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When the currency continued falling, Argentina raised interest rates to 33.25%. Today, with the currency still in freefall, rates were raised again to a record 40%.
When the currency continued falling, Argentina raised interest rates to 33.25%. Today, with the currency still in freefall, rates were raised again to a record 40%.

Argentina in Trouble Again

Argentineans are tired of austerity and unions have been resisting reforms to labor laws aimed at making the economy more competitive

Argentina in Trouble Again

The election, three years ago, of the modernizer Mauricio Macri as president was hailed as proof that what was once Latin America's richest economy was getting back on its feet. Now, after the country's central bank raised interest rates for the third time in a week, it does not feel like that.
Inflation—a perennial bugbear for Argentina—is running at an annual rate of 25.4%, compared with the central bank's target of 15%, while the local currency, the peso, is in free fall. This time last year, it cost 15 pesos to buy one US dollar. Today, it costs nearly 22, Sky News reported.
Accordingly, in an attempt to stop the run on the currency, the central bank raised interest rates from 27.25% to 30.25%.
When the currency continued falling, it raised them again to 33.25%. Today, with the currency still in freefall, rates were raised again to a record 40%. It has been quite a fall from grace.
Macri, a businessman and former chairman of the football club Boca Juniors, came to power in a manner not dissimilar to his near namesake, France's Emmanuel Macron, with a new center-right party called 'Cambiemos' (Let's Change).
Promising to shake the economy from the bedraggled state to which it had been reduced by his left-wing predecessor, Cristina Fernandez de Kirchner, his first move was to overhaul the country's official statistics—which had been distorted egregiously to hide the weak state of the economy.
Kirchner's protectionist policies and tariffs were dismantled and foreign investors, who had been scared off, were welcomed back.
However, such was the dire state of the public finances, Macri was forced to introduce austerity measures to bring down a budget deficit that had ballooned under Kirchner. This was difficult and painful.
Argentina froze the price of gas, electricity and water in 2002, sparking a collapse in investment, leaving the country's power networks in a dilapidated state.
From being an exporter of energy, Argentina became an importer, while much public spending—instead of going on investment in infrastructure—was blown on energy subsidies to households and in corrupt payments. Other changes, which also courted unpopularity, included reforms to pensions.

Progress Visible
This was highly necessary: before Kirchner came to power, social security payouts, including pensions, consumed around one-third of the government's budget. Now, after years of Kirchner bribing voters with borrowed money, it consumes nearly half of the budget.
Progress was being made. Argentina's economy has grown by 3% in each of the last three years. A lot of the corruption under Kirchner has been removed and the prices of energy and transport are now closer to their market rate rather than being artificially depressed.
Accordingly, international investors backed Macri: astonishingly, the country issued a bond in June last year with a 100-year maturity.
That always felt like a triumph of hope over experience for a country that had defaulted on its bonds eight times since it won independence from Spain in 1816 but was a symbol of the confidence the markets had in Macri.

Going Gets Tough
Unfortunately, of late, he has found the going tougher. The public is tired of austerity and unions have been resisting reforms to labor laws aimed at making the economy more competitive.
Argentina has also suffered bad luck. For, as Macri was dismantling tariffs in a bid to make Argentina more competitive, some of its main exports have been hit by other factors.
A drought and subsequent crop has hit production of soybeans, one of Argentina's leading exports, depriving the country of a key weapon in the battle to bring down its budget deficit. Production of processed plums and peaches, another key export, has also been hit by the drought.
Adding to the pain has been the rise in the US dollar, a frequent cause of pain to emerging market economies such as Argentina, which often denominate their debts in the greenback. An estimated $100 billion has been borrowed during the past two years.
When the dollar rises against the peso, the cost of servicing that debt goes up, while investors holding peso-denominated assets demand a greater return for the risk of holding them. That has sparked the run on the currency seen this month.
For older investors, the whole saga is reminiscent of the Mexican crisis of 1994 and the Asian crises of 1997.

 

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