Argentina’s Malbec Man Showing Yale Grad How to Manage Peso

Argentine central bank President Juan Carlos Fabrega doesn’t have the Ivy League education to match that of his predecessor, Mercedes Marco del Pont. In fact, Fabrega has no university degree at all.

What he does possess is know-how acquired over a four-decade career at the country’s biggest commercial bank and as a farmer producing grapes for Malbec winemakers in his native Mendoza province. That experience helped guide Fabrega’s decision to implement measures -- including a peso devaluation and increase in interest rates -- that bankers and analysts say have stemmed a plunge in foreign reserves and quelled concern the country was heading for its second default since 2001.

“He has the ability to see things for what they are and not be dazzled by ideology,” said Federico Sturzenegger, an opposition lawmaker and former president of Banco de la Ciudad de Buenos Aires. “He knows what it’s like to be a producer. He gives the government the connection with reality they were lacking.”

Four months into his tenure, Fabrega, 65, is starting to win over bond investors as he pulls the South American country from the brink of financial crisis. Argentina’s dollar-denominated bonds have rallied for five straight weeks, rebounding from a selloff that had sent benchmark yields over 13.5 percent as foreign reserves dwindled to a seven-year low. No developing nation posted bigger gains in the debt market last month.

Tight Money

Whereas Marco del Pont, an economist with a master’s degree from Yale University, pursued the expansionist monetary policies favored by President Cristina Fernandez de Kirchner, Fabrega has taken cash out of the economy and lifted benchmark local rates by as much as 13 percentage points.

Under his watch, the central bank has drained 73.7 billion pesos ($9.4 billion) from the banking system this year to shore up the peso after January’s 19 percent plunge, safeguard reserves and curb inflation that soared to 28 percent last year. In Marco del Pont’s four years running the bank, the money supply grew at a 32 percent average annual pace.

Fabrega declined to comment through central bank press official Jose Luis Olivero. Marco del Pont, who’s now a director at Buenos Aires-based research firm Fide, didn’t respond to a telephone call or e-mail message seeking comment.

Days before leaving the central bank, Marco del Pont said in a speech in Buenos Aires that the country needed to take measures to combat inflation without damping consumption that has been fueling economic growth.

“The big challenge is to seek heterodox tools to bring about lower inflation without suppressing demand,” Marco del Pont said at a seminar on Nov. 15. “We will take all the needed decisions but without sacrificing gains we’ve made in this process that started 10 years ago.”

Repsol Deal

The shift has been so pronounced that some analysts question how much further Fernandez will let Fabrega pursue the policies. Like her late husband and predecessor Nestor Kirchner, Fernandez rode into office in 2007 on the strength of Argentines’ anger over budget austerity programs that deepened the country’s recession before the 2001 default.

As the commodity boom that swelled Argentine grain exports and funded fiscal spending faded, foreign reserves plunged to below $28 billion from a high of $52.7 billion three years ago, putting pressure on Fernandez to change tack. In recent months, her government has also arranged to pay Spain’s Repsol SA for the 2012 seizure of its local oil unit, proposed to settle a $10 billion debt with Paris Club nations and published a new inflation index after the International Monetary Fund censured the country for inaccurate data.

Budget Deficit

“You can argue if Fabrega is more or less independent but in the end, the one making all of the decisions is still Cristina,” said Juan Pablo Fuentes, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “This shift toward more market-friendly policies has her stamp of approval. We’ll see how much further they’ll take it.”

Fernandez, 61, needs to help Fabrega by also cutting government spending, Fuentes said. Expenditures surged 46 percent in January, topping the 45 percent increase in revenue and adding to the budget deficit. Argentina posted a 22.5 billion peso fiscal gap last year, the widest in at least two decades. The central bank’s peso printing in recent years was in large part aimed at financing the deficit, said Mario Blejer, a former Argentine central bank president.

“Now the government should address fiscal policy,” said Blejer, who ran the bank in the aftermath of the default. “Fabrega is doing a good job, but he can’t fix all of Argentina’s problems by himself.”

High-School Friends

Fabrega’s 46-year career at state-run Banco de la Nacion Argentina began in the late 1960s, when he took a job as an assistant in an office in Rio Gallegos, capital of the southern province of Santa Cruz.

His family had moved there from Mendoza when he was a child. He attended the same high school as Nestor Kirchner, who would go on to become governor of Santa Cruz before winning the presidency in 2003, and the two men cemented a friendship that lasted until Kirchner’s death in 2010.

Fabrega steadily climbed the ranks in Banco de la Nacion: from division chief to branch manager in Uruguay and Chile, then to general manager in 2003 and finally president of the lender in 2010, where he remained until Fernandez appointed him to the central bank in November.

Two months into the job, he carried out the devaluation, letting the peso fall to a record-low 8.02 per dollar. Investors initially were unnerved by the move. They dumped Argentine bonds, helping trigger a selloff across emerging markets in January.

‘History Books’

As Fabrega ratcheted up local rates and tightened the money supply to prevent further peso losses, capital outflows slowed and the bonds rebounded. Argentina lost just $100 million in international reserves last month after seeing $2.9 billion vanish in January.

The peso, which has strengthened 1.6 percent since the devaluation, fell 0.2 percent to 7.8744 at 4:25 p.m. in Buenos Aires.

Investors have driven the average yield on the government’s dollar debt down to 11.87 percent from a high of 13.61 percent last month, according to JPMorgan Chase & Co. Fabrega is ensuring financial stability, at least for now, said Sturzenegger, the opposition lawmaker.

“He doesn’t want to go down in history books as the central bank president who ate up all of Argentina’s reserves,” Sturzenegger said.

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