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    A poster that reads "No to the (Argentine President Mauricio) Macri-IMF (International Monetary Fund) pact" is seen in Buenos Aires, Argentina, June 4, 2018 | Photo: Reuters

Published 26 September 2018
In an exclusive interview with teleSUR, Mark Weisbrot explains the "causes" of Argentina's economic fallout, and what it will take to turn it around.

Argentine President Mauricio Macri addressed the 73rd United Nations General Assembly Tuesday in New York, which he had said would be a speech telling everyone how “good the future looks” for his country. 

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It will be a hard sell since today's Argentine peso almost mirrors its 2001-02 recession value, and as inflation hovers at 34 percent, far outpacing salaries. Since Macri entered office in December 2015, inflation and consumer prices have risen so drastically that over 25 percent of adults and 40 percent of children are currently living in poverty.

Macri prefers to blame these statistics on previous administrations, namely his predecessor Cristina Fernandez who will likely be the incumbent’s closest competitor in the 2019 elections, and the supposedly greedy population.

However, many say its the president and his deficit-obsessed Cambiemos party that have brought the economy into a crisis that will likely lead to a recession by year’s end.

As he delivered his speech at the U.N. Tuesday amid ongoing negotiations for a loan advance with IMF director Christine Lagarde, back in Argentina the country’s unions and social movements were striking and shutting down the country, including the nation's airports, in protest of the government’s austerity plan. 

But, what’s going on financially to send the country into an economic freefall? And when will it end?

teleSUR talks with co-director at the Center for Economic and Policy Research, Mark Weisbrot, to better understand how Argentina got into this economic crisis and offers a way to leave it behind.

*Comments for context are italicized within the text.

TeleSUR: Guide us through the economic phases of this administration so far? How did Argentina get into its current financial chaos?

Mark Weisbrot: Macri did a couple of things that needed to be done. He settled with the vulture fund, he let the currency depreciate to get rid of most of the black market pesos, and removed exchange-rate controls and capital controls. Most of this was necessary.

But he also removed subsidies to energy in a way that harmed many low-income households, and he laid off tens of thousands of government workers.

But the mistakes that caused the crisis were the excessive, unnecessary foreign borrowing, resorting to super-high interest rates, and the draining central bank reserves in a failed attempt to prop up the peso.

(In February 2016 Macri’s administration settled with four U.S. hedge fund companies agreeing to pay out approximately US$4.65 billion for the bonds they bought during Argentina’s 2001-02 recession ending 15 years of international court cases and defaults. The negotiation raised the country’s international lending status from ‘stable’ to ‘positive’.)

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TeleSUR: What influenced Argentina’s accelerated economic down spiral last May?

MW: In May of this year a lot of the short-term foreign lenders decided that Argentina was riskier than they thought. The government raised interest rates to 40 percent and later to 60 percent in mid-September (the world's highest), but that was not enough to stem the fall of the peso, which has lost about half of its value since May first.

This process also made Argentina's debt grow at an unsustainable rate. The government also burned through billions of dollars (to which the peso is pegged) in central bank reserves trying to keep the peso from falling. The high-interest bond rates attracted speculative capital, which made a crisis likely when this capital got scared.

The Fed's interest rate hikes spooked investors, as happened during a similar cycle of rising U.S. interest rates from 1994-97, which provoked a crisis in Argentina, Mexico, Brazil, and countries across Asia.

(By June 2018 more than 40 percent of Argentina’s public debt was in private hands, around 70 percent of those investors were foreign.

In May of this year, the administration also issued $US2.75 billion in 100-year bonds with eight percent interest. The intent of selling bonds is to take in quick cash and reduce the number of weak pesos in circulation in order to increase its market value. The same holds with the central bank selling off at least US$6 billion of its dollar reserves since June. The purpose is to buy up the weak peso in order to increase its value.)

TeleSUR: If the government can’t pay out the interest on its recently issued bonds, do you expect a repeat performance of default and/or settling these payments through a foreign court?

MW: Argentina's foreign debt has increased from US$63.6 to US$141 billion since Macri took office in December 2015. This is a huge increase and as noted above, a lot of it was not necessary.

At this time I would not expect that it would lead to default, partly because Argentina has arranged a US$50 billion loan from the IMF.

However, the IMF agreement commits Argentina to continued austerity, and the economy is projected to shrink this year; if economic contraction continues and the debt burden grows as a percent of the economy, I would not rule out default in the future.

(Of the US$50 billion IMF loan disbursed in June, Macri's government has burned through US$15 billion already. The president and his Finance Minister Nicolas Dujovne have been negotiating an advance on the three-year agreement since last month hoping to receive between US$3-5 billion that was earmarked for 2019, as soon as possible.)

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TeleSUR: Can you explain how Argentina’s large sell-off of U.S. dollar reserves and hiking interest rates is intended to stabilize the economy?

MW: The rationale for the government's policies is all about restoring confidence in the markets.

The idea is that if the currency is stabilized and the government's primary budget deficit is reduced enough, investor confidence will return, the government will be able to lower short-term interest rates, and the economy will return to growth.

They are also trying to reduce inflation, primarily by cutting spending. Although they wouldn't say this, (by doing so) they are shrinking the economy.

The plan does not seem to have worked — it seems unlikely that the peso would have fallen by more than 50 percent if the central bank had not intervened.

TeleSUR: What parallels and differences can we draw from the current Argentina crisis and that of 2000-2002, and the country’s 1990s International Monetary Fund (IMF) deal and that of today?

MW: One disturbing parallel between now and then is the return to the IMF, and the commitment to fiscal tightening in return for the IMF loan.

This risks causing a self-perpetuating cycle, in which the austerity shrinks the economy, which causes further declines in investment and consumption, as well as capital outflows; and the economy shrinks further, falling into a deep recession (as in 1998-2002).  

The Federal Reserve's increasing interest rates over the past several months are similar to what happened in 1994-97, although much more gradual than 20 years ago.

There are many differences: for example, Argentina's foreign debt is not so unsustainable as it was in the late 1990s. And external factors are not the same — the U.S. and regional economy are doing better than they were during the crisis of 2000-2002.

Also importantly, Argentina does not have the fixed, overvalued exchange rate that it had at that time, which was bound to collapse.

TeleSUR: What would you recommend for the Argentine economy to recuperate?

MW: I would recommend a program that allows the economy to grow, boosts exports to reduce the current account deficit (rather than reducing it by shrinking the economy), lower interest rates, and develop a program to reduce inflation gradually.

Argentina would probably have to get rid of the IMF agreement to do these things.

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