2018-09-01 07:14:23 UTC
Investors are increasingly concerned Latin America's third-largest economy
could soon default as it struggles to repay heavy government borrowing.
This comes after Argentina's government unexpectedly asked for the early
release of a $50 billion loan from the International Monetary Fund (IMF)
The Argentine peso crashed to record lows on the news. It saw steep losses
in the previous session and collapsed another 15 percent to hit 39 pesos
against the U.S. dollar on Thursday morning.
The peso is down more than 45 percent against the greenback this year,
exacerbating pre-existing fears over the country's weakening economy while
inflation is running at 25.4 percent this year.
On Thursday, the central bank said it was increasing the amount of
reserves that banks have to hold, in a bid to tighten fiscal policy and
shore up the currency. It hiked rates by 15 percentage points to 60
percent from 45 percent and promised not to lower them at least until
Argentina's economy 'likely to contract this year'
The IMF said in a statement Wednesday that it would look to "revise the
government's economic plan with a focus on better insulating Argentina
from recent shifts in global financial markets."
The Washington D.C.-based institute also added that its plan included
"stronger monetary and fiscal policies and a deepening of efforts to
support the most vulnerable in society."
"It is now unclear if that will be enough to stabilize the government's
finances amid (a) persistent reserve drain," Deutsche Bank's Jim Reid said
in a research note published Thursday.
In addition to IMF support, Argentina's government has also raised
interest rates to 45 percent in an attempt to curb inflation and slow the
peso's dramatic slide.
But the world's highest interest rate levels as well as backing from the
IMF have both failed to significantly improve market sentiment.
"Real rates are not tight enough to encourage capital inflows (so) the
economy is likely to contract this year," Reid said.
A number of emerging market countries, including Argentina, Turkey and
Brazil, are feeling the impact as tighter monetary policy from the U.S.
Federal Reserve has boosted the dollar.
In a televised address on Wednesday, Argentine President Mauricio Macri
said: "We have agreed with the IMF to advance all the necessary funds to
guarantee compliance with the financial program next year."
"This decision aims to eliminate any uncertainty Over the last week we
have seen new expressions of lack of confidence in the markets,
specifically over our financing capacity in 2019," he added.
When Argentina's government agreed the terms of the loan with the IMF in
May, Macri said he anticipated his country's economy would recover and so
they did not plan to use the money.
Buenos Aires was forced to strike a deal with the IMF after a sharp
depreciation in the peso. The three-year standby financing agreement is
designed to improve the country's ailing economy and help it fight
inflation which at nearly 30 percent per year is one of the highest
Nonetheless, some analysts have criticized the decision to speed up the
IMF bailout, saying it smacks of desperation.
Many people in Argentina blame the IMF for encouraging fiscal policies
that escalated the country's worst economic crisis in 2001. At that time,
millions of middle-class citizens fell into poverty as the country
struggled to recover.
"I know that these tumultuous situations generate anxiety among many of
you ... I understand this, and I want you to know I am making all
decisions necessary to protect you," Macri said.