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.
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%. Experts expect such containment to be short-lived and costly in the mid-term.