Monetary policy: Argentina takes its bitter medicine
Another financial crisis has rocked the country. As it slips into what could be a deep recession, time is running out to achieve the recovery that could create the conditions for a pro-market candidate to win next year’s presidential elections.
Illustration: Jonathan Williams
Gradualism is dead in Argentina.
In its place a new strategy has been devised to tackle the country’s monetary and fiscal challenges. It has just begun to be implemented.
But it is going to be a strong, inflation-fighting medicine with many serious and unavoidable side effects and a level of toxicity that may kill the administration’s ability to govern.
The most obvious side effect will be a deep recession, already underway and that is expected to be lead to a contraction of around -2.5% this year. It will also drag on and likely lead to negative growth in 2019 – a presidential election year.
Meanwhile the country’s banking sector is back in the survival stance it adopted under the previous president, Cristina Kirchner.
As the recession hits and interest rates rise above 70%, the demand for credit has evaporated, with the exception of the distressed and the desperate. Everyone is monitoring asset quality, which has begun to deteriorate and carries the threat of much worse.