Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Aloway

and I'm Joe Wisenthal.

Joe, we are in Washington DC. Do you know who else is in our nation's capital? Lots of people, lots of people are in our nation's capital. Yes. Right now. The I could go on and on. There's a lot of people live there permanently, but also a lot of people visiting this week like we are.

True.

Okay. So, one person in particular is visiting who is of note for this particular podcast. And that is Javier Malay. He is the president of Argentina and he's meeting with Trump today. They're supposed to finalize like the $20 billion swap that Argentina just got from the US Treasury. Basically, Argentina is getting their like eenth bailout. I tried to count all of them, but then I stopped because I was like, I have a life. But normally, a lot of those bailouts come from the IMF. This one's coming from the Treasury, so it's fairly unusual. It also comes with a lot fewer terms than some other deals.

But this is a good time to talk about Argentina and why it seems to constantly be in financial trouble and either defaulting or on the verge of a default. You know, I'm like traumatized by Argentina topics, right? Wait, why? Well, I've probably said it once or twice before on the podcast, but you know, one of the first time I applied for a job in New York City was with uh Brad Settzer. And he was like, and in the middle of the interview, he's like, "How would you character?" This is 2006, maybe. He's like, "How would you characterize the struggles of Argentina?" And I just totally blanked. I like literally didn't get a word out and I didn't get the job obviously. So, I've sort of this is a huge blind spot for me and it's almost like a blind spot I'm afraid to revisit, but we have to dive in. I have to learn more eventually. One more bailout. This one's going to work, right? This one's going to be the last.

One one more lane, bro.

Yes. So, and you know the the other interesting thing about this is Malay was he was initially praised for reducing inflation. I think it was something like over 200% and it got down to 33% which by US standards still pretty high. But he did that by slashing government spending and selling Argentina's FX reserves to prop up the peso. And now fast forward a little bit of time and that approach doesn't seem to be working anymore. So again, there's lots to talk about.

There's so much about Argentina that confuses me, including like why is it like this? Because there are lots of countries that have institutional struggles of various sorts. There are a lot of countries that are poor. There are a lot of countries that whatever. I can't think of any other country that just is always always at the trough like this. It's not that poor of a country, etc. I don't really understand why this is this persistent thing distinct to this country.

All right, our first question will be why is Argentina like this?

Yeah. Why is Argentina like this?

And then after we record this interview, you can write a little essay for Brad Setszer and send it to him for his job. Yeah. And then he'll hire me.

All right. Well, I am very happy to say that we do in fact have the perfect guest. We are going to be speaking with Gregory Moff. He is the author of Default: The Landmark Court Battle Over Argentina's hundred billion dollar debt restructuring. I read this book when it first came out. It was absolutely fantastic. And even though it's about, you know, a very complex court proceeding, it's it's a page turner and there are lots of really interesting anecdotes and lots of interesting personalities as well. So, Greg, thank you so much for coming on the podcast.

Thank you for having me.

Well, for the history, they

start from the very beginning.

Start from wherever you want.

They spend too much.

Okay. But lots of countries spend too much.

Well, they've they're particularly politically divided and do have a reform effort. Countries have a crisis, then they reform. Hopefully, they embed the reforms and they graduate to a certain level of stability. But whereas the Mexicos and the Brazils and the Peru and the Colombia and and the Panmas did succeed in the '9s in their Brady programs and have not defaulted since Argentina and Venezuela have been distinct in not reforming and massively overspending.

That's the big difference. There's no magic or no mystery here.

machine politics, peronism.

So, all I know about Argentina comes from basically your book. I covered the New York court case a little bit when I was at the FT, but also all my knowledge comes from Andrew Lloyd Weber's musical Eva, which is fantastic and I highly recommend, but can you explain what peronism is? Yeah,

Peronism is kind of a shape shifter, but it goes back historically to Juan Peron who was the president or dictator for a while in the 50s and he in the post-war world was aligned with labor forces and cut the country off from the outside world nationalistic. It became a political machine that controlled the apparatus of government and the unions and everything. So it embedded itself. Carlos Menim, the president in the '9s who reformed was a peronist. He had the political machine, but he was a reformer, an imperfect reformer, and that broke down in 2001. But then the Kchners were also peronists and they have a particularly viralent version of Peronism, which is really what we're talking about here is Kchnerism.

