With Argentina’s currency tumbling as interest rates and inflation soar, fears are growing that the country could be on the verge of default – but analysts say that remains unlikely despite economic fragility.
Argentina defaulted in 2001 during an economic crisis in which the government was unable to handle debt of more than US$100 billion, a level it has once again surpassed.
“By Argentine standards that’s a large debt, but by international standards it’s not that big,” said economist Fausto Spotorno.
British analysts Capital Economics say default is not a “scenario” it envisages at the moment, although the outlook remains bleak.
“The recent turmoil in local markets means that Argentina’s recession will be even deeper than we previously anticipated,” Capital Economics said in an article outlining its downgraded forecast for the country, in which it says it expects GDP to drop four percent in 2018 and another two percent next year.
“A significant degree of fiscal slippage, a further rise in bond yields or another collapse in the real exchange rate would put the debt ratio onto a worrying path. That would make a sovereign default a real possibility.”
Unable to borrow on the open market, Argentina turned to the International Monetary Fund earlier this year and secured a US$50-billion loan, with an initial US$15-billion tranche of that handed over in June, in part to prop up its struggling currency.
The country is suffering from a crisis of confidence in the peso, which has lost more than half of its value against the dollar since the start of the year.
In a desperate bid to calm the turbulent waters, Argentina’s Central Bank hiked interest rates to a world-high 60 percent until at least the end of the year. But with inflation expected to reach 40 percent for 2018 and Argentines feeling the pinch from rising prices their meagre salaries are ill-equipped to cope with, fear and discontent are on the rise.
President Mauricio Macri’s austerity measures have been unpopular with citizens, while also failing to appease nervous investors. Some protesters have been chanting for the government to stop paying its debt, while Macri’s popularity has been falling.
The problem for economist Arnaldo Bocco is that Argentina’s “government is unable to give assurances over the solidity of its financial system.”
He says it needs to “show it can manage the exchange rate.”
Argentines have a long history of lacking faith in their own currency and normally save money in dollars. Some of that is held in banks, but low confidence in the system means savers are quick to take their money and run.
Since the start of the peso crisis in April, Argentines have withdrawn US$500 million from the banking sector.
That’s not quite on the level of the 2001 crisis, though, when the government froze savings accounts and some people lost everything.
“The monetary situation is critical in terms of confidence, but we’re a long way from 2001,” said Martin Vauthier, director at the EcoGo consultancy.
According to official estimates, sceptical Argentines are holding US$300 billion outside of their country’s financial circuit, either in cash or abroad, mostly in Uruguay and the US.
With the government proving unable to stabilise the peso, some economists advise restrictions on the purchase of foreign currencies in a bid to prevent a capital flight. But not everyone is convinced. “I think that would aggravate the depreciation of the peso,” said Spotorno, who said “capital control would be counterproductive.”