In the year and nine months that Alfonso Prat-Gay was president of the Banco Central de la Republica Argentina (BCRA), he won such praise and respect for its ability to stabilize the exchange rate, lower interest rates and regenerate internal institutional mechanisms that it was widely believed that President Nestor Kirchner would offer Prat-Gay and Pedro Lacoste, his vice-president, an extended term before the expiration of their appointments on September 23.
But in yet another sign of continued institutional weakness and political and economic uncertainty, on September 17 Kirchner and Prat-Gay agreed to disagree and the respected former Wall Streeter stepped down, making way for the seventh central bank president in less than four years.
The not completely unexpected resignations will, knowledgeable sources say, lead to a hardening of positions on the debt restructuring by Argentine authorities. Rumours of economy ministry resistance to a Prat-Gay/Lacoste reappointment frequently circulated as Minister Roberto Lavagna and the central bank chief were believed to disagree on the government's debt negotiating strategy. Sources close to the central bank, moreover, insist that Prat-Gay and Lacoste were seeking additional assurances of BCRA independence which, in part, meant a less politically influenced selection of directors.
Whatever lay behind Prat-Gay's departure from the central bank, his arrrival there on a steamy Southern Hemisphere day in December 2002 was, as analysts consulted by Emerging Markets attest, one of the critical steps towards Argentina's emergence from chaos. When he was taken to meet then President Eduardo Duhalde at the official residence in Olivos, an upscale neighbourhood north of the centre of Buenos Aires, the weather wasn't the only reason temperatures were running high.
A year had gone by since the country plunged into one of the worst crises in emerging market history. During the 12 months since rioting led to the resignation of President Fernando De La Rua, the decade-old currency system ? called Convertibility as it pegged each peso to the US dollar ? collapsed, three presidents came and went, bank deposits were frozen and then forcibly converted to massively devalued pesos, and the country defaulted on nearly $100 billion in foreign debt. Argentina, whose economic management had been gushed over by the international financial community, was a pariah.
While no one can deny that Argentina remains a deeply damaged country, it is not at the nadir it reached when the then 37-year-old economist Prat-Gay accepted the position of head of the central bank. And the monetary policies applied by the Bank have contributed mightily to Argentina's economic recovery.
daunting times
Was Prat-Gay daunted by the immensity of what lay ahead at the time of his appointment? Not really. ?We had a clear diagnosis of what needed to be done when we were appointed to the BCRA,? he says in an interview with Emerging Markets before his departure. ?Without that, it would have been difficult to do some of the things we did.? But, he admits, it wasn't easy.
?Just to give you a flavour of what the reality was like, remember that Argentina then had 13 currencies other than the peso and they totalled some 35% of the amount of pesos in circulation. Second, about 75% of banking deposits were frozen. We had no monetary instruments and not only was there no agreement with the IMF, there were actual disagreements. Inflation expectations were in the range of 40% and interest rates were 50%,? recalls Prat-Gay.
On top of that, he and Lacoste, his partner in an economics consultancy firm prior to joining the government, didn't realize the extent and magnitude of the problems they would wrestle with in terms of monetary policy and financial policy, especially regarding the banking system.
Calculated risk
So why would an affluent, successful former JP Morgan analyst and currency strategist take on such a challenge? ?We were convinced that we had the business cycle on our side,? explains Prat-Gay. He and Lacoste were among the very few who had already observed signs of life in the economy in mid-2002. ?We figured it is a calculated risk and we should give it a try.?
Perhaps the most audacious and effective action that Prat-Gay took came early on. Despite resistance from IMF officials, the BCRA moved quickly to expand money supply, providing the liquidity that has supported a record ? and totally unexpected ? 8.8% rise in GDP in 2003, which has continued, albeit at a slower pace, this year. While the ministry of economy continues to forecast 6.5% GDP growth, the BCRA is sticking with its more optimistic prediction of 8%. The 25% increase in money supply over the last two years has occurred exactly as Prat-Gay and Lacoste anticipated: without fuelling inflation, which by year's end will be within range of the lower target set by the Bank ? 4%.
Inflation targeting
The second most important achievement and the one that Prat-Gay seems to feel most proud of is the introduction of inflation targeting as a major innovation in Central Bank policy. Prat-Gay understood that the BCRA had to reinforce the floating exchange rate system as strongly as possible and as quickly as possible. That didn't mean just daily interventions in the currency market; it also meant removing foreign exchange controls as well as searching for benchmarking, a kind of predictability.
?If Argentina wasn't going to have a foreign exchange anchor ? which it had almost always had ? then it would have to be a monetary anchor. That's the reason for the adoption of inflation targeting,? he says.
Information spread
The third accomplishment is closely tied to the goal that Prat-Gay saw as critical for the BCRA. Systematically reinforcing channels of information sharing ? through publishing its reports and the results of its information gathering in hard copy and on its website ? is part of a strategy to raise public awareness about what a central bank is and what it does. After 10 years of Convertibility during which the Bank functioned like an ATM machine, the task is, says Prat-Gay, ?to turn the Central Bank into a real central bank?.
This has meant shoring up the research department and recruiting additional expertise to guarantee the desired quality of, for example, its quarterly Inflation Report. According to Prat-Gay, this is a long-run institution-building goal that will lead market agents, journalists, investors and financial community members to expect the highest level of transparency. ?If you want true central bank independence ? and I do ? you have to earn it,? he says.
If Prat-Gay's performance was faulted for anything it was the gradual pace of bank restructuring and the introduction of new regulatory procedures. Paulo Vieira da Cunha, chief Latin American economist at HSBC, says that this thorny area has been treated with ?benign neglect?. Prat-Gay had been consistent in arguing that the capitalization of the banking system had to come from within and that it would take time.
Revival?
There are indications that the banking system, which defied prophesies of imminent collapse in early 2002, may be reviving. According to BCRA data, in May banks made profits of 420 million pesos and in August reporting, four of the larger banks reported steeply lower losses and positive operational gains. Moreover, in the second quarter of the year lending increased by 35% on an annualized basis.
It will be up to his successor, Martin Redrado, who was previously deputy foreign minister, to see if he can continue what Prat-Gay successfully began.