So peronis come in many different flavors and when we're talking about the current situation it's really the kchner version of peronism versus the melee version of let's finally balance our budget.

I want to get to MLE obviously but just go into this a little bit more machine politics again not something that's alien to other countries in the world that's fairly common. talk about the sort of application or every country has some kind of machine politics. What makes that kchnerism etc so powerful and difficult to dislodge? How is it operationalized? The machine

the way the cash moves.

Okay.

In that if you get a a bailout check during co you get it from the federal government in the mail.

Okay. In the 2001 crisis, some of the emergency money that was allocated even from international institutions was given to Argentina who was given to peronis party operatives to hand out in the barios. You literally get checks from party operatives or in regions from the party governor under a picture of the governor in Peron. So in many cases the cash flow looks like a gift from the leader and the party and then when the leader says oh there's a peronist rally in Buenosares we'd like you to get on a bus the people who depend on them for the check say I guess I got to go.

Wow I had no idea that happened. Okay, so Malay campaigned on a platform of massively reducing government spending in order to bring down inflation and all types of austerity. It wasn't necessarily IMF style reform, but it was supposed to be a reduction in spending. And yet here we are and Argentina is getting its 20 billion bailout. Do the politics of economic pain, I guess the idea of people no longer handing out checks in the barios and stuff like that, does that make serious spending reductions just untenable in Argentina?

We should back up a bit and get a bit historical

because the people voted in 2023 for Mille because they were in such economic chaos. They voted for a complete outsider with a very particular message that had a lot of truth for them. And his promise was pain now, success later. Let's finally have reform and sustain it to stop this 200 years of boom bust devaluation and default.

Now the context of this just from 2001 is the country the program of the 90 of menum falling apart and facing a devaluation and default hundred billion dollar debt default as I talk about in my book.

The people were in the street screaming, "They all must go." And they were banging pots and pans, clink, clink, clink, clink. And the president left in a helicopter from the the top of Kasa Rosada. And they had a reform program. They ran a very tight budget, tighter even than Millle is running between 03 and '05.

But then they didn't sustain the reform. And after 2010, they've been in the boom, then the bust and default from 2010 to 23. So again, they voted for mele because they were saying they all must go. The rest of the political class who couldn't deliver must go. We want stability. Now the brilliance of Millle is he said

we spent too much. We print too much money. we have inflation. And that was true. And he symbolized it with a chainsaw,

right?

Because it was the problem and the solution. I've seen pictures of him at a rally. He's not even talking. He just holds it up.

That's really powerful.

And he lent that chainsaw to Elon Musk as well.

Oh, he did?

Yeah. That was that was Malay's chainsaw. Wait, what happened to that other guy? Wasn't there some guy like around 2016 or 2017 that all the international community loved and thought he was going to be the great neoliberal reformer there?

That was Mackery.

Oh yeah, Mackery. Right. What happened to that guy?

Well, the people were tired of the chaos of Christina Fernandez Durchner who was president for two terms after her husband Netor was president for one term.

He died after her first term. He was going to run again. So she had two and things were bad including on the bond default and all the litigation and MRI is like I'm going to bring a normal country and he did some great things at first but his program fell apart which brought back an even worse peronist administration with Alberto Fernandez who had been the chief of cabinet for Neesa Kchner with Christina Fernandez de Kurtchner as the vice president and then COVID hit. They did default again and they handed over the reigns to Millle with like 150% annualized inflation.

So there was an urge to reform under MRI but he had such a bad imbalance of too much monetary emission in the local market. He couldn't get out from it fast enough. He tried to slow walk it and be gradualistic and he couldn't make it through.

So Malay took a chainsaw to government spending in Argentina. It seems inflation did come down. Why do they need a bailout now? Their eenth bailout. Actually, I should ask you. You might actually know how many times Argentina has been bailed out.

I have the number on how many defaults.

Okay.

