Daily Management Review

Is the IMF pushing Argentina to a new crisis?


The central bank of Argentina raised the key seven-day Leliq rate from 45%, to 60% to stop the peso collapse, which depreciated by more than 50% since the beginning of the year. At the same time, the regulator promised that the rate will remain at this level at least until December 2018. According to Bloomberg, following the auction on August 30, the Argentine currency fell to the dollar by 13%, to 39.25 pesos per dollar.

The key rate at 60% is currently the highest in the world, according to the Bank for International Settlements (BIS). Turkey, experiencing the financial crisis, in second place (17.75%), and the third is taken by Mexico (7.75%). The statement of the Central Bank was preceded by a teleconference of President Mauricio Macri, in which he urged the IMF to accelerate allocation of the next tranche of financial assistance to the country within the framework of a $ 50 billion credit facility approved by the executive board.

Recently, Turkey has been in the limelight. At the beginning of the year, the dollar could be bought for 3.7 Turkish lira. In June for 4.7, on August 13, the dollar price jumped to 7 liras, although at the end of the month the lira slightly strengthened to the level of 6.5 liras per dollar. The main reason for this, in addition to domestic problems of Turkey itself (for example, the current account deficit in April was $ 5.43 billion), has become tensions in relations with the US, such as sanctions against Turkish officials, the tariff war between countries. Apparently, it is risky to quarrel with America. But what could possibly go wrong with Argentina?

In late 2015, the right-centrist and a prominent businessman Mauricio Macri came to power. He promised to correct the accumulated imbalances - a high level of budget deficit (about 6% of GDP), chronically high inflation, a long underestimation of prices for energy resources and transportation. Macri's emphasis was on preserving the budget deficit, which had to be reduced in a few years. Investors believed in promises. But with the first adjustments to inflation targets in the direction of deterioration, investors began to withdraw capital from the country.

The state already had debts, and now Argentina is loaning more money from the IMF to repay previous ones. But the devaluation of the peso leads to an increase in foreign debt denominated in foreign currency. The real debt load increases, which weakens the economy, and this, in turn, leads to further pressure on the Argentinean currency. The rate of the Argentine peso has fallen more than twice from the beginning of the year: from 18 to 38 pesos. Therefore, the Central Bank of Argentina is trying to keep the course in all ways. Thus, Argentina received the highest interest rate in the world - 60%.

Also, there are big problems inside the country. Over the past 3 years, the figures have fallen significantly: in early 2015, the unemployment rate was 6.9%, inflation was about 12%, the trade balance was mostly positive (indicating good export earnings), GDP was about 1%. What now? Unemployment has increased to 9.1%, annual inflation has already exceeded 30%, the trade balance has been negative for 5 months, but GDP has grown to almost 4%. However, with other indicators, increasing GDP growth rates create additional inflationary risks.

Argentina is now waiting for another tranche of the IMF and perhaps it will stop the peso falling. However, as history shows, no country that fully complied with the IMF's instructions has emerged from the crisis. All measures only give a respite of problems, which grow as a snowball and become heavier.

At the same time, the IMF began to give money to Argentina at high interest rates and demaned for reforms. As a result, the country in 2014 again lost about 50% of the purchasing power of its currency, and the new government of Argentina is still in the same crisis as the country's economy. Attempts to get out of the debt hole, including with the help of China and Russia, continue, but raising the key rate from 45 to 60% leads to a new economic crisis in the coming weeks. At the same time, Argentina belongs to one of the largest economies of Latin America, which in this case has to be said with regret, and its collapse will lead to the domino effect in other countries of the continent, because there are also very unstable positions.

source: reuters.com