While the list of countries with overdue loans to the IMF is long, noting that almost all of those loans were issued in times of war. Defaulting on loans to the IMF is unheard of.
Argentina is the latest in the list of fiscal losers to come to the IMF for help. Harsh rhetoric, but unlike the others on the list, there is no war going on in Argentina.
So what is happening? The story sounds hauntingly similar to one I just wrote on Italy. Different country, different players, same problems. Once the darling of the emerging market crowd, Argentina now is weighing heavy on the financial markets. The Argentinian Peso has crashed to its lowest level against the dollar, taking its depreciation this year to more than 50 percent.
In an interesting economic twist, Argentina will take the polar opposite approach to attacking its deficit, as that of its fellow economic dog Italy. Argentinian President Mauricio Macri told his people Monday, September 3, 2018, that he will raise taxes and cut government spending. A tale of two economies.
The first prong in the two-part attack will be to raise taxes on exports, a vastly unpopular idea in the eyes of the people, as Argentina is still largely agrarian. Argentina is the world’s largest exporter of soy meal, and farming is the economy’s main engine. High or low prices for soy and other commodities can either help sustain or bust government investment plans.
The second prong will be spending cuts. Like President Trump, Marci is looking first within his own government. Macri said the number of ministries would be reduced by nearly half, but did not immediately clarify. At least five ministries will be incorporated into other entities. One would assume this is political, as the fiscal results of such cuts would be a drop in the bucket of what they need.
Time for the IMF to step in.
Marci made the request last week for an accelerated $50 billion IMF rescue package. That is huge money; over five times that of which was loaned to Greece. Don’t think that kind of cash comes without pressure from the IMF. The International Monetary Fund essentially ran the books for Greece until the recent payback. Look for this to happen shortly in Argentina as well. Again like Trump, Marci is a reformer and businessman, with knowledge of how the financial markets operate.
With that said, the Argentinian central bank has raised its main interest rate to 60 percent, in an attempt to tighten the supply of money and looming inflation. The hope of Nicolás Dujovne, Argentinian economy minister, is that next year’s budget would be in balance, not including the elephant in the room, debt repayment. A lofty goal none-the-less.
Perhaps the time has passed where a Stalinist government would step in and break the backs of the farmers by taking their land and cooping their farms for the benefit of the state (Oh, and killing them all as well). The people of Argentina have better in Marci, of course. Death by starvation in the former Soviet Union under Stalin is happening in neighboring Venezuela, albeit for different reasons. South America is a mess. The domino effect is happening. When one falls, the others begin to teeter. Argentina is a teetering domino.