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Is Argentina facing a new 2001 crisis?

Argentinian President, Mauricio Macri announced on Tuesday, during a televised message to the nation, that he has begun talks with the International Monetary Fund (IMF) for a line of credit, in order to avoid a crisis like the ones Argentina had before. The announcement by President Macri came after two turbulent weeks for Argentina; the Argentine Peso has been losing value against the dollar for the entire period, registering a 5 per cent depreciation only on Tuesday. The Argentine Peso reached a trough on Tuesday, just before the speech by Mr. Macri, when one US dollar was exchanged for 23.08 Pesos. On April 26th, before the turbulence entered in its most acute phase, the dollar value of the Peso was 20.23. This sharp devaluation experienced by Argentine Peso forced the Central Bank to raise the interest rates, reaching 40 per cent in spite of spending $5bn in reserves. Mr. Macri’s announcement had a positive effect on the markets since the currency slightly recovered to 22.30.

The situation faced by Argentina reflects the past continuous currency and debt crises of the country, especially when the country was forced to default on its debt in 2001. Now that Argentina is trying with difficulty to regain credibility within international creditors, Mr. Macri wants to avert another debt crisis by reaching out to the International Monetary Fund. While this strategy has registered positive feedback by the market, the same cannot be said about Argentinians. In fact, talking about the IMF in Argentina means talking about crisis.

After the fall of Bretton Woods system in 1971, the IMF reinvented itself becoming a crisis lender for emerging markets. In 2001, Argentina was one of the countries where the IMF intervention became necessary after the country’s $100bn debt default. The policies adopted by Argentina after the IMF’s aid brought the country on its knees: 20 per cent of Argentines lost their jobs, the peso experienced a currency crash losing two-thirds of its value and, in order to avoid bank runs, banks froze deposits. More than ten people lost their lives during protests and the country ran through 5 presidents in two weeks. Furthermore, the leftist Kirchner government, in power before Mr. Macri’s presidency, emphasized the negative consequences of the IMF aid. Therefore while the call for $40bn credit line from the IMF may calm the markets, it will hinder President Macri’s chance to win the elections in 2019 for a second mandate.

Although Argentineans fear the repetition of the 2001 crisis, the present situation is different. Previously, Argentinean currency was pegged to the dollar. The fixed peg, jointly with the adoption of a currency board, allowed the country to obtain monetary credibility after periods of really high inflation and continuous devaluations of the currency.

In fact, the main problem for Argentina, much like many emerging markets, was the non-stop debt monetization which led to significantly high monthly inflation rates.

The fixed peg with the dollar ended with a currency crash because of the strong effective real appreciation of the US dollar, which in turn led to a real appreciation of the Argentine Peso, badly affecting its exports and trade balance, therefore worsening the debt crisis in 2001.

At the moment, Argentina has a floating exchange rate, which has recently given the possibility to its Central Bank to offset the sharp depreciation of the Peso by raising the interest rate. Another factor that has changed compared to seventeen years ago is that a very large share of Argentinean debt, close to 50 per cent, is now owned by public institutions, while in 2001 it was mainly in private portfolios. This makes the probability of a default more remote. Furthermore, now bank deposits are mainly in pesos instead of dollars, which makes the life much easier for the Argentinean Central Bank.

Furthermore, the current political situation seems to be more stable than in the past years. In 2001, the Peronist opposition was strong enough to remove the government, however, it is without a doubt that President Macri will finish his presidential mandate in December 2019.

For these reasons, analysts think that comparing recent events with the 2001 crisis is exaggerated.Following President Macri’s announcement, Nicolás Dujovne, Argentina’s treasury minister, tried to calm Argentineans, proclaiming that the International Monetary Fund has changed since 2001.

Christine Lagarde, the IMF’s managing director, also affirmed that “Discussions have been initiated”. What remains unclear is the exact kind of program the IMF will decide upon with Argentina. In fact, given its actual economic conditions, registering an annual inflation rate of 25.5 per cent and large current account and fiscal deficits, Argentina does not satisfy the requirements needed for an IMF Flexible Credit Line (FCL). As reported by the IMF, FCLs are addressed to “countries with very strong fundamentals and policy track records”.

President Macri, during his speech on Tuesday, added that Argentina’s main problem is to be “one of the countries in the world that most depends on external finance, as a result of the enormous public spending that we inherited and are restoring order to”. He also underlined that during the first two years of his administration, begun in December 2015, low international rates have been “very favorable”.

Recent Argentinean issues, in fact, have been amplified by the monetary policy normalization ultimately undertaken by the US, which is still expected to implement two rate hikes this year. According to standard economic theory, a raise in the US interest rates might lead to a depreciation of the currency of Emerging Markets (EMs) such as Argentina, since international investors will gain higher returns investing in dollar denominated bonds instead of investing in Peso denominated ones. However, Jerome Powell, Fed’s chair since February 2018, has lessened fears by highlighting that US rate-setters were convinced that a series of American interest rates raises, as well as normalization of monetary policies in other advanced economies, would be manageable for EMs.




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