The bailouts. We'd have to check the number. But first of all, I would term the Treasury support is not a surprise and was always in the cards from the IMF program in April. M the IMF program for what it was doing in the negative reserve position they inherited from the prior government was always too thin. They were always vulnerable to a speculative attack. They were always vulnerable around the midterm elections and a speculative attack occurred and as Treasury hinted they would they stood behind the IMF. This is nothing new. This is not a failure of the program. This is completely predictable.

The way it unfolded in the speed leaves a bad impression, but as an observer for a long time, this was no surprise. In Besson's word, we really need to have an orderly election here. This is true. The people have to choose. Are we going to sustain reform and stop defaulting

or are we going to go back to the other way and go back to overspending money printing devaluation inflation and default? There's a very stark difference between what the kissoff leadership of the party will lead the country to and what a continued leadership by Millle and a centeright coalition. Well,

can you actually explain a little bit further? Reform is a nebulous term. Sounds good, but I don't really know what it means. What substantively have we seen from the current administration in terms of either spending cuts or so-called reforms? What's been done so far?

The single number to focus on is the primary surplus.

Okay.

It's kind of like the free cash flow for a company,

but it's your net cash flow before your debt payments. your revenue in minus your expenses and your debt does not stabilize unless that's positive and positive enough to pay off your existing debt at a reasonable pace. Countries like us, the US, we're running negative primary surplus which means we're incurring more debt and we're refinancing maturing debt with more and more which has debt going up. Argentina to stabilize its situation has to run a primary surplus of let's say 3%.

Under Minister of Economy Levana who was a great reformer from 2002 to 2005 when Kchner fired him for being too tough. They were running a 5% primary totally stabilized the economy. Millle's program is carefully calibrated to stop monetary emission and stabilize the economy. There's nothing arbitrary about it. It is the kind of macroeconomic stabilization that you have to do. It makes sense and moreover it is done sensitively. They protected the basket of money available to the poorest households.

So where are they cutting?

They adjust a lot of different things. Most importantly, they did things like you don't get free buses anymore. You don't get free trains. So they moved the costs of those things up to a market rate and utilities because the Kchners they also defaulted on all the utility contracts in 2001. They never normalized utility rates. So one of their fiscal problems around 2000 after 2010 is they were subsidizing the power bills for everyone which was costing 4% of GDP a year. That's why you have a primary deficit. And they said we can't do that.

So they corrected those popular household subsidies and they did some adjustments including to the indexation of pension and that's a next level topic in terms of what the Kchners did to reindex the whole society.

So, we've been very focused on what Argentina itself is doing and why it seems to be in a perpetual financial predicament, but maybe we could talk about the role of external actors a little bit more. So in your book again, fabulous story of the big um court case over Argentina debt, but one of the criticisms of this whole process is that every time you successfully work out defaulted debt or every time you reach a settlement, the country can just return to market fairly quickly, right? So it's never really punished that much or enough to make it seriously think about reducing its debt. Is there some truth to that? Are there things that external actors like the court system or the IMF should be doing to stop this from repeatedly happening?

I really think the question you ask is the most important one, but it's really about the soul of the Argentine people. Have they had enough pain to insist their government

follows robust financial policies? They either elect people who will be straight with them about what they can afford and set up policies they will follow like Gordon Brown's golden rule and things like that or they will elect politicians who say, "Oh, I'll make it easier on you."

And so the people shocked me in 2023 on finishing my book. I was depressed. I saw no way out of perpetual chaos. And then Millle came and they voted for him because the people said, "Please, we want to be an orderly country." Now we're at the midterm, put aside the last 6 weeks of chaos.

You're asking the people, "Will you stick to the plan to get to the finish line, or are you going to say, "We're tired. We don't want to try so hard again." They may very well go for Miller and Mackery and say, "We do want to complete it. we we didn't like this blow up that happened. We don't want to go there or they're gonna do something else. So, no outside party can tell a sovereign nation what to do. No judge. The judge makes it worse.

Mhm.

The IMF, it has to come internally.

