial turbulence should pave the way for a drop in inflation.

This global scenario is not the most propitious for emerging economies, although the impact on each of them will depend on the initial imbalances that they present and the way in which the economic policy makers of each country face the new scenario.

The way in which a country is affected by the global context can be summarized in the impact on its terms of trade, the movements of capital to and from the country, and the situation of its trading partners.

The higher levels of interest rates that the US economy will maintain for some time and the expected slowdown in the pace of global activity have a negative impact on the outlook, while the impact on the terms of trade will vary by country, leaving winners and losers.

In the particular case of Argentina, internal factors exacerbate the negative potential of this scenario.

On the one hand, higher interest levels make financing more expensive for the private sector, and the final impact on the terms of trade could also be negative.

However, domestic problems clearly transcend the global situation, and include both recurring obstacles (relative price distortions, lack of access to financing, inefficient regulations, fiscal imbalance, etc.) and new obstacles, among which the drought that stands out currently plaguing the agricultural sector.

With a low level of own reserves and a poor flow of foreign exchange ahead, economic policy makers can only choose the combination of falling activity and inflation with which they will end the year.

Any attempt to avoid a recession by expanding public spending would collide with the economy's lack of financing and foreign exchange, leading to the loss of reserves and the need for more exchange restrictions, with the consequent widening of the gap and acceleration of the inflation.

Attempting an austere fiscal policy would allow greater control of nominal variables but, if the crisis of confidence is not reversed, a recession would be guaranteed.

Fernando Marengo is Chief Economist.

BlackTORO Global Investments


Source: clarin

All news articles on 2023-03-30

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