Article Link: https://money.cnn.com/2018/08/30/news/economy/argentina-interest-r

Question

Article Link:https://money.cnn.com/2018/08/30/news/economy/argentina-interest-rates-currency/index.html

Article Title: Argentina hikes interest rate to 60% as its currency plunges

Summary and Findings

Argentina has been one of the worst performing country in terms of its currency last year. Its currency fell by almost 50% against US dollar and as a result of this Central Bank of Argentina increased its interest rate from 45% to 60%. The depreciation of currency was caused by severe economic problems being faced by the country and recent vague communication by the leaders. Now the economy is asking IMF to expedite the disbursement of $50 billion as a credit line to revive the economy. Currently Argentina is facing a problem similar to Turkish lira.

I believe increasing the interest rate is the short-term monetary policy tool only. It cannot benefit the economy from the structural problems it is currently facing. Argentina is full of natural resources and all it needs is a good governance which can deploy the natural resources profitability. Working on education, employment and growth should be the focus of the country.

ELABORATE AND CLARIFY THIS POST OF ONE OF MY CLASSMATES (AGREE OR DISAGREE) AND WHY?

Explanation / Answer

With the benchmark interest rate now at 60 percent, the world’s highest, Argentina must turn to less conventional ways to remove excess money in the market. The central bank has sold billions worth of dollars at auctions to defend the currency, but that hasn’t done much good. What Argentina really needs, if it’s going to stop traders fleeing from its currency, is a quick narrowing of the budget deficit. Coming into this year, the government sought to gradually cut spending. “A fiscal adjustment shock,” Goldman Sachs economist Alberto Ramos wrote in a note, is “the antidote for the market’s lost confidence.”

"The low values (of Argentine assets) reflect Argentine risk ... it could be a turbulent ride," local consulting firm Delphos Investment said.Some in Argentina believe Macri's government lacks the political will to implement unpopular spending cuts that are expected to be part of a revamped IMF deal.

Rolling out the austerity measures will not be politically easy. Buenos Aires streets are regularly blocked by anti-austerity marches. When the government introduced a bill to reduce pension benefits late last year, protesters rushed Congress and were held off with water cannon and teargas. Economists expect Argentina's economy to shrink 1.9 percent this year compared to a previously estimated 0.3 percent contraction, according to a central bank poll published on Tuesday. Inflation in 2018 is now seen at 40.3 percent, versus 31.8 percent in the previous monthly poll.The austerity measures aim to eliminate the primary fiscal deficit next year, when Macri is expected to seek re-election. Previous targets announced after the country inked the IMF deal in June included a 1.3 percent of GDP primary fiscal deficit in 2019, with no deficit in 2020.

Argentina is struggling to break free from the cyclical crises that have hammered the country every decade over the last 60 years. A financial meltdown in 2002 tossed millions of middle class Argentines into poverty, with many blaming IMF's orthodox economic policies for setting the stage for the crisis.

It’s a country of ample natural resources but a history of poor governance. Political polarization over decades and a tendency to opt for short-term solutions has led Argentina to cycles of boom and bust. The 2001 default that plunged millions into poverty followed a successful run in the 1990s, when one peso was worth one U.S. dollar, which many economists at the time said was an unsustainable policy. These days, $1 equals about 38 Argentine pesos. The 2001 crisis was then followed by years of strong economic growth fueled by a global boom in commodities.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.