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Don’t Cry for me, Argentina
Argentina is teetering towards its 9th sovereign debt default, with the country’s new leftist government led by Alberto Fernández aiming reach agreement with its creditors by the end of March. With $3 billion of debt payments due to private and public investors between April and July, the issue is whether the amount owed will be reduced, and if the maturity for when these debts are due will be extended. Gross government debt is equal to 93% of the country’s GDP. This is large, but not as great as other countries such as Japan, who have had government debt levels twice the size of their GDP in recent years. However, two factors squeeze this figure – the country’s abysmal economic growth, and the continued slide of its foreign exchange rate, which makes it harder to repay foreign denominated debt. Argentine debt held by foreigners has increased by 72% since late 2015.
The country is under tremendous economic strain, entering its third straight year of recession. Argentina’s most recent president Mauricio Macri assum
ed office in 2015 with a reputation for market friendly pragmatism, in opposition to Cristina Fernández de Kirchner’s populist politics, who he succeeded as president. He promised to reduce inflation and restore economic growth. He did neither, leaving office last year with inflation at 54%, the highest since 1991.
As President Alberto Fernández entered office last month, Argentina’s central bank pursued an expansionist monetary policy, lowering interest rates and increasing money supply. This however puts pressure on inflation, and to offset this, the Fernandez government has implemented price controls to reduce the impact on consumer goods. In reality, this only hides inflation, putting greater pressure for the official (government controlled) and unofficial exchange rates to diverge.
A major factor impacting Argentina’s debt crisis are the “animal spirits” famously described by John Maynard Keynes. With a history of eight prior episodes of sovereign defaults, and an apparent political return to leftist “Peronism”, foreign investors are skittish. Outflows of foreign capital have caused periods of dramatic devaluation of the Argentine peso in recent years, and biased many to assume the country is again on track for another debt default. This is a nasty positive feedback loop that can be self-fulfilling.
Politically, President Fernández is beholden to his Vice President, leftist Cristina Fernández de Kirchner (no relation). As president herself from 2007-2015, she railed against the IMF with the country’s 8th default in 2014, and installed an array of populist, economically damaging policies. The risk now is that so-called temporary measures such as price controls become permanent under pressure from VP Fernández, embedding anti-market sentiment.
Underlying any economic crisis is the question of “who adjusts” to bear the costs of the crisis. Under Macri, the burden of adjustment fell on Argentines, as he tried to right a maligned economy and restore relations with international capital markets. It didn’t work, with the burden of recession too great for Argentine voters. Now under the two Fernández leaders, the fear is that the burden of adjustment will once again fall on creditors, as a tanking economy is padded with more populist measures that don’t correct the deeper economic challenges facing Argentina.
Trump's Impeachment
As I write, the Democratic “House managers” are completing their third and final day of opening arguments against Donald Trump. President Trump’s defence team is expected to begin their rebuttal tomorrow (Saturday) for a few hours, before resuming on Monday.
For further details of the proceedings alongside some of the lighter moments of the trial, take a look at my great mate Dan Flatley’s reporting for Bloomberg.
From Last Week...
Former World Bank president Bob Zoellick wrote a ripper (Australian for “fantastic”, “wonderful”, etc…) of an Op-Ed on Trump’s US-China Phase 1 trade deal, arguing along similar lines as I did last week – that it degrades free and open trade for everyone, and ultimately damages US interests. To me, the quote of the article is:
America throws away its best cards whenever it surrenders its commitment to open, fair rules—backed by and enforced with allies. These are also the principles that underpin U.S. security interests... For more than 70 years, U.S. security partnerships have depended on mutual benefits—backed by a combination of American self-interest and idealism—not on bludgeoning others with demands for tribute.
A big thanks to Danny Russel for sharing this article with me.
Please feel free to send through your own thoughts and articles, and forward this along to others who might find this an interesting read.
Have a great weekend,