Argentina was once one of the
richest countries in the world.
But over the last half century, it has been hit by a
major economic crisis roughly once every decade.
For citizens of South America’s
second-largest country,
this boom and bust cycle is a
situation that is all too familiar.
So why does Argentina seem
to be stuck in this pattern?
Argentina’s most recent economic
turmoil began in August 2019,
after a surprising result in its primary elections
set off a shockwave in financial markets.
That’s because the sitting president, Mauricio Macri
lost to his rival by a far bigger margin than expected.
The business-friendly incumbent has since
been ousted by the opposition ticket of centre-left
candidate, Alberto Fernandez, and his running mate,
former president Cristina Fernandez de Kirchner.
A return of the left to power has set alarm
bells ringing for international investors,
with many concerned it could herald a
new era of government intervention.
The primaries on August 11 had a dramatic effect
on Argentina’s stock market, known as the Merval.
It collapsed by 48% in dollar
terms the very next day.
That marked the second-biggest
one-day fall anywhere since 1950.
The market chaos was so extreme
that Argentina was estimated to
have lost $3 billion in
reserves in just two days.
The government has since restricted foreign
currency purchases in an attempt to steady the ship,
putting financial restrictions on companies
as well as the country’s citizens.
But unfortunately for Argentina, this kind
of economic turbulence is all too familiar.
In addition to wine, steak and tango dancing, Argentina
is known for enduring economic meltdown.
To understand why, we first need
to look back at its long history.
A century ago, Argentina was one of
the 10 richest countries in the world.
The resource-rich nation boasted vast amounts of
highly fertile land and was able to capitalise on this
to become one of the most important
exporters of grain and meat.
By 1910, its trade amounted to 7% of the global total,
making it the so-called “breadbasket of the world."
Then the Great Depression arrived in
1929 and global trade took a huge hit.
Latin American trade
declined by nearly 40%,
and Argentina’s meat exports to
Europe fell by more than two-thirds.
While its competitor, the United States tackled
the problem with programs like the New Deal,
Argentina was paralyzed and began to move
toward nationalism and protectionist policies.
Tariffs jumped in the 1930s, with the average import
tariff increasing from 16.7% in 1930 to 28.7% in 1933.
The government also began manipulating exchange
rates in an attempt to protect the local industry.
The government deepened these policies during World
War II and with General Juan Peron’s rise to power.
After a long history of policies that favored
the rich, Peron and his second wife Eva became
beloved figures among the country’s urban workers,
thanks to a wide range of new social welfare benefits.
And his legacy lives on, with many of Argentina’s
politicians throughout the years calling themselves
Peronists, including its
newly elected leaders.
While the U.S. and Europe
lowered the barriers to trade,
Argentina sought industrialization
within its borders.
Unfortunately, that wasn’t enough
to kickstart its economy,
with industrial productivity increasing at an
average of 2.6% between 1946 and 1963
and then actually declining at an annual
rate of half a percent until 1974.
The government was increasing
spending and discouraging exports,
meaning it had to borrow more and more
money to keep everything running.
Gradually, what was once one of the world’s most
stable economies became one of the most volatile.
To date, Argentina has defaulted
on its debt eight times,
and on two separate occasions
already this century.
In fact, over the last 70 years, Argentina
has spent 33% of the time in recession.
By comparison, its biggest neighbour Brazil has seen
recession 12% of the time over the same period.
The perennial tendency for Latin America’s
third-largest economy to slip into crisis-mode
has made hyperinflation, currency devaluations
and bailouts from the International Monetary Fund
very much part of the routine.
This long series of economic crises has made
Argentina the only nation in modern history
to regress to developing
country status.
But, it was perhaps the historic economic collapse
of 2001 that saw Argentina really hit rock bottom.
At that time, the country earned the dubious
distinction of recording what was then
the biggest debt
default in history.
People were pulling out more money
from the banks than they had,
and widespread civil unrest
led to deadly street riots.
The economic collapse famously led to the
former head of state Fernando de la Rua
escaping the presidential palace roof by helicopter,
just moments after presenting his formal resignation.
Later that same year, Argentina
proceeded to fall even deeper into crisis.
The country had four presidents in two weeks
and defaulted on nearly $100 billion in debt.
Nearly a generation later and the warning signs on
Argentina’s economy are flashing red once again.
And, in the spring of 2018, the IMF readily-
stepped in to offer a record-breaking bailout.
Argentina’s chequered past with the IMF
stretches back more than six decades.
Since it first sought the fund’s help back in 1958,
Buenos Aires has signed 22 agreements
with the global crisis lender, most of which
have ended with bad blood on both sides.
Nonetheless, in the midst of another economic
storm and just a year before the 2019 election,
President Macri controversially signed Argentina up
to the biggest loan package in the history of the fund.
The whole point of the bailout was to get investors to
feel confident about putting money into the country
and hopefully attract enough new funding from the
private sector to continue spending on imports.
That program, and the austerity measures that
came with it, was rejected at the primaries.
And the subsequent chaos in financial markets
has forced the country to delay payments on
around $100 billion of local and foreign debt
and restrict foreign currency purchases.
By the end of August, the super-sensitive peso,
seen by some as a guide for Argentina’s economy,
had tumbled more than 51% against
the dollar since the start of the year.
Some analysts argue it is the twin mistakes
of Argentina’s government and the IMF
that are to blame for the country’s current problems,
others claim it has fallen back into crisis mode
for the simple reason that it hasn’t
changed enough since the last debacle.
The latest downturn has stoked fears that Argentina
could soon register its ninth credit default,
making it a pariah among
global investors once more.
