Argentina historically has been in a rather unique position . They were not really in the spectrum of third world countries, given their rich mineral deposits and sufficient development from numerous groups of settlers. But at the same time they aren’t being talked about as a serious emerging market because they have never exhibited the growth rates minus inflation. They are in fact one of the two South American members of the G-20, the other one being Brazil.
However, Argentina has also faced a bit of a currency crisis over the past couple of years, and credit rating agencies have definitely taken notice. The Wall Street Journal reported that Moody’s downgraded Argentina’s credit into junk territory (Caa1 on their several step credit rating, US is triple AAA). They cited serious problems with net capital outflows and a lack of access to international financial markets due to other fiscal policies.
The reason the current situation is problematic, and the reason why Moody’s downgraded Argentina is better explained by the lack of access to international financial markets. This was a measure put in place after Argentina went into a near-depression back in 2001 and defaulted on their debts in early 2002 to effectively end the cycle of borrowing and further contractions. The result was an extremely painful contraction of 11% in GDP and a soaring unemployment rate of 20%. Naturally there was a lot of pressure on political leaders at the time due to rising debts but perpetual economic contraction beforehand and the situation would have deteriorated to where Greece is now. Argentina did agree to make payments on some of their foreign-debt obligations during the crisis after their economy stabilized in 2005; however, they have done so almost exclusively through reserve currency. The Argentine government has basically restricted itself to using dollars. With the high inflation that is currently ravaging the country, reserves were declining rapidly, so the government devalued the Peso by 19% in January to increase net capital outflows in the short-run. However, with very limited options to reverse the capital outflow trend, Moody’s analysts believe that Argentina would have to devalue again which would only be a temporary fix until their debt essentially becomes worthless or unsustainable. In which case, Argentina would have to default.
This crisis is not new, and in fact many of the problems that Argentina are facing now, led to a massive and largely isolated depression in the country. The Washington Post chronicled the Argentine collapse that unfolded back in the late 90s/early 2000s and the causes sound eerily similar to what is occurring today. Argentina introduced a dollar peg which brought about high growth for about a decade and an influx of capital; however, the rate of growth was unsustainable and Argentina entered a recession with escalating levels of debt that were unresolved after the government defaulted in 2002. Since then monetary and fiscal policy have taken to the other extreme in terms of financing and are in danger of heavy inflation and internal economic damage. The best solution would be to stimulate domestic investment. This will not be possible, however, unless the government encourages its citizens to start borrowing and lending with domestic currency while opening itself to some international borrowing.