Innocence and banks

Last Wednesday, Argentine deputies finally passed two government bills with strong majorities after being sidelined for over two months. However, these reforms do not represent a significant electoral advantage or the much-needed structural changes the international community has been calling for. The "fiscal innocence" system is being tweaked, essentially a tax whitewash, which makes it even harder to balance the budget in a struggling economy.

The Central Bank charter revision is not a monumental shift but rather a backdoor allowing public debt bonds in statutory reserve requirements. Additionally, the reform strengthens the Central Bank's independence on paper by requiring a two-thirds majority in both houses of Congress to remove the governor and directors. This could perpetuate the current governor's tenure, who happens to be the business partner of Economy Minister Luis Caputo.

The Central Bank authorities were not even elected by a simple majority in one house of Congress, making it almost impossible to remove them. This reform comes at a time when almost half of the population is in debt, with around a third of cases reaching unpayable levels. The question arises: which debt should be tackled first, internal or external?

Some of these arrears can be attributed to irresponsible spending, but many were driven by credit, a key aspect of the modern economy that was promised under a potential Javier Milei presidency. Despite the government's efforts to block off Central Bank reserves for foreign debt payments, relief for family debts poses a slippery slope that could lead to state bailouts of accumulating bills.

While the revision of the fiscal innocence legislation places some restrictions on access for officials, it also risks tax evasion continuing until the next reform, as seen in previous administrations. The legislation marks a minimal advancement towards the structural reforms constantly discussed in negotiations with the International Monetary Fund (IMF).

The triad of labour, pension, and tax reforms is expected to be the solution, but progress has been slow, with only a diluted labour reform so far. Index-linked pensions constitute around 40% of the national budget, making it a significant part of the problem caused by dwindling revenues. Addressing pensions without major tax reform is challenging, especially when considering the weight of export duties or the cheque tax.

The good news is that Congress has ended its long hiatus, with the 2027 Budget as the next task. However, it remains uncertain how much legislation will be processed before being overwhelmed by the upcoming election campaign. In summary, Argentina faces a pressing dilemma of internal versus external debt, with ongoing reforms that may not be enough to address the country's economic challenges.