Guido Sandleris: "It's a mistake to think that what's happening with the dollar and interest rates is like it was in 2018; there's no crisis, just more volatility."

-Is what's happening with the dollar and interest rates like it was in 2018, as some economists and banks are saying these days? You implemented a program, known in jargon as monetary aggregates, that seeks to control the amount of money on the streets.

I don't see a crisis today; I see a bit more volatility. And it's a mistake to think that what's happening with the dollar and interest rates is like 2018. I do recognize that there are commonalities between then and now. For example? An exchange rate that floats between bands, a monetary aggregates target, and an interest rate that moves endogenously. Then, one can say whether the dollar floats more or less, whether the rate is more or less endogenous, but there are similarities.

We implemented that scheme in the context of a currency run, when the dollar had already risen almost 100%, going from $20 to over $40. Our lower limit was above the current ceiling. There were no restrictions of any kind. In my opinion, the question that many are asking, not just you, about whether this is 2018 or 2019 is the wrong one. The question should be different.

-If what's happening now is the prelude to a dollar mess like what happened in 2017 before the elections.

-I don't see it. Look, in 2017, Cambiemos won the elections, I was in the Ministry of Economy, and six months later we had a phenomenal exchange rate mess. But after that exchange rate crisis, we implemented a system that could be described as similar to the current one.

-But could this be like 2017: a ruling party that wins the elections and is incubating a currency crisis?

The imbalances in 2017 were greater than they are today. The current account deficit doubled, and there was a primary fiscal deficit of four percentage points of GDP versus a slight surplus today. Furthermore, the influence of foreign investors in the carry trade in 2017 was much greater, meaning there was greater potential for damage from a reversal in capital flows, as ultimately occurred. Finally, Vaca Muerta is now an anchor that will generate dollars in the future.

Many say, "Okay, with those numbers," but the dollars aren't enough to cover the debt maturities the country faces in the next two years, and they're higher than what Macri had ahead of him in 2017.

-We also had quite a few debt maturities ahead of us, and in fact, part of the reason we went to the IMF in 2018 was to meet those obligations.

-Won't the high interest rates seen this week hurt the economy?

When you're a public official, you face a trade-off: let the dollar rise or prevent a spike by tightening monetary policy. So these higher rates reflect greater uncertainty. Greater uncertainty is bad for the economy and creates noise. It's obvious that interest rates at these levels for a long time negatively impact economic activity. But I don't see a crisis in the near future. When Luis Caputo says, "We won't lend a single peso until the elections," he's sending a clear message in that trade-off: he prioritized high rates to prevent the dollar from rising further, at the cost of perhaps damaging the payments system and, if it's sustained over time, also impacting economic activity. We'll see.

-The IMF warned in its latest staff report that these monetary aggregate schemes generate greater rate volatility and warned that monetary policy communication needed to be clearer. All these lights are coming on this week, with the economic team announcing measures on Twitter at 10 p.m. Do you agree with what the IMF is saying?

-Generally speaking, yes. Today, most Central Banks control the interest rate, not the aggregates, because the demand for the local currency fluctuates for many reasons, and it's very difficult to calculate the appropriate level. If you keep the supply fixed, the interest rate fluctuates a lot, and this is a problem in economies with developed financial systems, with a lot of credit, because it affects mortgage interest rates and complicates people's lives. But in Argentina, none of that exists. In 2018, we went for this scheme because the credibility of the inflation targeting regime had been severely damaged, and we were in the midst of a crisis. There was a fiscal deficit, fear that the Central Bank would finance the Treasury, and we had to clearly demonstrate that we weren't going to do the same. We said, "The monetary base isn't growing." But now the situation is different because there is fiscal balance, and the Central Bank doesn't need to finance the Treasury.

-And why did the Government resort to this scheme, then?

I'm not sure. There's something tempting, and that's that just as in fiscal terms there's a number that shows the balance of public accounts, monitoring the evolution of monetary aggregates allows us to see whether a monetary policy is lax or not. It's well known that these schemes generate volatility in rates, and I believe it was one of the triggers that led to the early exit from peso positions to dollars in July. If you're an unsophisticated investor and you have an investment and you see on your cell phone app that the yield fell overnight, well, maybe you'll get out. That's what the IMF pointed out in a section of the staff report.

-But the volatility that existed goes beyond this new scheme, right?

-That's right. It's normal that during election times, even when it's a midterm election, there's a bit more political noise and uncertainty, especially because Kirchnerism is still the dominant force in Peronism. The government was very successful with fiscal orthodoxy and monetary heterodoxy during these nearly two years in office. But it's true that they used the exchange rate, and that's causing the country to start to become more expensive in dollars. We experienced this process of dollar price increases throughout last year and much of this year. In almost all stabilization programs, one sees exchange rate lag, and what Milei did isn't something we've never seen before in economics.

