Just Another Debt Crisis
Updated: Jun 18, 2020
2020 has already been so bad that no year can be worse than this. Right?
Don’t conclude so soon. Argentina may have a different story to tell. Argentina, a country in Latin America, has always been plagued by the economic meltdown and today, the history is repeating itself. Today we are covering the debt crisis that Argentina is currently in and what led to it. Let’s get started.
In the far past, Argentina was one of the richest countries in the world and due to the abundance of fertile land and favouring conditions, it was considered the breadbasket of the world. But the Great Depression of 1929 hit them hard. Their major income contributor i.e. income generated through trade to European countries fell considerably and as a response, the country drastically switched to nationalist policies and protectionism measures.
Under these policies, a country tries to reduce imports into its economy by applying tariffs and thus tries to boost local industries. With such nationalist measures and supporting leadership, Argentina could revive itself after the Great Depression. But the relief was short-lived. Over the years, as Argentina has been moving towards industrialization, the productivity hasn’t been so great. As a result, the country needs to keep increasing its spendings to increase output to serve a growing population and even discourages exports, which impacts its foreign reserves.
As a matter of fact, in 70 years, the country has been recession 33% of the time, which eventually leads to a devaluation of their currency, Pesos. (Recession leads to currency devaluation as during recession that country becomes an unsuitable location for investments and thus the demand for that currency falls).
Now, to sustain such an economy, the country can no longer function without debts. But that is not the issue. Borrowing money is nothing unusual in the global scenario and every country does that. But what is not so common here is that Argentina has defaulted on these loan obligations 8 times until now and even today, there are speculations that they will default on their next $56bn loan obligation as well. In fact, the country is infamous for the biggest debt default in history, of nearly 100 billion dollars. This happened in 2001 where the situation was so worse that the President escaped from the country in his presidential helicopter after formal resignation and later, 4 presidents were changed in 2 weeks.
Despite such a bad experience, why is it happening again? We will tell you why. Before the elections in Argentina in 2019, Mauricio Marci, the former president brokered a loan package from IMF of about 56 billion dollars. Some good news, 44 billion dollars is already paid. The rest is to be paid by 2023. But Alberto Fernandez, the current presidents feels that payment obligations are unsustainable and they won’t be able to pay the remaining amount by 2023.
To try to make it possible, they even introduced austerity measures but it was revolted by the already struggling public. And now due to the slowdown triggered by the pandemic, the situation is worse. Another factor which contributed to the potential default is that after the election, Marci was removed from power and the position was taken by a far-left party leader Alberto Fernandez.
At that time, the country was already in recession and a change of power to leftist government further reduced the investment’s confidence into the country as investors feared the government’s intervention. This impacted foreign reserves and further devaluated pesos.
The recession is getting worse day by day and the recovery is nowhere to be seen. This is what is being referred to as the debt crisis of Argentina.
Talks between IMF and Argentina are going on but a final agreement is yet to come.