Is the problem democracy? I mean, we've talked about No, for real. Like we've talked about this in the context of um Fritz Bartell uh wrote a book um the triumph of broken promises. Similar story with the post Soviet states and how they ultimately broke apart from the Soviet Union because of the sort of difficulty that they had in making difficult decisions and these attempts to impose austerity or live within their means etc. and they finally like it didn't work anymore and and in the early 80s somehow the UK found a way to you know sort of do an internal adjustment but these things are like really hard in a democracy they're really hard in a system in which every two years there's a referendum on how it's going and if it's painful I understand why people don't want to continue with it even though maybe long-term it's beneficial like I'm not really proposing this but like in your view does someone like a Main need like a nice like 10 year or 20 year runway where he doesn't have to face the voters.

You know what I'm saying? Like is this the issue is that these difficult things keep coming up for a vote over time and in the middle it's like what are we getting here?

Yeah. And somebody wrote a book a black rock manager gave me. He says, "Greg, this is the best book. It's called a free country deep in debt

about the histories of countries getting in debt." He said, "You don't need to know any more than that. But there's this challenge between democracy and running a balanced budget. But populations learn and I heard I think it was a Moody's analyst or a Fitch analyst last year talking about the debt trajectories in Europe. He said France is going up and this country is going up and the UK is going up. But you know what? Greece is going down and Spain is going down and Italy is going down because the crisis country people don't want to go through the disaster again.

So when you have people like Argentina who dealt with hyperinflation, they don't want to be lied to. They know the cost of no pain now and suffering later. Now Americans, we don't know. We're willing to have the government massively overspend because we want low taxes now and more benefits now and we don't know what a imbalanced budget mean. You can go forever. But when you've been in Argentina and you've suffered it, you want a government who says, "I'm not going to overspend because you've lived the cost."

Countries, the people embed that knowledge in their voting behavior and they can sustain it year after year. That's called graduating. That's the point of this election, this midterm. Did the Argentine people get the message and they are now going to sustain the path because they understand the costs or are they going to just say, "I'm tired of it. Let's go back." We don't know the answer. We will know on the 26th of October after they vote on the 27th. And it's an incredible historical moment that we're facing.

Okay. So, the new bailout that's getting finalized today in DC between Trump and

we're recording this the 14th, by the way, October 14th.

I should have said October 14th. So, the new bailout does have direct US involvement. I know you said it was part of the earlier IMF agreement, but still people are, you know, talking about the US doing a $20 billion bailout of Argentina. Do you think that involvement changes maybe creditor debtor dynamics in the future?

I think in the short term, right now, it's a big bazooka to stop a run on the bank.

There is a speculative attack on the Argentine peso at the worst possible time and the Perona start amping it up. Christina Fernandez de Kchner, I think it was October 1st, is on X saying, "Oh, he's going to devalue right after the election

and okay, pour more speculative attacks on. That's kind of odd behavior towards your own country." And so, Treasury is responding by putting a huge bazooka. It's very expensive to be short. And so this should put all those shorts out of business. They have an orderly election. And you don't even know the extent that these sort of external things nobody understand really affects behavior. They're living their life. They're worrying about their bills. They're know their local stories about what's happened, what Millie has done and hasn't done, and what people are saying. This is just another piece of noise in a complicated picture. external creditors. That's a different question. This is perceptually very important. Bonds started rallying because you have people like was it Bob Catron said he immediately bought a lot of bonds and they went up and he's saying, "Oh, Treasury is backing Argentina. You buy long-term bonds because of short-term bailout. That's a risky thing to do, but it's pro Argentina. It helps stabilize the situation." But the market is so afraid

of kissalof in particular. So not just peronism which I explained it had reformer men in early Nester Kchner was quite reformist but it has this Kissalof Christina Fernandez de Kchner version of Peronism which involved notorious defaulting and Kisalv was directly involved with the nationalization of YPF in 2012 which you know led to the $16 billion judgment. in the court because the way minority shareholders were treated the non-payment of some GDP warrants that were due I think in 2013 which led to a 1.5 billion judgment in the UK court and was deeply involved with Christina Fredanis de Kurtchner dner in the redault under the Perry Pasu threat in 2014

went to New York and failed to negotiate in a deal which was basically on the table slightly better than what MRI took two years, a year and a half later, but wouldn't take it or couldn't figure out how to take it. And so foreigners see this ghost of default their past as coming back into power. So if they see any big chance of Kesal coming back, they're going to run. So that's how the bond holders buying dollar bonds in New York think. They're very happy when Treasury comes. But we should talk for a minute about the election and what success means.

