Article today in FT.com

Ceviche

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Argentines take no chances as default fears grow

Argentines remember all too well what happened during the 2001-02 sovereign debt crisis that prompted the biggest economic downturn in the country’s recent history. Locals’ savings were obliterated overnight after dollar bank deposits were converted into local currency. Unemployment soared, there was a deep recession and four presidents lost their jobs in 10 days. So almost two decades later, few people are taking chances ahead of what is set to become Argentina’s ninth sovereign default. Economy minister Martín Guzmán said on Tuesday that a deadline to pay a $503m bond payment this Friday was “anecdotal” and that the government would continue negotiating with creditors over the restructuring of its $65bn of debt. “I’m changing what I can into dollars, even if I don’t have much cash to spare,” said one small business owner in Buenos Aires, who did not want to be named because of official disapproval of what is seen as currency speculation. He was a student during the 2001-02 crisis and his family lost their life savings. Such fears partly explain the soaring gap between the official and parallel exchange rates over the past month, a proxy for economic sentiment. The relatively — but artificially — stable official rate is now at about 68 pesos to the dollar, while on the black market greenbacks fetched almost 140 pesos last week, double what it was when the centre-left administration of President Alberto Fernández took office in December.

The country has been mired in recession since a 2018 currency crisis that led to an IMF bailout. With the central bank printing money as the government can no longer issue debt and tax revenues collapsing because of one of the region’s strictest coronavirus lockdowns, economist Marcos Buscaglia fears the worst. “If you thought 2001-02 was bad — the biggest slump in Argentina’s modern history — just wait and see what 2020 will bring,” said Mr Buscaglia, who runs Alberdi Partners, a consultancy. Even without a default “the economy is in free fall”, he added, estimating that gross domestic product contracted by 15 per cent in April from a year earlier. Inflation, above 50 per cent last year, was 1.5 per cent in April, a reflection of collapsing consumption as a result of the lockdown. Economists fear a default could bring even greater exchange rate volatility, especially if negotiations between the government and its creditors break down, in turn spurring inflation and hampering growth. With less than $10bn of liquid central bank reserves, the central bank will struggle to continue to support the official exchange rate, they say. With the centre-left government keen to bring more dollars into the economy, radical members of the ruling coalition have called for a wealth tax and for further restrictions on access to foreign currency. Purchases are already limited to $200 a month at a “solidarity rate” of 30 per cent above the official rate. “The idea that they might grab bank deposits just makes me feel ill. When has that ever ended well?” asked Paola Ramos, a retired civil servant.


As it is, companies are already suffering — especially small and medium-sized businesses that form the backbone of the economy and employ about 80 per cent of the workforce. Already, Luis Barrionuevo, who leads the union of restaurant workers, fears that almost half of the country’s 45,000 bars and restaurants could close in the coming weeks and months. Observatorio PyME, a think-tank, estimates that 9 per cent of industrial small and medium-sized enterprises will close. “SMEs are suffering terribly because of the pandemic,” said Marcelo Fernández, president of CGERA, a business association representing small and medium businesses. More than 200,000 postdated cheques bounced in April, 10 times as many as normal. Against this gloomy backdrop, most Argentines — unlike in 2001 when non-payment was applauded by legislators — do not support a default. In a recent survey, only 17 per cent believe that the government should not pay Argentina’s debt, while 53 per cent of voters for the ruling coalition consider that default should be avoided. “There is consensus that an eventual default would have negative consequences for the country,” said Alejandro Catterberg, a director at Poliarquia, a local pollster. Recommended The FT ViewThe editorial board Debt relief alone will not save Argentina Many are looking to the president’s speech on May 25, the day when Argentina celebrates its independence from the Spanish empire, for direction. Mr Fernández was cabinet chief to Néstor Kirchner, the man who led Argentina in the wake of the 2001-02 crisis, taking office on May 25 2003. He is likely to attempt to construct an epic narrative comparing the two administrations’ success in rebuilding the country, said Jimena Blanco, head of Latin America at Verisk Maplecroft, a risk consultancy. “But it’s a very different context now,” she said, pointing to the commodity supercycle that helped the economy in the 2000s, and the fact that Mr Kirchner took over the country more than a year after the default, when many of the toughest problems had already been fixed. “Once [Mr Fernández] has set the epic scene, the question is what are the measures needed to reactivate the economy — and how will he implement them? . . . In the next 18 months or so, you could be talking about hyperinflation [in the event of a hard default].”
 

gracielle

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Thanks for the post....concise review of the economic situation. The opinions of Marcos Buscaglia and Alejandro Cattenberg have been right on in the past. If I was placing a bet,
1. AF-Guzman will not default on the IMF loan.
2. the peso will see a cumulative substantial devaluation in the next couple of months whether ARG defaults on the loan or not.
3. ARG would be looking at hyperinflation in the next couple of years whether it defaults on the IMF loan or not.
 
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antipodean

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Thanks for the post....concise review of the economic situation. The opinions of Marcos Buscaglia and Alejandro Cattenberg have right on in the past. If I was placing a bet,
1. AF-Guzman will not default on the IMF loan.
2. the peso will see a cumulative substantive devaluation in the next couple of months whether ARG defaults on the loan or not.
3. ARG would be looking at hyperinflation in the next couple of years whether it defaults on the IMF loan or not.
If Argentina does not default, is there enough USD in the bank to be able to make the payment? I have lost track of how much USD is actually in there. What kind of compromise will be required in the immediate term to make such a payment - austerity or “freezing” / “borrowing” USD from private accounts?
 

gracielle

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If Argentina does not default, is there enough USD in the bank to be able to make the payment? I have lost track of how much USD is actually in there. What kind of compromise will be required in the immediate term to make such a payment - austerity or “freezing” / “borrowing” USD from private accounts?
I think the answer will depend on the terms of the deal they can hammer out this week.
Austerity but without structural changes to entice foreign investment capital needed to revitalize the economy in the next 2 years.
 
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Ceviche

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This article is from FT.com ( not economist).

I subscribe to both WSJ and FT. In case you guys reading such articles, I will post more often-- of course, with kind permission from the admin.

Many times such articles leave me in deep thought. And having a discussion here about it, is really welcome.
 

on the brink

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Sorry, I had a synapse breakdown - should have said Financial Times. I do have access to some Economist articles. I used to think that the magazine's evaluation of Argentina was too negative but it seems to have been sadly right.

I'd much appreciate seeing more FT pieces. Among the Washington international community, it is considered the best source of economic news. Specially after Murdoch's WSJ takeover.
 
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London2Baires

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If Argentina does not default, is there enough USD in the bank to be able to make the payment? I have lost track of how much USD is actually in there. What kind of compromise will be required in the immediate term to make such a payment - austerity or “freezing” / “borrowing” USD from private accounts?
Good question. Maybe this helps your calcs:

"Pasa el tiempo y al Gobierno se le terminan las municiones. Las reservas de u$s43.137 millones se reducen a apenas u$s8.500 millones cuando se le restan los encajes de los bancos, el swap chino, créditos de organismos multilaterales, los DEG en el FMI y la caja chica del Banco Central."


 
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