It was almost exactly a year ago to the day that Argentinian President Mauricio Macri told his people that he will raise taxes and cut government spending in an attempt to keep solvent with $50 billion in IMF loans. A reformer like Trump, Marci is a businessman, with knowledge of how the financial markets operate. Fast-forward to today.
Macri issued a declaration re-imposing controls on the peso in an attempt to shore up the currency. From this point on ordinary Argentines’ purchases of dollars will be capped at $10,000 a month. Companies will face restrictions on their ability to purchase dollars in the foreign-exchange market and to pay dividends to investors abroad. As one would imagine, this didn’t sit well with the markets.
The price of Argentina’s sovereign bonds traded in Europe tumbled by about 5% the day after the announcement. That was really unsystematic in that the turmoil had been priced into the bonds since the Argentinian central bank raised its main interest rate to 60 percent, in an attempt to tighten the supply of money and looming inflation.
There is no question that Macri inherited an economic state of emergency when he was elected president in 2015. The financial extension given to him by the IMF is a terrible stain on the balance sheet of the world lender. The central bank was given the mandate to eliminate government price controls.
Macri had initially won the trust of Wall Street as a pro-business politician, and as usual, the lemmings in finance jumped on board. Chief lemming, Jamie Dimon, CEO of JPMorgan Chase, told his shareholders that, “Argentina can be an example to the world of what can happen when a country has a good leader who adopts good policy.” Incredibly, in hindsight, Argentina managed to float a 100-year dollar bond at an interest rate of only 8% in June 2017. It has since lost over 60% of its value. One wonders how much of this boondoggle Dimon bought into.
Macri will likely pay for this collapse with loss of office. In a nutshell, he relaxed the central bank’s inflation target, despite racing prices. In early 2018 the peso slid rapidly, losing a fifth of its value against the dollar in just over four months. Macri was forced to turn to the IMF, which agreed to lend Argentina $50 billion, later extended to $57 billion, its largest loan ever.
On August 11th, Marci was defeated in what would be considered a primary election for president by Alberto Fernández. Foreshadowing things to come, investors rushed to dump Argentine assets, fearing that Mr. Fernández will return to the reckless policies previously pursued, under which inflation soared so high that the government had to manipulate the data. One imagines this doesn’t sit well with the IMF.
The Merval stock market index lost 37% the day after Macri’s drubbing. The peso plunged by 25%. Put a fork in Argentina because it is done. A default has happened on Argentina’s foreign debt, which has only occurred eight times since independence in 1816. I wonder if Jamie Dimon knew that.