Post date : 09.12.2014 2:54 pm
Things only seem to be getting worse for Argentina. Since its default, the economy has deteriorated rapidly with each passing day. Consumption is falling, exports are down, consumer confidence is sinking, the peso is hitting record lows while prices are rising, wages are deteriorating, and labor unrest is expected to pick up as the 2015 election approaches. And the government only seems to be aggravating the situation.
A Reuters piece from yesterday titled, “After default, Argentina economy falling into deeper hole,”summed up the situation well. The article stated, “Argentina’s government is ramping up state intervention in the economy to try to prevent a new debt default from triggering a balance of payments crisis but its policies are also battering business confidence and may deepen a recession.”
Argentina’s reserves are at an eight-year low of $28.4 billion, equivalent to less than five months of imports. An economist at Jefferies, Siobhan Morden, believes that reserves could drop as low as $7 billion by the end of 2015. The Central Bank has increased the minimum monthly salary required by Argentine citizens to buy dollars and strengthened its restrictions on dollars available to importers. El Cronista just reported today that the Brazilian subsidiary of GM will suspend auto exports to Argentina due to a lack of hard currency. The President of General Motors America, Jaime Ardila, apparently believes the lack of access to hard currency is temporary and “will normalize when the problem is solved with the holdouts.”
Instead of dealing with its debt crisis and seeking a resolution with its holdout creditors though, Argentina’s government is implementing more restrictive economic measures by the day. The government is in the process of passing an update to a law that allows it to intervene in various aspects of private companies, from the setting of prices and profit margins to production levels. This so-called “Supply Law” has alarmed businesses, and prompted the leaders from the agricultural, construction, banking, industry and retail sectors to threaten legal action against the bill.
Jim Grant, of Grant’s Interest Rate Observer, apparently thinks that “Like Russia, Argentina is so bad it almost can’t get any worse.” Grant, who cited the country’s recurring power outages, skyrocketing inflation, and plunging real estate deals, puts the economic crisis squarely in Cristina’s lap. “In misgoverning, she’s wrecked the economy,” Grant observed. “By stepping down, she’ll improve it.”
Discussing the prospects for a post-Kirchner Argentina, Grant concludes that, whatever the differences between the presidential candidates, the contenders seem to agree that capital controls must be lifted, real rates of interest must be restored, and a settlement with creditors must be achieved.
Cristina can still turn this situation around. Negotiating a solution with creditors would restore investor confidence and allow Argentina to re-enter the capital markets. It’s not too late to come to the table.