Argentina’s default risk a tale of central bank failure not just government mismanagement


Jeremy Weltman
Published on:

Risk survey contributor Steve Hanke puts the blame on central bankers as Argentina dives, pushing the country below Egypt in the global risk rankings.

Argentina's new president Alberto Fernández

A new year, but Argentina’s investors face a far too familiar problem, as the country embarks on another economic crisis plan under a new more left-leaning administration targeting a debt restructuring deal for the end of March.

In December, the lawyer and Peronist Alberto Fernández replaced the market-friendly president Mauricio Macri after he tried and failed to restore the country back to health.

Macri successfully lowered the primary fiscal deficit, but not without sovereign debt soaring from 53% of GDP to more than 90% – a sum equivalent to more than $100 billion – with Argentina seeking out the biggest bailout in the IMF’s history.

Venom is injected into the economy. The instances of the poison delivered by that snake bite are almost too numerous to count 
 - Steve Hanke, Johns Hopkins

Invariably, this led to a run on the peso, causing recession, sky-high inflation and unemployment of more than 10%, putting more people back into poverty.

While the peso collapse has improved the terms of trade to correct the current-account deficit, GDP contracted for a second successive year in 2019, by around 3%.

It has shrunk every other year going back a decade, as Argentina has repeatedly lurched from growth to recession. It seems almost certain to decline further in 2020.

In that light, it is understandable that analysts have downgraded all of Argentina’s economic risk indicators in Euromoney’s quarterly risk survey, precipitating a sharp fall in the global risk rankings between Q3 and Q4, to 97th (from 86th) out of 174 countries in total.


Arguably, Argentina should be even lower. Indeed, several contributors to the survey have indicated that further falls seem likely with Fernández admitting the country is in “virtual default”.

Much will depend on how the economic crisis plan and debt negotiations pan out.

His government has outlined spending pledges for pensioners and low-income groups, with tax hikes on foreign currency, agricultural exports and car sales, but uncertainty hangs over debt repayments after a request this week from Buenos Aires governor Axel Kicillof for creditors to accept a three-month delay on the provincial government’s debt repayments.

The unexpected move is signalling the far-left anti-business faction of the ruling Peronists led by vice-president Cristina Fernández de Kirchner are in no mood for compromises, which could make for some difficult relations in a cabinet comprising leftists and moderates.

Economist Joseph Stiglitz knows Argentina’s new economy minister Martin Guzman only too well after mentoring him and publishing together.

At this week’s World Economic Forum in Davos, he said there is only one way out, and that creditors must accept substantial haircuts.

The risks were obvious, he said, and many of Euromoney’s survey contributors would agree after downgrading Argentina last year, knowing full well that Argentina has a discomforting record of lurching from one crisis to another.


Steve Hanke,
Johns Hopkins

One of those survey contributors is the academic and financier Steve Hanke, who is especially critical of the central bank’s role.

Hanke has considerable experience of Argentina’s political economy and financial markets as professor and co-director at Johns Hopkins Institute for Applied Economics, Global Health and Study of Business Enterprise, and a former Buenos Aires-based president of Toronto Trust Argentina.

Peso crises

It is noteworthy, he said, that the frequency of these peso crises picked up after the establishment of the Central Bank of Argentina (BCRA) in 1935 – occurring in 1952, 1958, 1967, 1975, 1985, 1989, 2001 and 2018.

“Before the BCRA, Argentina [the peso] held its own against the United States [the dollar], with the respective per capita GDPs being roughly equal in 1935,” says Hanke. “But, after the BCRA entered the picture, serial monetary mismanagement ensued, and a great divergence began.

“Now, US GDP per capita is roughly three times higher than that of Argentina.”

When they strike, “venom is injected into the economy”, he says. “The instances of the poison delivered by that snake bite are almost too numerous to count.”

The only way to fix the problem once and for all, Hanke argues, is to “mothball the BCRA and put it and the peso in a museum”.

“Until Argentina dollarizes, it will be subject to the receipt of the peso’s poison,” he says. “However, the new government has expressed no interest in formal dollarization. Instead, it has embraced a number of policies that have failed in the past and will fail today.”

Inflation rose to almost 54% in 2019, its highest in almost three decades, and will likely remain in high double-digits in 2020.

The approach is different this time. Fernandez’s newly appointed central bank governor Miguel Pesce has lowered interest rates four times during the past month to improve liquidity, while easing restrictions on foreign currency repatriation.

Will it work? Only time will tell, but it seems investors are in for another bumpy ride.