Argentina is no stranger to debt crises and defaults, and at Foreign Policy, Victor Gilinsky gives readers the impression that the country may be headed for another in the face of 30-year high inflation and rapidly diminishing foreign currency reserves. Gilinsky writes:
Argentina’s annual inflation rate soared past 70 percent in July—the highest level in three decades—according to data released by the Argentine government last week, and it could hit 90 percent by the end of the year. The runaway inflation has left many in the country mired as they turn to barter and parallel currency markets amid dwindling Central Bank reserves, a bloated fiscal deficit, and a looming debt bomb.
But this is not the country’s first dance with economic danger.
“For those of us who have been around for longer, living in this country, everything has a sense of déjà vu,” said Carlos Gervasoni, an associate professor and chair of the political science department at Universidad Torcuato Di Tella in Buenos Aires. “It’s always the same story, there are just different flavors of what Argentina faces every five or 10 years.”
Argentina’s ongoing battle with inflation dates back to the 1980s, or even earlier. But the COVID-19 pandemic, coupled with Russia’s war in Ukraine, shrinking global food supplies, and tighter energy markets, has sent shock waves through an already battered economy. Nearly 4 in 10 Argentines currently live below the poverty line. The economy—which is highly dollarized given the diminishing value of the Argentine peso—is running through billions of dollars’ worth of foreign reserves on a weekly basis. Some Argentines have resorted to trading milk for diapers. Others complain that the frequent changes in prices have left them guessing the cost of their newspaper or bag of rice—often they only find out when they get to the cashier. Tourists who do try to use debit cards overseas have to pay a tax of almost 50 percent on transactions—a desperate measure to keep foreign currency reserves in the country.
“It is a big problem, of course, but being born in it, you kind of get used to it,” said Alfonso Sundblad, a student at the University of San Andrés in Buenos Aires. “But what you feel the most is the uncertainty—you can never unplug from the political world and the economy, even though you’re a child.”
Yet, given an unstoppable fiscal deficit—the government spends much more than it takes in—the Central Bank keeps printing more pesos, which pushes the value of each one lower, making inflation even worse. The Central Bank of Argentina last week hiked lending rates to stratospheric levels (the benchmark rate is now 69.5 percent) in a bid to check inflation, but such steps will also check investment and economic growth.
And then there’s another debt crunch. Argentina still owes the International Monetary Fund $40 billion as part of its 2018 bailout, but took out another $44 billion loan earlier this year from the IMF to meet its obligation, adding to the risks of a default, which would just make everything worse.
“The combination of global shocks, overprinting money within Argentina, and a very high inflation expectation combines into this toxic stew,” said Benjamin Gedan, the deputy director of the Latin America Program at the Wilson Center.
When it comes to defaults, Argentina does have a bit of a history. Since it joined the IMF in 1956, Argentina has sought and agreed to 22 financial-support programs from the organization, the most notable of which was during the 2001 Argentine financial crisis when it defaulted on a $21.6 billion IMF loan. (It also halted payments on $95 billion worth of bonds to other creditors.)
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