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ARGENTINA-ECONOMY-CURRENCY-DEBT
Analysts doubt Argentina on verge of 2001-style default
BUENOS AIRES, Sept 7, 2018 (BSS/AFP) – With Argentina’s currency tumbling
as interest rates and inflation soar, fears are growing that the country
could be on the verge of default, but analysts say that remains unlikely
despite economic fragility.
South America’s third-biggest economy defaulted in 2001 during an economic
crisis in which the government was unable to handle debt of more than $100
billion, a level it has once again surpassed.
“By Argentine standards that’s a large debt, but by international
standards it’s not that big,” said economist Fausto Spotorno.
British analysts Capital Economics say default is not a “scenario” it
envisages at the moment, although the outlook remains bleak.
“The recent turmoil in local markets means that Argentina’s recession will
be even deeper than we previously anticipated,” Capital Economics said in an
article outlining its downgraded forecast for the country, in which it says
it expects GDP to drop four percent in 2018 and another two percent next
year.
“A significant degree of fiscal slippage, a further rise in bond yields or
another collapse in the real exchange rate would put the debt ratio onto a
worrying path. That would make a sovereign default a real possibility.”
– Crisis of confidence –
Unable to borrow on the open market, Argentina turned to the International
Monetary Fund earlier this year and secured a $50 billion loan, with an
initial $15 billion tranche of that handed over in June, in part to prop up
its struggling currency.
The country is suffering from a crisis of confidence in the peso, which
has lost more than half of its value against the dollar since the start of
the year.
In a desperate bid to calm the turbulent waters, Argentina’s Central Bank
hiked interest rates to a world-high 60 percent until at least the end of the
year.
But with inflation expected to reach 40 percent for 2018 and Argentines
feeling the pinch from rising prices their meagre salaries are ill-equipped
to cope with, fear and discontent are on the rise.
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ARGENTINA-ECONOMY-CURRENCY-DEBT 2 LAST BUENOS AIRES
President Mauricio Macri’s austerity measures have been unpopular with
citizens — protests have become a daily occurrence — while also failing to
appease nervous investors.
Some protesters have been chanting for the government to stop paying its
debt, while Macri’s popularity has been falling.
The problem for economist Arnaldo Bocco is that Argentina’s “government is
unable to give assurances over the solidity of its financial system.”
He says it needs to “show it can manage the exchange rate.”
Argentines have a long history of lacking faith in their own currency and
normally save money in dollars.
Some of that is held in banks, but low confidence in the system means
savers are quick to take their money and run.
Since the start of the peso crisis in April, Argentines have withdrawn
$500 million from the banking sector.
– ‘Critical monetary situation’ –
That’s not quite on the level of the 2001 crisis, though, when the
government froze savings accounts and some people lost everything.
“The monetary situation is critical in terms of confidence, but we’re a
long way from 2001,” said Martin Vauthier, director at the EcoGo consultancy.
According to official estimates, skeptical Argentines are holding $300
billion outside of their country’s financial circuit, either in cash or
abroad, mostly in Uruguay and the US.
With the government proving unable to stabilize the peso, some economists
advise restrictions on the purchase of foreign currencies in a bid to prevent
a capital flight, a system in force during the administration of Macri’s
predecessor, Cristina Kirchner.
But not everyone is convinced.
“I think that would aggravate the depreciation of the peso,” said
Spotorno, who said “capital control would be counterproductive.”
Finance Minister Nicolas Dujovne has been in Washington this week meeting
with the IMF in a bid to secure an accelerated disbursement of the remainder
of the agreed loan originally slated for 2019 and 2020.
Dujovne didn’t divulge too many details about how those talks progressed,
but said he was “convinced we’re going to quickly reverse this situation.”
The peso has at least stabilized this week after two days of dramatic
falls last week where it lost a total of 20 percent against the dollar.
“No-one should ever consider a default as impossible,” warned Roberto
Frenkel, from the Center for State and Society Studies.
But in all probability, he said, “it’s very low.”
BSS/AFP/HR/0935