Argentina finds itself in a very familiar place: in the throes of another financial crisis.
It’s like old times. The peso is tumbling, hyperinflation is back, foreign investors are fleeing and the International Monetary Fund is readying a massive bailout.
On the one hand, Argentina’s history of serial economic failure is hard to fathom. The country seemingly has it all – vast mineral and agricultural wealth, a highly literate population and a diversified industrial base. A century ago, it was one of the richest countries in the world, a magnet for immigrants and investors, and full of promise.
Instead, it has endured a century of decline.
Argentina is a cautionary tale of how dysfunctional politics and populism can ruin everything. This is a country where no one trusts the government and key institutions, including the central bank and the currency. Argentines have decades of evidence to validate their wariness.
With each crisis, Argentina has been slipping backward economically. In 2016, the World Bank downgraded it from a high-income to a middle-income country, on par with Colombia.
Argentina is especially vulnerable to the vagaries of global financial flows because it is so dependent on foreign borrowing. Nearly two-thirds of combined government and corporate debt is denominated in foreign currencies, most notably the U.S. dollar.
Rising global interest rates and a surging U.S. dollar have been lethal to Argentina. It has sent the peso plunging, and inflation higher.
Argentina’s right-leaning president, Mauricio Macri, made matters worse earlier this year when his government prodded the central bank to cut interest rates even as inflation was edging up again. That spooked foreign investors. By April, the central bank was forced to reverse course. It raised its benchmark interest rate to 40 per cent and sold off foreign reserves to prop up its currency.
The arrival of the IMF is a mixed blessing. The Washington-based emergency lender is loathed in this country of 43.6-million people. Most remember the last time the IMF intervened, with many Argentines blaming it for plunging the country into a depression in 2001 and an eventual loan default.
Unemployment spiked to more than 22 per cent, there was a run on its banks and millions of people fell into poverty. The peso lost 70 per cent of its value.
News of an imminent IMF backstop has calmed markets a bit.
The fear now is that Argentina may be the proverbial canary in the coal mine when it comes to emerging markets. It’s unusually exposed to rising global interest rates, but it’s far from alone. There are hints that Turkey, Brazil, Russia and South Africa are also facing foreign selling pressure.
Global investors have been on the hunt for high yields in recent years. And countries such as Argentina, which were on an economic reform track, were attractive. Last year, Argentina floated 100-year bonds with a yield of nearly 8 per cent – a rate that was attractive to both the government and foreign investors.
Until recently, Mr. Macri seemed to be making progress in tackling swollen public finances. His government cut civil-service jobs and curbed subsidies to utilities. He also lifted currency controls and cut export taxes. But Mr. Macri has been hampered by resistance from the country’s powerful labour unions.
These reforms could prove even more difficult with the IMF involved. Three-quarters of Argentines oppose taking money from the IMF.
Seeking to ease fears in Argentina, IMF managing director Christine Lagarde insisted Friday that its financial aid, expected to be worth at least US$30-billion, has the full buy-in of the Macri government and aims to create “equitable growth and robust job creation.”
There are no easy answers for Argentina. The country spends too much, borrows too much and saves too little – creating a false sense that life isn’t that bad. Inflation, now running at more than 25 per cent a year, is the price of fiscal and monetary recklessness.
But it is unsustainable. Countries such as Argentina that depend heavily on foreign debt and low interest rates are at high risk.
Getting a backstop from the IMF, however unpalatable in Argentina, would go a long way to restoring confidence in it and other emerging markets.