Need to Know: Argentina currency chaos
What’s gone wrong now in Argentina?
Luis Capato, Argentina’s central bank chief, has resigned after only three months in the job, triggering a 5 per cent fall in the peso against the dollar today. He has cited unspecified personal reasons for his departure and he will be replaced by deputy economics minister Guido Sandleris.
Wasn’t Caputo supposed to sort it all out?
That was the theory. Caputo, a former broker, had been attempting to negotiate the details of a three-year, $50bn loan from the IMF, agreed with President Mauricio Macro’s government in June, to strengthen the country’s deteriorating finances. Some $15bn was paid immediately but Caputo had been asking for a more accelerated programme of payments.
How does this fit in with the broader economic picture?
The emerging markets are struggling as the post-crash flow of cheap money from the West dries up. Investors are spooked that governments holding billion dollar-denominated debts will not be able to pay them off as the dollar continues to strengthen.
And how has Argentina coped with the deteriorating situation?
The peso has lost half its value this year, leading to swingeing spending cuts and world record highs of 60 per cent interest rates to restore investor confidence. Growth has stalled with the economy going into sharp decline. It shrank by 4.2% in the second quarter, the biggest quarterly drop since 2014.
This has produced social unrest in Argentina as Macri attempts to force through an austerity programme to improve investor confidence. It has so far been met with a series of massive strikes. The opposition announced a 24-hour strike which is ongoing paralysing transport and public institutions.
Why is Argentina so unstable?
Right back at the beginning of the nineteenth century, Argentina was poised to become a significant new player in the global economy – blessed in natural resources, with fertile land, and what became a thriving export market – but the so-called “lords of the pampas” failed to meet the challenges of rapid globalisation, embracing protectionism and failing to diversify its agrarian base.
A century of economic mismanagement and incipient growth followed. In the post-war era, the country was run along the ‘Peronist’ lines – a toxic combination of massive state control of the “commanding heights” of the economy, an over-reliance on foreign capital markets, and high inflation.
Occasionally, Argentina has tried a different approach. In the nineties, President Carlos Menem attempted to link the peso the US dollar to combat hyper-inflation and to reduce public spending. But it didn’t work. As the global economy slowed down in 2001, the government went bankrupt. It has lurched from crisis to crisis since of which today’s news is only the latest iteration.