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OPINION AND ANALYSIS | 15-07-2022 13:00

The opposite of drowning in a glass of water

Argentina, eternally in crisis and trained in resilience, clearly has an opportunity, and the worsening of the situation may be pushing the country toward a resolution, even if certain politicians do all they can to resist it.

For the first time in quite a while, the rest of the world seems headed down a similar path as Argentina, with inflation looking increasingly uncontrollable and a looming recession that will hit both rich and poor nations alike. Global poverty has been on the rise, just like in our country, and there’s a very real risk of a cascading global debt crisis given rising interest rates and slowing or even negative growth. Social unrest has been on the rise, recently claiming Sri Lanka as one of its latest victims as president Gotabaya Rajapaksa was forced out of office and fled the nation given energy and food shortages, a situation that could quickly spread to other countries on the brink. And then there’s the war, with Russia’s invasion of Ukraine hardening NATO’s stance as it also eyes conflicts with China. In this world in distress, Argentina continues to drown in the proverbial glass of water, but actually has an opportunity to finally organise its internal political mess and maybe come out of this global crisis quicker and stronger than the others. Unfortunately, that depends on our political class.

Most informed Argentines aren’t too interested in international affairs, even if they may be able to name the starting line-up of several major European football teams and even the relatively obscure names of their stadiums. The global situation is indeed troubling. The Covid-19 pandemic created a series of distortions that exacerbated underlying asymptomatic trends. Governments around the globe relied on fiscal injections in order to counteract the economic standstill caused by lockdown orders, giving rich nations an advantage over their poor and developing peers. At the same time, global supply chains broke down in an important part as a consequence of China’s strict zero-Covid policy, unmasking the fragilities of the globalised model of production and consumption that had progressively consolidated after the fall of the Soviet Union. With inflationary pressures mounting from the supply side, along with decades of easy money policies from the United States and the European Union, Russian Premier Vladimir Putin decided to invade Ukraine, causing severe disruptions to global food and energy markets, pushing price increases across the globe to multi-decade highs. This sets the stage for an aggressive rise in interest rates, particularly in the United States where the Federal Reserve is facing the highest inflation rates since the early 1980s, prompting central banker Jerome Powell to promise a heavy hand in the fight against inflation, meaning that most probably he will end up tipping the economy into a recession, which in turn will drag on global output as a whole.

According to a report cited by The Guardian, authored by the United Nations’ trade and development arm (UNCTAD), at least 107 nations were facing at least one of the three shocks threatening the world today — rising food prices, rising energy prices, and tighter financial conditions — while 69 countries were being thrashed by all three (25 in Africa, another 25 in Asia and the Pacific, 19 in Latin America). According to figures cited by the Financial Times’ Gillian Tett, total global debt has tripled since 2000 and doubled since 2006, reaching 352 percent of global GDP in the first quarter of 2022 (slightly below the 2021 peak). Tett suggests plenty of mini debt shocks are in the works over the coming years, from sovereigns to corporate, both in advanced and emerging economies. An over-leveraged economy facing a marked increase in inflation will have to deal with large rate hikes by the Fed and other major central banks, which will raise borrowing costs across the globe and put pressure on emerging markets’ financial stability, with 60 percent of low-income countries in high-risk of debt distress or directly in it before the war in Ukraine, World Bank data indicated.

“Can a thrice-leveraged system ever really deleverage, without suffering a full-blown crisis (that is, mass default),” asks Tett. “After all, growth is unlikely to provide an exit-route. And while inflation is ‘a potential route for reducing debt relative to GDP,’ as the JPMorgan report notes, that only works if inflation is ‘unanticipated and does not drive up interest rates.’ Therein lies the challenge for central bankers — and the huge philosophical question hanging over our 21st-century global economic system,” she concludes.

Argentina, eternally in crisis and trained in resilience, clearly has an opportunity, and the worsening of the situation may be pushing the country toward a resolution, even if certain politicians do all they can to resist it. After a scorched earth campaign against former economy minister Martín Guzmán, the former Columbia University academic stepped down in bombastic fashion, only to be accused by Cristina Fernández de Kirchner, son Máximo and de facto spokesman Andrés ‘Cuervo’ Larroque of irresponsibility for leading to increased financial stress as the informal peso-dollar exchange rate (“dólar blue”) surged near 300 pesos per greenback and the ruling coalition was reportedly on the verge of collapse, with serious rumours spreading of President Alberto Fernández’s impending resignation circulating over recent weeks.

With Silvina Batakis taking over from Guzmán, the ruling coalition’s main shareholders have held a series of meetings that hadn’t been occurring given egos and political differences. Mrs. Fernández de Kirchner, President Alberto, and Frente Renovador leader Sergio Massa — who unsuccessfully sought to take the reins of the economic cabinet — appear to have reached an armistice, allowing Batakis to apparently push forth with Guzmán’s plan, the one he agreed to with the International Monetary Fund (let’s wait and see if it pans out). Indeed, whether or not Guzmán’s restructurings were well negotiated, they’ve cleared an impossible debt calendar with private creditors and the IMF at a time when the multilateral institution is seeing a flare up of activity across the board. Argentina may very well become a second-level priority in the short-to-medium-term.

The question for Argentina is whether or not this administration can shore up trust in Batakis and the rest of the economic team to avert a hyperinflation or an institutional crisis that pushes the government over the edge. Cristina, who did not veto Batakis — or Daniel Scioli leading the Productive Development Ministry — will not be able to decouple herself from this government’s economic plan any longer. She also has to be careful not to push Alberto too hard, or she’ll have to take over the Executive as well. Awash with natural reserves and great human talent, Argentina’s opportunity manifests itself once again, even against our will. We’ll see if we can take it this time.

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Agustino Fontevecchia

Agustino Fontevecchia

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