Can I ask one more question before we talk about that?

Yeah.

Why do investors keep buying Argentina bonds?

I should play you this tape. The second circuit in one of their two hour and a half hearings. Judge Pooler, Rosemary Per, who was the nice judge in very kindly voice at the end of a hearing looked to Argentina's council Jonathan Blackman and said, "Can I ask you a question sort of off the record?" He says, "Sure."

She says, "Why would anybody who can read ever buy a bond from Argentina?"

That's right.

Jonathan Blackman had the best answer. He's like, "They didn't default arbitrarily. They were suffering a crisis worse than the Great Depression. It was like VHimar Germany with middle class people selling their furniture on the street. Like he was brilliant in that spontaneous answer to the question. But I keep thinking of that question and we're back there. But Millle and the P party with Mackery and reforms they don't need a lot at this election in the sense with 33% of the lower house they continue to veto legislation they don't like and rule by decree and things. So the chance that the peronas completely take over the legislative branch is really low. We're just facing a more bigger picture perceptional question. Which direction is the mind of the voter going in leading to the next presidential election? Are they really tired of MLE and they're going to go back to Kisoff as their leader or are they going to stick in the reformist direction with some complaints and demands for readjustment of direction?

So what should we watch? So okay, tell us a little bit about what date is the election again?

October 26th.

Okay. So what what should we be watching for on that day so that we can be smart and I can you know post a tweet that's insightful or something like that.

It's first the percentage that Mille's party gets,

okay?

Plus the percentage that MR's party gets plus then the percentage that other center reformist center right parties get. And you want to know they have blocking minority, a veto proof minority in each house. That's the minimum. But you would hope that they get a majority as a coalition in let's say the lower chamber. So there's between the best case and the lower case. What the markets, the bond holders in New York would fear is a sort of blowout for the Peronist and the strong message from every corner of the country.

What's the name of the Ponist party?

It keeps changing its name. So right now they often set up a new legal vehicle for every single election. So the name changes so much. So I kind of

Yeah.

avoid the names.

Okay. But it's the Peronis party.

Yeah. Now what they're calling themselves is for Patrea like homeland party.

Got it. I see. So there the reason these anxieties kicked off is because there were some small regional elections in which they did well which got people in the minds of thinking oh they might have a really good midterms. Oh, no. It's far more fun than that.

Okay, good.

And there's a lot of history in this.

Okay, good.

It was not a small regional election. It was the biggest region of Buenosares who had an offcycle early election for provincial offices and it was a deliberate political ploy to bring down Melee. Here's the history. 2019 in the presidential election, they had the primary in let's say July, August. the presidential elections in October. The weirdest system ever called the POSO is the primary where you don't vote by party for your candidate within the party. Everybody votes for all the candidates

and those who run for a party are those who ran better, but it's kind of like an early vote on who's going to win. And Alberto Fernandez with the former president Kchner running as his vice president did so well that the markets tanked. It was a self-fulfilling prophecy

that Mack's people can barely make it to the finish line because the currency and local interest rates and bonds were exploding. And so that lesson meant mille in February said we do not want to have a paso. We don't want to have a primary. We just want to have the election in October. So they got the senate to agree to take the paso off the table. But then kiselof where the strength of peronism is in the buenosares province where a lot of poor people are. He said, "Oh, let's have our provincial election 6 weeks or whatever before because we know we'll do well and they anticipated Millle would pound his chest. I'm going to get the majority and he might fail." And he did fail.

And even though he got let's say 35% which nationally would be his veto proof minority that he minimally needs to continue to rule, it was less than he said he'd get. So he did not manage the perceptions well and his political team got stung by that and he admitted it wasn't handled well. So there was a lot of history in this early vote being engineered and as far as the corona concerned it was a perfectly executed attack on the stability of his program.

