Argentina

Argentina: Down The Tubes, Again

President Christina Fernández de Kirchner has turned up her left-wing rhetoric as the economy goes down the tubes. Indeed, GDP has contracted for the past two quarters; inflation is galloping at 56%, not the official 15.01%; and the country has defaulted on its debt, again. Never mind. The President claims Argentina’s financial system is “one of the most solid in the world.” She asserts that Argentina’s woes can be laid squarely at the feet of foreign “vulture funds” and greedy capitalists who have speculated against the peso. Yes, the peso has lost 42.6% of its value against the U.S.

Measuring Misery in Latin America: More Dollarization, Please

In my misery index, I calculate a ranking for all countries where suitable data from the Economist Intelligence Unit exist. My misery index — a simple sum of inflation, lending rates, and unemployment rates, minus year-on-year per capita GDP growth — is used to construct a ranking for 89 countries. The table below is a sub-index of all Latin American countries presented in the world misery index.

Three Cheers for the Rule of Law: Holding Deadbeat Debtor Argentina to Account

Being a creditor is a thankless task. The worst offenders are governments, whose leaders constantly promise their peoples a free lunch, dinner, and more. 

Argentina is a typical offender. One of the world’s richest nations at the end of World War II, the South American country embraced political authoritarianism and economic populism. In the most recent Economic Freedom of the World rating Argentina came in at 137 of the 152 nations rated. 

The country’s worst measure is rule of law, which is reflected in its treatment of international creditors—and steadfast resistance to U.S. court rulings ordering Buenos Aires to pay its debts.

In 2001 Argentina defaulted on nearly $100 billion in debt. The Argentine people essentially had a wild party and woke up with a hangover. Their first reaction was to stiff the fools who had extended credit. Owners of roughly 93 percent of the debt gave in and restructured their paper, accepting huge write-offs.

Syrian Pound Soars, Iran’s Single Digit Inflation, and Other Troubled Currencies Project Updates

Syria: On September 27th, the United Nations Security Council unanimously adopted a resolution outlining the details of the turn over and dismantlement of Syria’s chemical weapons. Syria’s president, Bashar al-Assad, has stated that his government will abide by last week’s UN resolution calling for the country’s chemical weapons to be destroyed. 

Rouhani Delivers Lower Inflation, and other Troubled Currencies Project Updates

Iran: Prior to Hassan Rouhani’s election as Iran’s new president in June, the black-market Iranian rial to U.S dollar (IRR/USD) exchange rate stood at 36150, implying an annual inflation rate of 109 percent (June 15th 2013). Since Rouhani took office, Iranian expectations about the economy have turned positive, or at least less negative, and the black-market IRR/USD exchange rate has strengthened to 29200. In consequence, the implied annual inflation rate has fallen like a stone, and currently sits at 20 percent.

Bondholders Should Think Twice about Argentina’s Debt Swap Offer

The video below shows interim-Argentine president Adolfo Rodríguez Saá (he was president for a week) announcing before Congress in late December 2001 that Argentina would default on its debt—the largest sovereign default in history. Rodríguez was interrupted by a standing ovation and chants of “Argentina! Argentina!”


Fast forward 10 years to May 2012 when Argentina’s congress voted overwhelmingly to seize (without compensation so far) Yacimientos Petrolíferos Fiscales (YPF), the country’s largest oil company whose controlling stake belonged to Spain’s Repsol. When the 207-32 vote was announced, the chamber erupted in a wild celebration, with deputies hugging each other and singing:


This is just a taste of Argentina’s flimsy rule of law.

Dollarize Argentina Now

Argentina is once again wrestling with its long-time enemy, inflation. Now, it appears history may soon repeat itself, as Argentina teeters on the verge of another currency crisis. As of Tuesday morning, the black-market exchange rate for Argentine pesos (ARS) to the U.S. dollar (USD) hit 9.87, meaning the peso’s value now sits 47.3% below the official exchange rate. This yields an implied annual inflation rate of 98.3%. For now, the effects of this elevated inflation rate are being subdued somewhat by Argentina’s massive price control regime. But these price controls are not sustainable in the long term. Indeed, the short-term “lying prices” only distort the economic reality, ultimately leading to scarcity. There is, however, a simple solution to Argentina’s monetary problems: dollarization. I have advocated dollarization in Argentina for over two decades, well before the blow up of their so-called “currency board.” To put the record straight, Argentina did not have a true currency board from 1991 to 2002. Rather, as I anticipated in 1991, the “convertibility system” acted more like a central bank than a currency board. This pegged exchange rate system was bound to fail—and fail, it did. The 2001-02 Argentine Crisis could have easily been avoided if the country had simply dollarized. Argentina had more than sufficient foreign assets to dollarize their economy even late into 2001. But the Argentine government, through a series of policy blunders, ended up “floating” the currency. Not surprisingly, Argentina is now back to where it was in the late 1980s. So, how can Argentina dollarize? In short, the Banco Central de la Republica Argentina (BCRA) would take all of the assets and liabilities on its balance sheet denominated in foreign currency and convert them to U.S. dollars. The Central Bank would then exchange these dollars for all the pesos in circulation (monetary base), at a fixed exchange rate. By my calculation, the BCRA would need at least $56.36 billion to dollarize at the official exchange rate (as of April 23, 2013).

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