by Mauricio Streb
Committee on U.S.-Latin American Relations (CUSLAR)
Protesters have once again become a common sight in the city center of Argentina’s capital, Buenos Aires. Argentines of all classes have been flocking to the Plazo de Mayo, located in front of the national congress, to protest President Macri and his Cambiemos party’s economic plans.
The new budget for 2019, passed this past November with help from the Peronist Justice Party, implemented massive cuts to social spending while increasing foreign debt service payments. Critics argue that the cuts will remove critical support systems making life difficult for working and lower class citizens.
The current president, Mauricio Macri, came to power in 2015 promising to use his business savvy to bring the economy back on track. Argentina had been under center-left governance for twelve years between the financial crisis of 2001-2002 and Macri’s election. The previous administrations succeeded in paying off the default from the that crisis but at a cost. Argentina has been largely separated from the international financial community for much of the past decade.
Macri sought to bring his nation back into the fold by removing currency controls, reducing government ministries, promoting foreign investment, and cutting subsidies. These policies left the Argentine economy dependent on continued foreign investment and changes in international markets. As a result, when the US Reserve Bank began hiking interest rates this past April, it caused spikes in interest rates worldwide. The newly strengthened dollar pulled investors away from Argentina and other middle-income countries. The sudden withdrawal of foreign funds led to a precipitous drop in the peso’s value this past May which has yet to abate.
The crisis was brought on by a combination of other factors, besides the steady devaluation of the Argentine peso. At the beginning of 2018 the exchange rate stood at 20 pesos to the dollar, it dropped to 41 pesos to the dollar in October and has stabilized between 37 and 38 pesos to the dollar in the months since then. On top of having a falling currency, inflation rose by 6% over the same period while the country was hit with a severe drought that crippled staple crops such as corn and soybeans in the agricultural sector.
In order to address the escalating crisis, Macri has brokered a massive bailout deal with the International Monetary Fund (IMF) totaling US$57 billion to prop up the national economy and allow the government to continue paying its debts.
IMF bailouts always come with strings attached. The IMF believes in using the opportunity of a bailout to force what it sees as financial responsibility on its borrowers, usually in the form of austerity.
Austerity requires the receiving country to cut government spending as a condition for receiving continued support, almost always in the form of cutting welfare programs and other social safety nets. In Argentina, the government subsidizes healthcare, transportation, and education; all of which have recently been cut for IMF support. The goal of these cuts is to bring national spending in line with revenue, with a special emphasis on balancing the federal budget, in spite of the pain that will bring to the country, with the poor being hardest hit.
The last major crisis in Argentina occurred at the end of 2001 when the government defaulted on over $100 billion in public debt. Over the preceding decade Argentina had pegged its currency to the dollar, meaning that the exchange rate was fixed at one peso to one dollar. The government relied on IMF funding, accompanied by lax oversight, to keep the economy stable well into the second half of the nineties in spite of a growing recession.
The system worked as follows: Argentina exchanged its currency at an equal rate with the United States’, making the peso as strong as the dollar. However, the Argentine and U.S. economies are not interchangeable. This means that in order to maintain this exchange rate, the Argentine government had to keep a stockpile of dollars on hand so investors could trade their pesos for dollars whenever they wanted. This is where the IMF came in.
The IMF arranged billions in loans to Argentina between 1991 and the crash in 2001 in order to facilitate the artificial currency exchange. These loans came with the requirement that government run a “zero-deficit” budget. The situation came to a head at the turn of the century as the U.S. overvalued its currency.
This led to a trade deficit in the US but was disastrous for Argentina. Argentina relies heavily on exports, especially crops, and a strong currency makes their goods expensive and non competitive internationally. This led to concerns that the country wouldn’t be able to pay its debts, or match peso for dollar, which in turn led the country to ask for ever greater loans until the system collapsed.
Argentina is the third largest economy in Latin America, and this newest round of uncertainty comes at a critical moment. Combined with the recent uncertainty in the region after the Brazilian elections in October, failing to address the mounting inflation and sovereign debt could lead to another decade-long recovery.
Furthermore, the Argentine presidency and national legislature are up for re-election in October 2019. Should the Macri administration fail to find an answer, Argentina may become the latest to elect a radical candidate to office as many other countries have.