Why Ar­gentina mat­ters

Richmond Times-Dispatch - - OP/ED -

The world is not ready for an­other financial cri­sis, but an­other financial cri­sis may be ready for the world. OK, the odds of this are long. Still, they’re not nonex­is­tent. The his­tory of mod­ern financial crises is that, orig­i­nat­ing in ob­scure cor­ners of the financial sys­tem, they are ini­tially ig­nored be­cause they seem in­nocu­ous — and then wham!

Think Thai­land in 1997; a run against the Thai baht ul­ti­mately led to crises in South Korea, In­done­sia, Rus­sia, and Brazil. Or con­sider U.S. “sub­prime” mort­gages; in 2008, they trig­gered a col­lapse of global credit markets. Or re­call Greece in 2010; its debt threat­ened the very ex­is­tence of the euro.

The ac­tion these days in­volves Ar­gentina. It has suf­fered a sud­den loss of con­fi­dence. Since mid-April, its cur­rency, the peso, has lost about 12 per­cent of its value against the dol­lar. To stem the panic — that is, to con­vince in­vestors not to sell pe­sos for dol­lars — Ar­gentina’s cen­tral bank has raised in­ter­est rates on pe­sos from 27.25 per­cent to 40 per­cent.

No dice. These mea­sures haven’t fully sta­bi­lized financial markets. Ar­gentina’s lat­est move is to ap­ply to the In­ter­na­tional Mone­tary Fund

— a global agency that makes loans to fi­nan­cially frail coun­tries — for a re­ported $30 bil­lion bailout. The ap­par­ent aim is to in­still con­fi­dence by demon­strat­ing that the coun­try has am­ple dol­lar re­serves to meet ma­tur­ing debts. The cru­cial ques­tion is whether all this is just an Ar­gentina prob­lem — or a har­bin­ger of a broader financial crackup.

For the mo­ment, it’s mostly an Ar­gentina is­sue, says econ­o­mist Mon­ica de Bolle of the Peter­son In­sti­tute for In­ter­na­tional Eco­nomics.

The present pres­i­dent, Mauri­cio Macri, who took office in late 2015, in­her­ited a dole­ful le­gacy of eco­nomic mis­man­age­ment: high in­fla­tion, un­em­ploy­ment, and bud­get deficits af­ter 12 years of left­ish eco­nomic poli­cies.

Re­fer­ring to Macri’s pre­de­ces­sor, Cristina Kirch­ner, de Bolle says: “She just blew up the econ­omy” with sub­si­dies, price con­trols, and easy money. Ar­gentina couldn’t bor­row dol­lars in in­ter­na­tional markets, be­cause it had de­faulted on its gov­ern­ment debt in 2001 and was locked in a bit­ter le­gal strug­gle with its cred­i­tors.

It was hard to know the econ­omy’s pre­cise con­di­tion, be­cause the gov­ern­ment stopped pub­lish­ing many statis­tics. As best can be deter­mined, in­fla­tion peaked at about 40 per­cent an­nu­ally, de Bolle says.

Macri re­versed many of these poli­cies. He set­tled with the cred­i­tors and re­duced bud­get deficits and in­fla­tion. “There was a sense of op­ti­mism ... that things were mov­ing in the right di­rec­tion,” she says.

But the pace has been de­lib­er­ately “grad­u­al­ist,” leav­ing the econ­omy vul­ner­a­ble to ad­verse de­vel­op­ments. Ac­cord­ing to de Bolle, the bud­get deficit is still about 5 per­cent of the econ­omy (gross do­mes­tic prod­uct), as is the cur­rent ac­count; in­fla­tion is about 25 per­cent. (For com­par­i­son: The U.S. bud­get deficit is now ap­proach­ing 5 per­cent of GDP.)

Per­haps in­evitably, ad­verse de­vel­op­ments have now ar­rived. Amer­i­can in­ter­est rates have edged up, re­duc­ing the at­trac­tive­ness of Ar­gen­tine debt; Pres­i­dent Trump’s trade poli­cies threaten Ar­gentina’s ex­ports; and the dol­lar has ap­pre­ci­ated, mak­ing it costlier to re­pay dol­lar debts. It’s harder for Ar­gentina’s econ­omy to grow, lead­ing anx­ious in­vestors to dump pe­sos.

What is to be feared is the pos­si­bil­ity that what’s hap­pen­ing to Ar­gentina could hap­pen to other na­tions.

For the last two years or so, in­ter­na­tional in­vestors have poured money into “emerg­ing mar­ket” coun­tries, such as Ar­gentina, Brazil, Mex­ico, In­dia, China, and In­done­sia. In 2017, in­flows to 25 of these coun­tries to­taled $1.2 tril­lion, ac­cord­ing to the In­sti­tute of In­ter­na­tional Fi­nance, a re­search and ad­vo­cacy group for global financial in­sti­tu­tions.

If these in­flows slowed sig­nif­i­cantly — or stopped al­to­gether — there would be neg­a­tive con­se­quences for the wider world econ­omy.

Coun­tries might have to raise in­ter­est rates to de­fend their cur­ren­cies against crip­pling de­pre­ci­a­tions. At some point, herd be­hav­ior might take over: In­vestors would buy or sell financial in­stru­ments (stocks, bonds, cur­ren­cies, and the like), mainly be­cause they thought that oth­ers were go­ing to buy or sell the same in­stru­ments.

What seems es­pe­cially wor­ri­some, ar­gues econ­o­mist Des­mond Lach­man of the Amer­i­can En­ter­prise In­sti­tute, is the “abrupt change in mar­ket sen­ti­ment.” In­vestors who only re­cently had been emerg­ing-mar­ket en­thu­si­asts have sud­denly be­come risk-averse skep­tics.

We may or may not be on the edge of an­other financial cri­sis, but re­gard­less of what you think, there’s plenty of room for self-doubt. One way or an­other, Ar­gentina mat­ters.

Robert Sa­muel­son

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