Argentina began formal talks with the IMF on Thursday as it sought emergency financial support to stabilize its economy which is still recovering from decades of socialism.
It is seen as a controversial move in a country with painful memories of involvement with the multilateral lender.
Argentina’s Treasury minister, Nicolas Dujovne, was expected to meet Christine Lagarde, the IMF’s managing director, to discuss a “standby arrangement” with the fund the Financial Times reports.
Argentina is once again seeking IMF aid after a series of drastic interest rate rises failed to stop the slide in the peso, in a blow for a country that was taking small steps to restore its credibility after years as a financial pariah.
President Mauricio Macri inherited a bloated fiscal deficit from the previous administration but has taken strides to reduce it. Last week Mr Dujovne cut the target for the primary fiscal deficit for 2018 from 3.2 per cent to 2.7 per cent, in an attempt to calm panicking investors. It has raised interest rates to 40 per cent to defend its plummeting peso.
Argentina went from robust to bust in a matter of months, leaving investors scratching their heads. Among the mysteries: why the country’s record hoard of currency reserves—often seen as shield against foreign-exchange volatility—did so little to stem the crisis.
The lesson seems to be that loads of dollar reserves alone can’t make up for weakness in a country’s economic underpinnings. Foreign investors who had been burned by Argentina’s repeated defaults over the years, reassured by the country’s rising reserve bulwark, edged back into the country in recent years, buying up assets like a 100-year government bond issued in June last year, the Wall Street Journal reports.
“If they thought they could defend the currency by selling the reserves, to be honest they wouldn’t have raised interest rates to 40%,” said Carl Shepherd, portfolio manager at Newton Investment Management. When a currency is falling, central banks can sell dollar reserves and buy the local currency to prop it up. But in Argentina’s case, the maneuver failed to reassure investors.
Argentina’s situation may also shed light on whether reserves will prove more useful against a rising dollar elsewhere among the world’s most vulnerable economies. Turkey, whose currency has weakened sharply against the dollar this year, is a clear focus for investors.
The country is not quite repeating its own crisis-ridden history. Argentina today has a reformist government largely intent on doing the right thing, rather than the populist administrations that blighted its recent past (see article). But its troubles are real. Many wonder if they will spread to other emerging markets. Several economies share one or two of its vulnerabilities. Mercifully few share all of them.
Argentina’s rate of inflation, which exceeds 25%, seems to belong to a lost world. Only in Egypt, Nigeria and Turkey (among notable economies; socialist Venezuela is on a different planet at 18,000%) is inflation even in double digits.
Mr Americana, Overpasses News Desk
May 10th, 2018