So this speculative attack is not a failure of the program. It was really a deliberate political process ahead of an important vote.

I have a question actually about um MLE. You know, he has this whole vibe. He's sort of a colorful character. I think he quotes like Austrian economists and stuff like that, calls himself a libertarian and sort of iconoclastic and all that. But setting all that aside, like would you characterize his economic program as like fairly normie IMF style regular economics?

Yes. And you have to separate the political character

from the policy. And you have behind him, remember he got elected. He did well in the Po the primary in 2023. I don't know if it was 35%. And he beat out MR's candidate. So MRI said, "I'm going to support you." So he got to 55% trouncing the Pronis opposition with MRI support. But part of the deal was that Millle then took the superstars, the financial superstars of MR's administration, Caputo and Basili to be his minister of economy and as head of his central bank. Already Mille had chosen Federico Sterszenegger Harvard professor had worked in the MRI government too to be his head of reform has been churning out pages and pages of reforms to make the country more efficient. He has the tightest best technical team behind him. Great economist negotiating with the IMF making sure the execution of the plan is perfect which is not something Argentina has ever seen. Having looked at 30 years of history, this is an amazing tight team. They work together as a team. Melee completely supports them. But on top of them, he says all kinds of wild things. He's kind of a Trumpy character like that. So, you have to separate the sort of wild things he says from the policy.

So, if I could ask you to put your betting cap on, if you have one, how do you think this plays out? Does Mille retain the majority and Argentina is now on a path to non-default after many many many years or are things going to go sideways again?

I think they'll be fine. I think the events of the last few weeks will be noted in the history book. But the people want normaly. Argentina can always surprise you, but having looked at what they've lived through, they understand what's happening. And I'm hopeful that this shocking instability has reminded them of what's going to happen if they don't stick with the plan.

You mentioned that the um MLE character is sort of Trumpian. Trump himself, is he Malayan? Whatever is like where like if you thought like okay Trump who does he remind you of in Argentina

Peron.

Okay.

It's totally ironic. They're total opposites. I've written pieces about this. You have two characters who bind at an emotional political character level. One of whom is massively overspending in the United States. The other one is running the most disciplined reform ever. And they're best friends. And then we have this bailout. You can't make this up. So non-fiction.

Who needs fiction when you have Argentina?

No. Indeed. All right. Uh Greg, thank you so much for coming on OddLots. The book is Default: The Landmark Court Battle over Argentina's hundred billion dollar debt restructuring. And if you're interested in this topic, definitely go pick it up. That was fantastic. Thank you so much.

Thanks, Greg. That was great.

Thank you.

Joe, that was very interesting, very timely. Do you feel like you could write a little answer essay for Brad Setszer now?

I mean, like for a job interview when I'm 25 or 26, I could probably maybe come up with I literally had it was so embarrassing. I like it's like you open your mouth and no words come out. That's what happens.

Yeah, that's painful.

What I'm really interested in still is why the political environment is as messed up as it is or messed up as it seems to be and what is it about Argentina specifically that somehow other countries like the Mexicos etc didn't fall into that trap. But also like you know if it gets going say I don't know I worry I worry about I worry about all kinds of things but corruption debt etc. It seems like you could fall into some very bad very bad cycles that are hard to escape from. Well, it also feels like there's a tension between what Greg was saying about, you know, the Argentinian people need to decide if they've had enough of, you know, being serial defaulters and high inflation and if they're willing to trade that for austerity.

But on the other hand, you know, having someone come out to the bario and hand you a check for a bunch of cash sounds really good. So, it does seem to be a a decision for sure.

Yeah, it seems really difficult. And there's just, you know, there's just the reality that, okay, you can get by without help from abroad, but then you might have to deal with sort of a massively reduced standard of living, devalued peso, etc. No, no easy options here.

Yeah. I'm also still kind of wondering who is buying Argentina bonds all the time.

Let's find an investor. I mean, haven't they haven't they done well? Don't they always like, you know, they end up with a a bond in a yacht or something like that? Don't they end up they get a ship?

It was bigger than a yacht. Yeah. All right. Shall we leave it there?

Let's leave it there.