Thursday, 31 July 2014

The Argentinian Default: Here's What Happened to The Monetary Data Preceding It

Argentina has just defaulted on its debt for the second time in the last twelve years (the technicalities of it is under some debate). Following futile attempts to maintain an overvalued exchange rate against the US dollar (here), the Argentinian Peso has dropped from about 5.51 against the dollar a year ago to yesterday's 8.19.

Back in early February this year, I wrote a short post asking what all panic-prone emerging market had in common. The answer was a very high money supply growth rate over an extended period. So here's what happened to the monetary data in Argentina leading up to the default:

Back in October last year Reuters reported,
Argentina is inching closer to a currency crisis that could unleash economic havoc unless the government takes the tough decisions needed to increase confidence in Latin America's No. 3 economy and stem the outflow of foreign reserves.
Starting in 2003, Argentina's government began moving away from market-friendly economic policies toward a more populist attitude that grants generous government subsidies on everything from public transport to social programs.
This soon led to a spike in inflation, which private analysts estimate at 25 percent, one of the world's highest rates. The government, which has been reprimanded by the International Monetary Fund for inaccurate data reporting, says inflation is between 10 and 11 percent.
In an attempt to control prices, President Cristina Fernandez's government has kept the official exchange rate at artificially strong levels, effectively making imports cheaper but hampering manufacturers' ability to compete internationally and driving down private investment.
With the country unable to finance imports or debt payments by borrowing from abroad after its 2002 default, Argentina has been forced to rely on foreign exchange reserves, which are mostly generated by grains exports.
Reserves are down by 20 percent this year to $34.4 billion, their lowest level since early 2007.
If this trend continues, the government may find itself without enough foreign currency to honor its debts or pay for its energy needs, eventually leading to economic collapse.

The current Argentinian default is arguably a text book example of how a government, in tandem with its central bank, can be a harbinger of poverty and with it bring an entire economy to its knees.

Related: Argentina's Consumer Price Inflation, Money Supply and the Collapsing Peso

Also see: Understanding Argentina’s Coming Default