May 1, 2019 / 4:00 PM / a year ago

EXPLAINER-How Argentina crept to the threshold of crisis, again

    By Eliana Raszewski
    BUENOS AIRES, May 1 (Reuters) - Hobbled by recession and one
of the world's highest inflation rates, Argentina may be
lurching toward the next in a series of economic crises
afflicting the country over the last 70 years.
    Consumer prices streaked more than 54 percent higher in the
12 months through March in defiance of central bank efforts to
control inflation, fueling poverty and further damaging a 
business climate blighted by nose-bleed high borrowing rates.
    The peso           , which lost 50.5 percent of its value
against the U.S. dollar in 2018, has shed another 15 percent so
far this year, prompting the central bank on Monday to ease
limits on foreign exchange market interventions.                
    The situation is threatening President Mauricio Macri's
chances of being re-elected in October.
    How can this be happening again in a country that was once
richer than all its Latin American neighbors combined?  
    Macri was elected in late 2015 as a champion of free
markets, promising to "normalize" the economy after eight years
under President Cristina Fernandez, a free-spending populist who
placed tight government controls on the markets.
    He hired a cabinet of technocrats who promised to use
orthodox policies to bring down inflation, attract waves of
foreign direct investment and put the country on track toward
sustainable growth. 
    But some of the measures Macri promised would cure the
country's economic ills just gave it a different ailment.
    To attract investment, Macri set out to cut the fiscal
deficit. First on his list of budget cuts: the generous public
utility subsidies that helped families recover from a 2001/02
sovereign debt default and shock currency devaluation that
tossed millions of middle-class Argentines into poverty.
    As useful as Macri's budget cuts were on the fiscal side,
they had an unintended effect on people who had long taken the
subsidies for granted. Every time a water, electricity or home
heating gas subsidy was reduced, people's monthly utility bills
    The utility bills sapped the economy by reducing consumer
spending in other areas and boosted inflation as businesses
increased the price of goods and services to pay their own
rising utility bills. 
    After taking office in December 2015, Macri got off to a
good start. 
    He ditched Fernandez's trademark currency controls and
settled a long-standing feud with holders of defaulted Argentine
bonds, finally getting the country out of default. In October
2017 his governing coalition swept congressional elections.
Macri's political future looked bright. 
    But Argentina's high labor costs and activist unions known
for going on strike continued to scare off investors. The big
foreign bricks-and-mortar investment promised by Macri never
arrived and the central bank appeared flat-footed in dealing
with the inflationary threat linked to the subsidy cuts. 
    When the United States raised interest rates last year,
money started flowing out of Argentina and other riskier
emerging markets. All this pressured the peso, prompting the
central bank to increase interest rates, which further weighed
on the economy. A noxious circle of fear, low private
investment, recession and inflation deepened. 
    As the familiar doubts resurfaced about Argentina's ability
to pay its debts, Macri negotiated a $56.3 billion standby
financing agreement with the International Monetary Fund.
    The deal included a promise from the government to erase its
primary fiscal deficit in 2019. To hit the target, the Macri
administration cut more subsidies, further inflaming inflation.
    Meanwhile, the central bank's reference interest rate, the
one it gets for issuing short term notes, shot to over 74
percent, choking off what little credit there was for businesses
and households.
    Some Argentines have starting to look back fondly on the
tenure of Fernandez. She remains popular among low income voters
 who benefited from generous welfare spending during her
2007-2015 administrations. 
    Fernandez could pose a tough challenge to Macri if she runs
for another term in the October general election. 
    As much as the economy has suffered under Macri, many
investors fear that leftist Fernandez would be worse. The catch
is that when investors get nervous about political uncertainty,
they yank money out of Argentina, making it harder for Macri to 
pursue his orthodox policies and get re-elected.
    The president has already been forced to embrace some
populist policies, including grains export taxes and price
freezes on food staples, two hallmarks of the Fernandez years.
    This has generated concern among investors who say these
measures go against Macri's own market-friendly platform. 
    With the October vote up for grabs, the only certainty in
Argentina is that uncertainty looks set to reign during the
months ahead. 

 (Writing by Hugh Bronstein
Edited by Sonya Hepinstall)
Nuestros Estándares:Los principios Thomson Reuters
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below