Argentina crisis explained

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Once considered one of the most prosperous nations, Argentina has people struggling to make up for a living. Hyperinflation rate, high unemployment rate and peso going down forced the entire country into a crisis with no clear way of getting out of it.

A history behind the crisis

During the 1990s, Argentina outrun most of the countries in Latin America region. The economy was growing rapidly during that time. However, the first economic crisis which happened in 2001 brought the country to its knees. This was due to the overvalued exchange rate (Argentina adopted fixed rate – 1 peso equaled 1 dollar). Because inflation in Argentina was much higher then in the US, this meant that in real terms it has led to the loss of competitiveness and it made Argentine goods very expensive. Overvalued currency resulted in account deficit which forced the government to seek help from foreign investors. International Monetary Fund provided financial support to the country in total amount of 22 billion dollars in 2000 and 2001. By 2010 Argentina managed to restructure its foreign debt, but it became clear that the next crisis is on its way in the near future.

What is happening now?

What we can see now is a typical example of the currency crisis. Those who are holding pesos are selling to buy US dollars because the US Federal Reserve is raising interest rates. The problem becomes even deeper as Argentina also has a fiscal deficit, which it needs to finance in dollars. As peso falls, prices are rising rapidly bringing back horrible memories of 2001. The inflation rate is currently about 30 %. Argentina’s president Mauricio Macri turned to IMF again in search of financial support and managed to obtain a credit line of 50 billion USD, which country now can use to pay its debts and to support the peso. In turn, the agreement holds that the country has to reduce its budget deficit through the introduction of taxes on exports.

What are the risks?

The main concern is that the history will repeat itself and the country once again will not be able to meet the terms proposed by IMF. There are significant worries that Argentina will not be able to meet the inflation and budget targets the IMF demanded in return for its help. It is most certain that if it happens so, the Fund will cut off their support over the next year. It means that the country might find itself in default situation with no one else willing to fund its debt.