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1. Why is the Argentine peso collapsing now?
Though Argentina’s economic problems have been building for a while, the recent collapse was triggered by disjointed and vague communication by elected leaders. On the morning of Aug. 29, Macri said the International Monetary Fund had agreed to expedite cash payments to Argentina as part of a $50 billion credit line. But IMF officials didn’t comment for several hours, and Macri’s government was mum on details of timing and amounts. Eventually, the IMF said only that it would consider Argentina’s request to speed up disbursements. The Fund’s Director, Christine Lagarde, will meet with the country’s Treasury Minister, Nicolas Dujovne, on Tuesday to discuss revisions to the agreement.
. How did we get here?
A mix of bad luck, bad communication and confusing policies have plunged the peso in 2018. The central bank unexpectedly cut interest rates in January despite no signs that inflation was slowing down. That raised questions about whether Macri’s administration was controlling monetary policy, despite publicly saying the central bank was independent. Then a historic drought ruined the country’s top export, soy. Rising U.S. interest rates and emerging market selloffs in May and August compounded Argentina’s problems. And Argentinians appear unconvinced that Macri has the political will before next year’s election to cut spending faster and cover debt payments.
3. Is default a possibility?
Despite concerns among some weary Argentines, the nation isn’t staring another 2001 in the face and shouldn’t default anytime soon, according to Martin Vauthier, an economist at Buenos Aires-based consultancy Eco Go SA. That’s because its repayment schedule is manageable over the next year and much of the debt is in pesos, not dollars, he said.
4. Is this similar to or different from Turkey?
The challenges are similar but the policies are night and day. Both countries have large fiscal deficits and large amounts of debt denominated in U.S. dollars. But while Turkey’s President Recep Tayyip Erdogan has unorthodox economic vies, Argentina followed the textbook recipe of hiking interest rates, selling reserves and cutting spending faster. Markets however, are taking a dimmer view on Argentina based on fundamentals, writes Tom Orlik and Felipe Hernandez from Bloomberg Economics. ”Argentina has a larger fiscal deficit and higher inflation than Turkey," they note.
6. What else can be done to contain the peso?
With the benchmark interest rate now at 60 percent, the world’s highest, Argentina must turn to less conventional ways to remove excess money in the market. The central bank has sold billions worth of dollars at auctions to defend the currency, but that hasn’t done much good. What Argentina really needs, if it’s going to stop traders fleeing from its currency, is a quick narrowing of the budget deficit. Coming into this year, Macri sought to gradually cut spending. “A fiscal adjustment shock,” Goldman Sachs economist Alberto Ramos wrote in a note, is “the antidote for the market’s lost confidence.”
. “A fiscal adjustment shock,” Goldman Sachs economist Alberto Ramos wrote in a note, is “the antidote for the market’s lost confidence.”
1. Why is the Argentine peso collapsing now?
Though Argentina’s economic problems have been building for a while, the recent collapse was triggered by disjointed and vague communication by elected leaders. On the morning of Aug. 29, Macri said the International Monetary Fund had agreed to expedite cash payments to Argentina as part of a $50 billion credit line. But IMF officials didn’t comment for several hours, and Macri’s government was mum on details of timing and amounts. Eventually, the IMF said only that it would consider Argentina’s request to speed up disbursements. The Fund’s Director, Christine Lagarde, will meet with the country’s Treasury Minister, Nicolas Dujovne, on Tuesday to discuss revisions to the agreement.
. How did we get here?
A mix of bad luck, bad communication and confusing policies have plunged the peso in 2018. The central bank unexpectedly cut interest rates in January despite no signs that inflation was slowing down. That raised questions about whether Macri’s administration was controlling monetary policy, despite publicly saying the central bank was independent. Then a historic drought ruined the country’s top export, soy. Rising U.S. interest rates and emerging market selloffs in May and August compounded Argentina’s problems. And Argentinians appear unconvinced that Macri has the political will before next year’s election to cut spending faster and cover debt payments.
3. Is default a possibility?
Despite concerns among some weary Argentines, the nation isn’t staring another 2001 in the face and shouldn’t default anytime soon, according to Martin Vauthier, an economist at Buenos Aires-based consultancy Eco Go SA. That’s because its repayment schedule is manageable over the next year and much of the debt is in pesos, not dollars, he said.
4. Is this similar to or different from Turkey?
The challenges are similar but the policies are night and day. Both countries have large fiscal deficits and large amounts of debt denominated in U.S. dollars. But while Turkey’s President Recep Tayyip Erdogan has unorthodox economic vies, Argentina followed the textbook recipe of hiking interest rates, selling reserves and cutting spending faster. Markets however, are taking a dimmer view on Argentina based on fundamentals, writes Tom Orlik and Felipe Hernandez from Bloomberg Economics. ”Argentina has a larger fiscal deficit and higher inflation than Turkey," they note.
6. What else can be done to contain the peso?
With the benchmark interest rate now at 60 percent, the world’s highest, Argentina must turn to less conventional ways to remove excess money in the market. The central bank has sold billions worth of dollars at auctions to defend the currency, but that hasn’t done much good. What Argentina really needs, if it’s going to stop traders fleeing from its currency, is a quick narrowing of the budget deficit. Coming into this year, Macri sought to gradually cut spending. “A fiscal adjustment shock,” Goldman Sachs economist Alberto Ramos wrote in a note, is “the antidote for the market’s lost confidence.”
. “A fiscal adjustment shock,” Goldman Sachs economist Alberto Ramos wrote in a note, is “the antidote for the market’s lost confidence.”
