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CAPITAL MARKETS

Is Argentina headed for the rocks?

The rhetorical battle between Argentina’s government, the IMF and bondholders is heating up but the bigger – largely ignored – issue appears to be the country’s looming financial collapse.

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As the IMF negotiating team arrived in Buenos Aires on February 12, comments from the Argentine government and the central bank led to sharp price movements of the sovereign’s debt – both in hard and local currency. However, while the market’s focus is on the issues surrounding a debt relief agreement that is “sustainable”, there is a surprising lack of debate about the fact that the economy – on its current trajectory – is itself completely unsustainable and headed for a sharp crisis.

The country is already in recession and is facing a set of challenges that even orthodox economic policies would be hard pressed to meet. Meanwhile the country’s president, vice-president, economy minister and the governor of its central bank remain committed to a mix of price and capital controls to create a semblance of stability in inflation and the exchange rate.

In January, Argentine inflation surprised to the downside, coming in at a monthly rate of 2.3% and an annual rate of 52.9%. The Central Bank of Argentina (BCRA) reduced its policy rate by 400 basis points to 44%.