The President of Argentina has embarked upon a raft of reforms which, he hopes, will put the economy on the path to sustainable expansion. As a largely precautionary measure, Argentina agreed a loan with the IMF that could be tapped, if needed, and was worth $50 billion. President Marci has asked the IMF to release the loan early to help stem a growing economic crisis by, he hopes, restoring confidence.
The IMF’s director, Christine Lagarde, noted “I stressed my support for Argentina's policy efforts and our readiness to assist the government in developing its revised policy plans”. The IMF confirmed (yesterday) that it is changing the agreed phasing of the loan and looking to strengthen arrangements.
Much of the current turmoil in Argentina is over investor concerns that the government may not be able to honour its commitments on government borrowing – the loan ought to allay this concern. It is a measure of the loss of investor confidence that the purpose of the IMF loan was to provide a financial credit line which the government did not intend to tap.
The value of the Argentinian Peso has declined by 40% against the Dollar over the course of the year and inflation in the economy is the highest of any G20 nation at 31.2% (July data). In an attempt to choke off inflation, the central bank interest rate stands at a whopping 45% (if you are feeling brave…).
The government wants to get public spending and borrowing under control, but this is proving easier said than done. Since any imported goods (largely priced in Dollars) have become dearer as the Peso weakens, life is getting harder for Argentinians. The problem, of course, is exacerbated by the high inflation in the economy which affects domestic goods too.
Time will tell if having the financial guarantee of the IMF on tap will restore confidence to investors and ease the crisis, but Argentinians are in for the long haul, unfortunately.