The peso crisis highlights the fragility of the argentine economy

A panel indicates the value of the argentine peso against the dollar, the may 8, 2018 in Buenos Aires (Photo by JUAN MABROMATA. AFP)

Argentina seems to have managed to solve, at least in the short term, the peso crisis and stopped its depreciation, by deploying the heavy artillery, even though this policy is untenable in the time, noted the analysts.

To stabilize the peso, the central Bank of argentine republic (BCRA) raised its key interest rate at 40% and injected in a few weeks, more than $ 10 billion to support the currency.

The argentine president Mauricio Macri wants to be reassuring, saying “overcome it, the turmoil on the foreign exchange market”, while pointing the finger at an endemic evil: the budget deficit in the 3rd economy in Latin America, however, increased from 6% to 4% of GDP since coming to power at the end of 2015.

“It is obvious, otherwise, one enters into a logic of permanent funding for the State. It is a true structural problem, although identified long ago by the IMF, which is difficult to resolve politically,” says Stéphane Straub, an economist at the Toulouse School of Economics (TSE), founded by the Nobel Prize winner Jean Tirole.

– High rates, a risk –

“In time,” continues the French economist, if the rate were to remain at this level, it will pose problems in the medium and long term. But to be able to lower the rate, it is necessary that the confidence comes back, this is where the intervention of the IMF may be useful, to restore confidence and halt the outflow of capital and the pressure on the currency.”

Annual Inflation over 20%, trade balance deficit, 4% of the budget deficit, cripple even the attempts at reform of the 3rd economy of Latin America, whose annual growth was 2.8% in 2017.

To the economist, argentine Matias Carugati, the recent instability in the exchange rate reflects “a crisis of confidence due to the fact that Argentina’s economy is quite fragile”.

It should pay an investment to the tune of 40% “is not tenable in the medium term, it is a very short-term rates to reassure the foreign exchange market.”

Etranglée by the debt when the economic crisis of 2001, Argentina was declared in default of payment. Since then, any convulsion of the economy reminded of this painful episode for the Argentines.

– Argentina solvent –

The centre-right government of Mauricio Macri, elected in 2015, ensures that it is temporary, the time to clean up the economy after years of mismanagement, the liability remains very moderate, but the debt of Argentina has exploded in the past two years. The opposition to Mr. Macri is worried.

The recent issuance of Treasury bills are very attractive for investors, further increases the debt.

For Matias Carugati, there is no need for panic, “if it is occasional and not recurring. If the situation stabilizes, there will be room for issuing bonds at a lower rate”, but it can also lead the economy to recession.

“Argentina, he said, has no solvency problem, as long as there is on the horizon in the medium-term economic growth and inflation, which converge to normal levels, and a tax adjustment. If this is possible, we’ll see”.

The 42 million Argentines are eager to see the economy rebound, and are many to fear the intervention of the IMF, and the conditions of budgetary rigour that they generally pose.

Mauricio Macri has sought the assistance of the Fund, in the form of a loan, but ensures that the organization will not dictate the procedure to follow. “Nobody’s going to ask conditions, he says. They will tell us how much will be the reduction of the deficit, but it is up to us to decide how we will reduce it”.

“The IMF is associated with the painful episodes of the history of argentina, acknowledges the economist Stéphane Straub, but this is not the same IMF, or the same leaders (argentina) in the 1990s. The government of Macri pays for the broken pots, poor past management and the make-up statistics. There is a necessary adjustment”.

The argentine minister of Economy Nicolas Dujovne has warned: “we are going to have a little more inflation, a little less growth” in 2018, due to the peso crisis of avil-may 2018, which marks an inflection point in the governance of Mauricio Macri.

For its part, the IMF said on Thursday that it intended to conclude an agreement “soon” with Argentina, noting that the situation in the country is very different from what it was 15 or 20 years.

“The IMF could advance quickly, and has the intent to move forward quickly,” said his spokesman, Gerry Rice during a press conference, however, without the advance date to the extent that “the details (of the agreement) are in discussions,” and “the exact terms of the agreement still to be discussed”.

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