"Cavallo will have to make an adjustment. He cannot cure the evil with words"

"Sooner or Later, Cavallo will have to make an adjustment. He cannot cure the evil with words."

In this way, Roque Fernández talked about the economic outlook of the country, though he expressed certain optimism: "Argentina can grow 2-3% this year if Cavallo does something with the public spending".

He criticized harshly the possibility to use government bonds as cash reserves: "Thus, a Bonex (government bonds) plan could be implemented," and talked about what will happen in the next months with the country risk. This is the dialogue Roque Fernández had with Ámbito Financiero:

Journalist: When will Argentina start growing?

Roque Fernández: With an optimistic view, we could reach a level of 2-3%, because even though problems have not been solved, I am hopeful that Cavallo will do something with the public spending. The psychological approach used by Cavallo, by means of which he thinks that he will pull the country out of recession if he cheers Argentineans up, is completely wrong. It is as if we had a bleeding ulcer and we went to the shrink. The ulcer is bleeding; the expense is high and country risk, too. You cannot cure them with words.

J.: Which will be the impact of the elections on the economy?

R.F.: Unfortunately, over and above the people let's forget Cavallo for a while- we have always had in the Ministry of Economy somebody who does not conduct political campaigns. On the contrary, the minister of economy is the bad guy, the wet blanket of those who do carry out campaigns. In my case, it was me that rejected Canal Federal and Plan Laura. There is always a bad guy who says "It can't be done, it can't be done...". This is the reason why there is a troubled relation between the Ministry of Economy and the political circle. Here we have somebody with a checkbook and his own political agenda.

*Cash Reserves

J.: What do you think about the decision taken by the government and the Central Bank to make use of bonds as cash reserves (liquidity requirements of banks)?

J.F.: It is said that it is voluntary, but higher interest rates are paid, and the Argentinean bank knows that a Bonex plan or something of the sort could be implemented by means of which depositors will be paid. When we are just coming out of the effects of the Bonex plan we start creating a new Bonex plan. We are heading for a remunerated cash reserve system, generating a quasi-fiscal deficit again. What were we used to before? We increased reserves and, in order to prevent deposits from going to Uruguay, we paid cash reserves. Today, we pay cash reserves with bonds and generate a dynamics in that direction that is not good.

J.: The Central Bank should have rejected this measure, shouldn't it?

R.F.: No. In order to make transitions easy, the Central B has to be willing to help the incoming minister. I was especially worried about the special powers granted to the Executive to make changes in self-regulated entities. I believe that the most important of those entities is the Central Bank. Senators wanted to know my opinion and I told them that "I do not know about the other entities, but I think that the Central Bank should not be changed". Part of Argentinean strength was provided by the Central Bank and its autonomy.

J.: Were you taken aback by the fleetingness of López Murphy?

R.F.: It was an ingrate surprise. I think it was a political mistake.

*Right

J.: He should not have put forward something that was impossible...

R.F.: No, quite the opposite. During Menem's administration we worked on the State Reform, and we made up the list of companies that were going to be privatised, we did it with one company at a time. When we included in the list FF.CC and YPF, we said that it would never happen. And then Menem arrived and privatised everything. López Murphy did the right thing; his position was technical, honest and personal. We could debate some points, but he needed at least a 2,000 million spending cut. Sooner or later, Cavalo will have to make an adjustment of about 2,000 million. López Murphy suggested it right forward and knew that it would be a problem, but he faced it, supported it and discussed it. Now we have a hike in taxes, and, for the time being, he does not have a mechanism to contain public spending.

J.: But he collects...

R.F.: I you apply part of the tax on debits and credits against the taxes that must be paid, this means that the collection of VAT, Income Tax and Gross Income tax will not be paid any more. The fight against evasion is still pending. Tax evaders who leave trace are very few. Everything paid in terms of the tax on check will be subtracted from VAT and Income.


J.: Can the new convertibility become into force this year?

R.F.: The proposal is the result of the fact that Cavallo can no longer battle with an issue that he himself put forward. Instead of taking back what he said and support the present exchange system, which has had good results and has provided a decade of stability and growth, he is planning to change what is doing well in order to distract. Saying that it is being discussed in Congress is a way of getting rid of the problem. The congress could say that the convertibility law will not change until a full agenda is discussed and, thus, could guarantee people that the 1-to-1 parity will not be touched. That is to say, the congress could do away with the uncertainty generated by the Economy Ministry.