“We must forget the frequently used clichés of international experiences and look at Argentina for what it is,” he says. Although this is in reference to a new norm from the central bank, which instructs banks to set aside the same amount of capital for loans to individuals, companies, the state and others, it is emblematic of his attitude towards many foreign concepts.
Placing the blame
The internationally accepted differentiation of the state being the best credit and individuals being the lowest has been shown not to apply in Argentina, Mr Prat-Gay points out. Using that criterion incentivised banks to lend to the public sector. (Argentina has an estimated $94,300m of foreign and domestic public debt in default.)
He also blames the banks for lending to the state then, and for not lending to the private sector now, which must make his regular meetings with the banks rather heated. “They have not worked out for many years. The rules of the game were such that it was much easier to lend to the provinces than to dirty their hands trying to rate [differentiate between] private sector businesses,” he says. “Who in their right judgement would take on debt at 30% interest rates today? It is a process of price discovery, where the more aggressive banks will test what is the marginal rate at which loan requests will appear and the less aggressive will follow them.”
The banks argue that, even though there is about 30% excess liquidity in the system, there is no demand for credit. After the bank runs during the crisis in 2001-2002, they feel they need to keep excess funds in case of a repeat, while the depositors who have started returning are only leaving their money in short-term accounts, making it difficult to lend funds for the medium to long-term. There is the problem of balance sheets, which are, in the words of Ricardo Gutiérrez, a former president of Banco de la Provincia de Buenos Aires, “an expression of desire” due to a host of unresolved issues connected with the mismatch between assets and liabilities and government debt not held at market value.
Interviewed in the central bank in the heart of the financial district of Buenos Aires – which is cut off daily by protests by piqueteros (unemployed groups) – blue-eyed, black-haired Mr Prat-Gay looks every inch the London-based JP Morgan investment banker he once was. Then, however, he was not responsible for a financial system with a negative net worth estimated at $92m, as he is now.
Monetary policy
Banks criticise Mr Prat-Gay for being interested in monetary policy rather than the banking system. He denies the charge but gives it some credence when he shows his excitement at discussing the intricacies of money supply and presses the central bank’s first ever inflation report on me.
To be fair, the excitement is understandable: for 10 years the bank did not have to fulfil the usual central bank duties, due to the convertibility regime, and inflation targeting was not an issue. Mr Prat-Gay wants inflation targeting in place by 2005.
“He is more intent on creating a future system and does not accept that banks want to deal with the problems of the past,” says a top foreign bank executive. “For banks, there was an expropriation. We are willing to accept slow reparations. But he says you should start making loans and so reduce your losses, yet banks keep liquidity in case of a client run.”
However, it is not obvious that this is the central bank governor’s fault: debt restructuring and reparations are the province of the government, which has been dragging its feet on the issue. Mr Prat-Gay insists his relations with Roberto Lavagna, the minister of the economy, are fine but this beggars belief when the minister’s old-style, Peronist ideology is taken into account.
Some bankers express fear that the government may force them to lend. They also object to some of the new norms from the central bank, with which Mr Prat-Gay took issue, suggesting that I should have come to see him first, rather than the bankers, to have them explained properly. This points to a lack of clarity about the norms on the part of the central bank. Carina López, a director of financial services at rating agency Standard & Poor’s in Buenos Aires, suggests that confusion sometimes arises due to disputes between the central bank and the finance ministry.
IMF wrong-footed
Some arrogance can be explained by Mr Prat-Gay’s confounding of IMF predictions. He admits one of his most tense and difficult experiences in office was negotiating the IMF agreement at the end of 2002 and beginning of 2003. “We had to defend our vision. They insisted there was a monetary overhang and therefore we had to contract money supply. They thought that even when we did that inflation would be 35%. We expanded [the monetary supply] almost 30% and inflation is below 4%. That says a lot,” he says.
Repressed inflation, however, may explode later in the year (see ‘Crumbling away behind a façade of optimism’, The Banker January 2004, page 32).
Mr Prat-Gay also notes that international observers recommended allowing a number of banks to go bankrupt, separating the good from the bad, which he argues is based on examples of other crisis-ridden countries, like Indonesia and Mexico. The IMF has since realised that these cases bear no similarity to Argentina, he says.
“This does not mean that I do not believe there are no rotten apples in the financial system. There can be, and a lot of our supervision effort this year will be dedicated to identifying them,” he says. That should prove politically awkward: closing down a few banks will pit him against entrenched political interests.
He disagrees with those who say there are too many banks in Argentina, noting that, as a result of the contagion from the Mexican Tequila crisis, there was consolidation from more than 200 banks to about 90. After the latest crisis, the banking system cut staff by 20% and branches by 15%.
“It is not a problem of too many banks, but rather one of too few businesses so far. If banks could find revenue, with their streamlined costs…” he tails off. “This is why I am reasonably optimistic about the future. Only through retained earnings and new private capital can banks replenish their capital base at the pace that our regulations require. Unlike other countries, there is no possibility of a big cheque from the IMF or the US or the federal government. The only resource I have to recapitalise the financial system is time.”
He has picked up a few political traits so the chances of repeating his faux pas of May 2003 are low. Then, he said it was “un enorme disparate” [an enormous blunder] for President Néstor Kirchner to say he wanted a dollar at three pesos. Although Mr Prat-Gay denies he has an exchange rate target, daily central bank intervention has kept the dollar at about 2.90 pesos, which coincides quite closely with the exchange rate that the government wants.
Authoritarian stance
“He is honest and honourable, which is not a small thing in Argentina,” a former central bank executive says of Mr Prat-Gay. “But he is also very authoritarian and very ambitious. Every decision has to go through him, it reminds me of [former central bank governor Domingo] Cavallo. He has not bothered to develop a base of support within the bank, he only trusts his associate Pedro Lacoste [the bank’s vice-president who he brought on board].”
Mr Prat-Gay’s term ends in September 2004. Although he refuses to be drawn on whether he wants another term – and it is dependent on the government – his emotional response to the question of why he returned to Argentina provides an answer: “I left London in early 2002 to be closer to home. No-one who feels even a minimum for the country could wash their hands of it. I want to have a clear conscience that I have tried. One day I will have to explain to my grandchildren what kind of country we are handing over to them. I want to make sure I can say: I tried my best to do things a different way.”
Perhaps he is not that arrogant, after all.
