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1 [1] (June 15, 2020)

handle is hein.crs/govdbzx0001 and id is 1 raw text is: Argentina's Economic Crisis and Default Updated June 15,2020 In 2018, the Argentine government faced numerous economic challenges: the unsustainable buildup of debt, rapid depreciation of its currency (thepeso), economic contraction, and inflation. The government, headed at the tine by center-right President Mario Macri, reluctantly turned to the International Monetary Fund (IMF) for financial as sistance to avoid defaulting on its debt. After securing the largest IMF loan (in dollar terms) in the institution's history, economic conditions failed to improve. In the October 2019 elections, Mario Macri lost to the center-left Peronist ticket of Alberto Ferndndez for president and former President Cris tina Fern ndez de Kirchner for vice president. The Peronist ticket campaigned on a reorientation of Argentine economic policies. After taking office, the Femdndez government implemented several economic reforms and entered debt restructuring negotiations with its bondholders, which remain ongoing. The COVID-19 pandemic and resulting economic turmoil further stressed Argentina's economy, andthe government defaulted on its debt in May 2020. Argentinahas a long history of economic crises. It has defaulted onits externaldebt (debt held by foreigners) nine tines since independence in 1816. It took 15 years to resolve Argentina's default in 2001. Argentinahas also entered into21 IMFprograms sincejoiningin 1956. The current economic crisis facing Argentinastems fromboth longstanding is sues and recent developments. When President Macri was elected in 2015, he ushered in a series of economic reforms aimed to address the unsuccessful economic policies of the previous Kirchner governments, whichhad governed Argentina since 2003. He cut export taxes, lifted currencycontrols, andresolved a 15-year long dispute with holders ofdefaulted Argentine bonds, allowing Argentina to resume access to international capital markets. The centralbank also raised interest rates to 25% to curb inflation. The economy contractedby 1.8% in 2016, butresued growthof2.9% in 2017. To maintain political support for the reforms and support the country's nostvulnerable (onein three Argentines was living below the official povertyline in 2015), the government held off on substantial fiscalreforms to addiess the budget deficit, 4.3% of GDP in 2014. However, the Macrigovernment saw borrowing costs rise, as it switched to traditional borrowing frominternational capital markets relative to the Kirchners' unorthodoxfinancing tools, including money creation and coercing domestic banks into buying government bonds. TheMacrigovemmentis sued $56 billion in external debt between January 2016 and June 2018. Interest payments facing the governmentcaused the budget deficit to increase to 6.4% of GDP in 2017. Meanwhile, capitalinflows into the country to finance the deficit contributed to an overvaluation of the peso, by 10%- 25%. This overvaluation also exacerbatedArgentina's current account deficit (a broad measure of the trade balance), which increased from2.7% of GDP in 2016 to 4.8% of GDP in 2017. ckis~s. -akc ' s Nc.-k8 ey Argentina's increasing reliance on external financing to fund its budget and current account deficits left it vulnerable to changes in the cost or availability of financing. Starting in late 2017, several factors created problems forArgentina's economy: the U.S. Federal Reserve (Fed) began raising interest rates, reducing investor interest in Argentine bonds; the Argentine central bank reset its inflation targets, rais ing questions about its independence and commitment to lower inflation; and the worst drought in Argentina in 50years hurt commodity yields, significantly eroding agricultural export revenue. Investors began selling Argentine as sets, putting downward pres sure on the peso (Figure 1). With most of its debt denominated in dollars, a depreciated peso increased the value of the debt in terms of pesos. To improve investor confidence, the centralbank and government announced in April and May 2018 higher interest rates (to 40%) and fiscalreforms to cut the budget deficit. Market volatility continued, however, and in June 2018, the Macri government reached an agreement with the IMF for a three- year, $50 billion program Figure I. Value of the Argentine Peso: 2018 to date Pesos per U.S. dollar M:F ..Eleton program Ganera starts ' t\ , . Eiect;on nterest Mncreases ,x rates to JU% ditfui tnwg Source: Global Financial Data. At the program' s outset, skeptics raised questions about the fiscalcuts and growthprojections underpinning the program Through the program, the government committed to ambitious andpolitically unpopular austerity. The IMF was aware of the potentialrisks when the programwas approved in June 2018: IMF staff noted in program documents they could not certify under the baseline foiecast scenario with a high probability that Argentina's debt would be sustainable, with Argentina's external debt A A '2

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