Argentina is haunted by the ghosts of crises past

They call it “green fever.” As the peso loses value against the dollar, Argentines panic. Suddenly, everyone is an economist, tracking the exchange rate like the score in a World Cup match. 

In some ways, that angst is understandable, as vivid memories of economic chaos have left the impression that Argentina is forever on the verge of collapse.

{mosads}In good times, that sentiment merely stunts growth by discouraging investment. But in moments of financial stress, Argentina’s reputation deprives its leadership of an indispensable resource: the benefit of the doubt. The rush to the exits reinforces doubts, raising borrowing costs and bludgeoning the peso.

That is what is happening today. As the United States raises interest rates, investors are trading emerging market currencies for dollars. This has depressed the value of many currencies, notably the Turkish lira. But the Fed’s actions were widely expected, and the global impacts have been relatively modest.

Argentines, however, are prone to overreact, and alarmist theatrics are a national pastime.

Fearful that the weakening peso would worsen inflation, Argentina’s central bank sold $5.3 billion — 10 percent of its hard currency reserves. Nevertheless, the peso lost 12 percent of its value in less than a week. This spooked the central bank. In three unscheduled meetings, it repeatedly raised interest rates, from 27 percent to 40 percent. 

In most countries, this type of decisive intervention would have been reassuring. But in Argentina, South America’s second-largest economy, the markets did not calm until President Mauricio Macri announced on television that he was seeking International Monetary Fund (IMF) support. Though the IMF is reviled in Argentina, the president said he needed its help to “prevent a crisis.”

A crisis? It seems like yesterday that Argentina was the international prom queen. 

The election in late 2015 of a pro-market government had reawakened investor interest. At the “Casa Argentina” in Davos in January, Bill Gates, Facebook’s Sheryl Sandberg and the Coca-Cola CEO queued up to meet Macri. Argentina hosted the World Trade Organization ministerial last December, and it holds the G-20 presidency this year.

In March, the IMF’s managing director, Christine Lagarde, visited Buenos Aires, where she spoke glowingly of the economic reforms. Macri, she said, was making adjustments with “determination and will.” 

Observers understood that Macri’s reforms were built upon a shaky foundation. His populist predecessors had overspent and over-promised for a decade.

His government inherited double-digit inflation, empty central bank vaults, capital controls and unsustainable subsidies on utilities and public transportation. The primary fiscal deficit in 2016 was 4.6 percent of GDP.

As is often the case, fixing one problem worsened another. Reductions in public spending and lifting capital controls contributed to a recession and ballooned inflation in 2016. The economy expanded again last year, growing by 2.9 percent, after a 1.8-percent contraction the year before.

But cutting public subsidies has kept inflation high; the rate last year hit 25 percent, far above the government’s 17-percent target. Avoiding an even sharper deficit reduction has forced heavy borrowing.

Even so, observers had been satisfied with the pace of reform. Last August, Vice President Pence traveled to the Olivos presidential residence, where he lavished praise on his host:

“I’m here to commend you, President Macri, for your bold reform agenda, an agenda that’s transforming Argentina’s economy at home and restoring its reputation around the world,” he said. “Argentina, in many ways, is an inspiration across this hemisphere and across the wider world.”

So what changed? A minor external shock, and a major reminder of Argentina’s checkered past. 

Since 1827, Argentina has defaulted on its debt five times. The last was in 2001, a catastrophic meltdown. The $100 billion default was the largest in world history, and it sunk Argentina into a painful depression. For years, it refused to repay Paris Club creditors, and its wrangling with a group of private bondholders lasted until 2016. 

Because a center-right government had provoked the crisis — through excessive borrowing and an overvalued exchange rate — Argentines turned to leftist Peronists, first Néstor Kirchner and then his wife, Cristina Fernández de Kirchner.

Their populist policies brought Argentina to the edge of yet another collapse. Hostility to the private sector made the country an international financial pariah. Locked out of capital markets, Argentina printed pesos to cover chronic deficits, leading to sky-high inflation. 

Mercifully, Macri’s reforms prevented the imminent collapse. In his first two years in office, he has slowly rebuilt Argentina’s economy, though the policy obstacles are immense. But as it turns out, Argentina’s biggest challenge was not the economic wreckage left by the Kirchners, but rather the ghosts of crises past.

Benjamin N. Gedan is an international affairs fellow at the Council on Foreign Relations, a public policy fellow at the Woodrow Wilson International Center for Scholars and an adjunct professor at Johns Hopkins. He is a former South America director on the National Security Council at the White House.