Argentina has been back in the spotlight following a jump in its benchmark interest rate from 27.5% to 40%. Its foreign-exchange reserves have plunged by $7.6 billion as it tries to defend its currency (chart 1), which has dropped by 17% so far this year and 9% in only the last two weeks. This weakness seems incredible, given that less than one year ago (June 2017) the country managed to issue $2.75 billion in U.S. dollar-denominated bonds maturing in 100 years! What’s even more incredible is that the country only relinquished capital controls in 2015 after having defaulted on its debt in 2014 (the second such occurrence since 2000). The fact that such an issuance managed to get off the ground was a testament to both the belief in the strength of the reforms of President Mauricio Macri following his 2015 election and the ongoing reach for yield taking place across the world on the back of central bank accommodation. In this week’s Economics Weekly we look at the pressure the country is facing—which is a direct result of the dollar’s strengthening—and what it tells us with regard to the current economic cycle and the potential for systemic contagion risks for the United States.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.