Argentina is facing an economic crisis

Economic crisis : Why Argentina is bankrupt for the third time since 2000

Argentina's President Mauricio Macri had set out to do everything differently. He wanted to give free rein to the forces of the market and attract foreign investors. He promised to end poverty and inflation and free Argentina from left-wing Kirchnerism, which had led the country into a severe economic crisis. When Macri won the 2015 election, the Bloomberg news portal ran the headline: "Wall Street is (again) in charge."

Now, just four years later, the observers can't believe their eyes. Macri's policy is similar to that of his predecessor Cristina Kirchner. Argentina is once again in a deep economic crisis with capital flight, high inflation and a bankrupt public budget. And Macri? Reacts with state interventions that he, the liberal, had previously demonized as "socialist".

But he may not have had much choice when he introduced capital controls on September 1. The Argentines had begun to move their money out of the country in a panic: Within just two days, three billion dollars flowed out of the country. In order to prevent the total crash, Macri limited the exchange of pesos to $ 10,000 per month per person.

There are also restrictions on companies buying dollars and paying dividends to foreign investors. So the liberal Macri resorted to interventionism. It would be as if an economics minister Christian Lindner nationalized the banks.

Broke for the third time in this century

The markets reacted in horror: Argentine government bonds crashed and the rating agencies are practically counting on the country's insolvency. Argentina is bankrupt for the third time in this century after 2001 and 2014. The government has already begun “restructuring” the total of $ 101 billion in debt to the International Monetary Fund and other creditors. In other words, you will not be paid.

The Argentines are now trying to get their money from the banks as quickly as possible. In the face of the peso's decline - inflation is 55 percent - they want to exchange it for a foreign currency or spend it as quickly as possible. So you want to save what can be saved. Those who can invest their money abroad, something that various internet platforms have already specialized in. Money-free exchanges for everyday products are now flourishing again, for example a pair of children's shoes can be exchanged for two bottles of cooking oil. In the meantime, there is uncertainty among companies as to which prices should be set at all.

For the Argentines, the situation is like déjà vu. Finance Minister Hernán Lacunza said resignedly: “Argentina is like a ship that goes in circles and always returns to the same port.” As in 2001, when the country suffered a most traumatic crash, tens of thousands are demonstrating again against the government.

The peso becomes an object of speculation

How did this shock come about? First of all, you have to mention August 11th: President Macri lost a primary against the opposition presidential candidate Alberto Fernández. Its runner-up is, of all things, the “left bugbear” Cristina Kirchner. The duo managed to form a broad opposition alliance, and no one doubts their victory in the October 27 elections. This prospect robbed the financial markets of their last faith in Argentina.

The causes of the crisis, however, lie deeper. Argentina has lived beyond its means for years. Once the richest country in South America, it imports more than it exports and has a permanent current account deficit. That means it depends on the import of foreign capital. Macri also kept Argentina afloat, mainly by borrowing. But because these loans are in dollars, they make the country extremely vulnerable.

Because as soon as the creditors think their investments are no longer safe, for example due to high inflation, they withdraw them. The peso then continues to lose value, which in turn results in further capital outflows. It also makes the peso an object of currency speculators. Exactly this development started after the Lira crisis in Turkey in 2018. Nobody trusted the peso anymore.

The International Monetary Fund (IMF) then intervened. And again it played a fatal role for Argentina. Hardly any other country has the IMF granted more loans - and hardly any other country has it done more damage.

Bad sign for Europe

The IMF aid package of 2000 can be seen as a prime example, which, in keeping with the neoliberal zeitgeist, was linked to drastic cuts in social spending. Numerous people plunged into misery at that time. Serious unrest with looting, deaths and five presidents within two weeks were the result. Then the twelve-year reign of the married couple Néstor and Cristina Kirchner began.

So the IMF didn't seem to have learned much from the past when it granted Argentina the highest loan in its history at $ 50 billion in June 2018. It is said that the US administration pushed for it to back up Trump ally Macri. Once again, the IMF tied the loan to strict austerity. But soon the first installment of the loan was eaten up. Without hesitation, the IMF granted an additional loan of 6.3 billion dollars - Argentina was again in the debt trap.

It was no use to Mauricio Macri. The Argentines, a third of whom live below the poverty line, lost their last trust in the government and turned to the opposition. Many now also blame the outgoing IMF boss Christine Lagarde for the insane destruction of money. The record loan should crown her career with the monetary fund. Now it has become a disaster. That is not a good omen for Europe either. Lagarde will chair the European Central Bank in October. At the same time, the Argentines will probably vote out Macri and bring Kirchnerism back to power.

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