-The government says that since credit's share of GDP is low, bank complaints are overrepresented. Is that correct?

-You're right that interest rate volatility has a greater impact if the financial system is more developed and larger. But that doesn't mean that the impact of raising rates is zero, and if it persists over time, I insist, it will have consequences.

There are two options. One path is the one the government explains: not releasing a single peso until the elections, maintaining high rates and a stable dollar because it's important to lower inflation. This path entails taking risks in terms of the payment chain, with the caveat the government makes: our financial system is small, and therefore the consequences if the measure isn't extended for a long time will also be felt. The alternative? Accepting a slightly higher dollar, which will make it a little more expensive for us in dollars.

-But we are seeing that the transfer to prices is lower.

-“Play Menger,” the Government would say...

-There's some evidence of that. But I think with the dollar slightly above $1,350, there would be little room for the exchange rate to rise further, and it would be a scheme that would reduce interest rate volatility and lower interest rates.

I think that having served in public office in positions of certain responsibility gives one empathy for those who hold those roles. Therefore, I understand the trade-offs the government faces, and I might be more comfortable with a few more reserves, a slightly higher exchange rate, even if that meant a little more inflation, but these are decisions that have costs and benefits.

Would it be a cause for concern if the dollar reached the ceiling of the band, close to $1,450?

-No. And I insist: I think the government shouldn't have any problems if it reaches the exchange rate it reached in July, plus some mechanism to reduce volatility in the interest rate in pesos.

-Could there be a problem renewing maturities, as happened in 2019?

I don't see it as such, because it was interest rate volatility, not their level, that reduced demand for peso-denominated assets, given that the risk of buying government bonds increased. That said, if monetary policy is adjusted based on what I said above, that appetite for these instruments and their demand should be restored. Of course, the maturities facing the Ministry of Finance are not irrelevant in the run-up to August and September. It's never a good thing to have a very high rollover wall build up in a given month, but to do that, you have to pay more interest, and well... with the benefit of hindsight, we'd like to see fewer maturities...

-When will country risk decrease?

-It will depend on the outcome of the elections and the accumulation of reserves. But for the latter, a higher exchange rate may have to be approved and inflation lowered more slowly. There's no way around it. But again: these are trade-offs that the government will evaluate.

According to Guido Sandleris, former president of the Central Bank of Argentina (BCRA), three factors combined to increase financial volatility in July: "The political noise with Congress pushing public spending and compromising the fiscal deficit, changes in the functioning of monetary policy, and a reduced supply of dollars, with the Treasury purchasing nearly US$1.5 billion. Sandleris also spoke about his past experience at the bank.

-How do you view the President's relationship with the Central Bank?

-The last few decades have taught us that independent central banks tend to achieve good results in terms of controlling inflation, but it's also true that in crisis situations like the one this administration inherited, thinking about an independent central bank that doesn't coordinate with the executive branch is a recipe for disaster.

Where does coordination end if there's so much closeness and the President of the Nation is an economist? Is it an advantage or a disadvantage?

Having a president who is an economist has the great advantage of perhaps being more aware of certain risks, and that allowed for faster fiscal corrections. The disadvantage is that at the bank, you have to pay attention to technical aspects on a daily basis, something that a president of the nation can't possibly do, even if he's the best economist in the world. So, a little more distance helps. When I accepted the position of president of the Central Bank, I remember having a conversation with Mauricio Macri. I had been working with the economic team at the Treasury and I saw how Macri spoke every day with Caputo, who was then in charge of the bank. We were coming off a few very hectic months in the exchange rate. So before taking office, I told Macri: "I accept the position, but it seems to me that one condition for this to work is that we can't be talking every day about how the dollar moved. Don't worry, if something relevant happens, I'll speak with the minister or you and explain it to you." But we can't talk about micromanagement because we have to leave some room for work, otherwise it becomes difficult. This does not mean not coordinating.

Do you agree, as many argue, that what the economic team needs is to define a definitive rule on the exchange rate, and that would remove the ceiling on the band to take the final step toward stabilization?

I wouldn't rush it. I think there's still time to consolidate what we have. Just as the government was very orthodox fiscally, it has been very pragmatic monetary-wise, and I say this as a compliment to the government, despite the mistakes it may have made. But with the initial gap, high inflation, and negative reserves, it's logical to change the monetary system. The end of that journey is what we all want: a normal country where the dollar floats, but I wouldn't rush it.

A memory: when my children were born.

A society you admire: I like the value of friendship in Argentine society, the family ties, and I would like to see greater respect for the rules.

A book: A story of love and darkness.

A hobby: Soccer, tennis and reading.

A project: accompanying my children.

A dream: to be Boca Juniors' number 9 and the national team.