It has been just days that Argentina had made three successive rate hikes in eight days – taking the interest rate in the country to 40%, to control the slide of its currency peso. Now the country has appealed for an emergency credit package form the International Monetary Fund to enable it to prevent a financial crash and prevent the peso from falling further against the dollar.
This announcement of the need for a rescue debt has brought up memories of the financial crash of December 2001 in the country because the announcement was made in the backdrop of the consecutive rate hikes and a very sticky inflation. In 2001, there was fall of nearly a quarter of the value of peso against the dollar virtually overnight which forced the government to freeze bank accounts throughout the country.
“This will allow us to face the new global scenario and avoid a crisis like the ones we have faced before in our history,” the president Mauricio Macri said.
Macri said that ever since had had assumed office of president in 2015, there has been a change in the international market and political conditions. “During the first two years we have had a very favourable global context, but today that is changing, global conditions are becoming increasingly complex due to several factors: interest rates are rising, oil is rising, currencies of emerging countries have been devalued, all variables that we do not control.”
With the aim of stopping the peso from falling further, the interest rate in Argentina was increased 33.25% to 40% by the country’s central bank last week.
During the last few months, there has bene a steady fall in the value of the Argentine peso against the dollar touching 24 pesos against a dollar on Tuesday from 20 pesos to the dollar even with the rate hike. There has been an 18% decrease in value in the peso so far this year.
According to media reports in Argentina quoting government sources, a debt of $30bn would be requested by Macri from the IMF at rates that are below the normal market interest rates. “It’s a large loan that justifies paying the political cost,” a government source was quoted as saying by the daily Clarín.
In the last months the foreign currency reserves at the central bank has come under strain because of the falling of value of the peso. “Going to the IMF at 4% is saving about half on the interest rate,” tweeted Elisa Carrió, head of the Civic Coalition party that forms part of Macri’s Cambiemos governing coalition. “This will allow us to be covered until 2019.”
However, there were others who are in the ruling coalition who are not as pleased. “More than an agreement with the IMF, what is needed is an agreement between Argentinians,” said Ricardo Alfonsín of the Radical party. “I’m worried by the IMF’s conditions. With time, the remedy could prove worse than the disease.”
(Adapted from TheGuardian.com)