I predict a riot - Argentina

Always a weak link in the chain, the Argentinian central bank was recently forced to raise interest rates for the third time in 8 days to an eye watering 40%.

As expected the economists have warned that the government must take "aggressive steps to fix Argentina's economic vulnerabilities". These vulnerabilities - large budget and trade account deficits, high debt burden, high inflation, and an overvalued currency. Indeed everything we might expect from a country that has defaulted on its debt eight times in it's history.

Source https://today.rtl.lu/news/business-and-tech/1174952.html

The 2015 October elections highlighted a deeply divided elite faced with this exact crisis ahead of them. Trying desperately to distance themselves from the former president Menem who is now in prison on charges of embezzlement ,the winners were the right wing Cambiemos coalition. The new President, Mauricio Macri, who belongs to one of Argentina's wealthiest families hoped that by opening up to the Western banks the elite could save themselves.

This is unsurprising because the entire Argentinian political system originates from the Conquistadores. They basically enslaved everyone and set up an oligarchic rule by rich Spanish families. The Spanish may have been kicked out but the oligarchy remains. Huge wealth disparities resulted in a country where uprisings from below have been countered by dictatorial regimes.

Source https://www.alamy.com/stock-photo-president-juan-peron-and-his-wife-evita-waving-to-the-crowd-69278381.html

Argentina did have it's third way proponents. Juan Peron had been a lieutenant general in the army and was president between 1946-55 and again in 1973-74, and he had a major impact on Argentinian politics. He managed to balance demands between the left and right. Whilst keeping private property rights in tact the government also protected exports through a monopoly on grain and cattle. Extra revenue was used for reforms, such as the eight hour working day. Of course, this strategy only worked in the good times. During the economic crisis of the 70s fascist dictatorships became the norm throughout the continent.

The effects of Peron's statist/protectionism and the 1976 fascist dictatorship have largely defined Argentine society. Elements of both surface today and work to keep the inequalities of Argentina in place. For example, the last President, Crisitna Kirchner (who followed her husband into office), were leftist Peronists who favoured Chavez, and promised reforms. However, all the rhetoric of social justice and wealth redistribution, was only the soundtrack as vast amounts were looted from government coffers. She is alleged to have amassed a fortune whilst in office. Since leaving there has begun dozens of investigations into corruption charges of those closest to her.

Now the new President Macri was given about a year and a half's grace, according to a former IMF division head, "to put the house in order". Macri had been pursuing a plan of gradually tackling the budget deficit and investors had been hoping that Macri's reversal of Kirchner's protectionist "state interference", would bring predictability and lure foreign capital.

His government proceeded to liberalise investment rules and invite foreign capital in. This produced initial success, although this was happening at a time of general global growth in which emerging economies were borrowing cheaply and investing in infrastructure projects. However, this does lead to inflationary pressures.

Source https://stockboardasset.com/insights-and-research/crisis-argentina-raises-interest-rates-40/

The result has been a steadily weakening peso against the dollar, which makes all those dollar dominated debts harder to pay back. The peso fell against the dollar by 8% in a single day this week. A currency death spiral looks inevitable. According to Bloomberg, the sell off had its roots in December's decision by the central bank to loosen its inflation targets after coming under pressure from the government. In January the bank cut rates 1.5% even as inflation hit 25% with no sign of abating.

The government has already been at logger heads with Argentinian workers with Macri's brutal pension cuts and anti-union legislation. The government has already reacted to this currency crisis by stating that Argentina will reduce infrastructure spending by $1.4bn and find savings of about $3.2bn. Goldman Sachs say "more may need to be done".

By "more" the good people at Goldman Sachs mean more looting, more privatisation, more cuts to living standards. It seems that for Macri the breathing space has come to an end. "It's time to rip the Band-Aid off" investors demand, which in plain language means slash government spending, sell off assets and raise taxes on ordinary people. However, there does not seem to be much confidence that Macri can pull this off. Most likely a debt default and a complete currency collapse is just round the corner.

Of course what is happening in Argentina is not some isolated incident. This is happening now because of the pressures pushing upwards internationally on interest rates. When the US raises interest rates by even 0.25% we can see the ripples in the emerging economies. Macri is part of the parade of neo-liberals currently postulating a delusory plan of gradual reversal out of this black hole of debt.

Sources
https://www.bbc.co.uk/news/business-44001450
http://news.goldseek.com/DollarCollapse/1525455200.php
https://en.wikipedia.org/wiki/Justicialist_Party
https://en.wikipedia.org/wiki/Cristina_Fern%C3%A1ndez_de_Kirchner
https://www.newyorker.com/news/news-desk/argentinas-culture-of-corruption
http://www.marxist.com/argentina-s-past-peronism-revolution-and-counter-revolution.htm
https://en.wikipedia.org/wiki/Juan_Per%C3%B3n
https://stockboardasset.com/insights-and-research/crisis-argentina-raises-interest-rates-40/

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