Argentina is walking on hot coals

« You know I’m committed to telling you the truth every time. Also that I got into politics and ran for the presidency to work every day, and that every Argentinian can live better and develop fully« , words of the President of Argentina Mauricio Macri (May 18th 2018), to announce the loan from the International Monetary Fund (IMF)

The last few months have meant a 360-degree change for Argentina, which still has not been assimilated by citizens. This turn was perceived in May 2018 when President Macri pressed the red button to ask for help from the IMF. The IMF granted a three-years credit of $50 billion to counter Argentina’s economic problems, the largest loan in the history of the Fund.

Crisis in Argentina

The crisis in Argentina occurred mainly during the last eight decades, with the Rodrigazo in 1975 (a package of economic measures proposed by the then Minister Celestino Rodrigo), hyperinflation in 1989, the Corralito in 2001-2002 (the restriction on the free disposal of fixed term cash, current accounts and savings accounts imposed by the radical government of Fernando de la Rúa on December 2001, and which lasted for almost a year when the release of retained deposits was officially announced on December 2002), and lastly, with the government of the current Argentinian president Macri in 2018.

All these events have a common point: excessive public expenditures that were not compensated with other revenues. All these crises meant high economic and social costs such as high inflation rates, loss of credibility in the currency (peso Argentino), high devaluation, high interest rates, increased external debt and increased migration to other countries.

Inflation and exchange rate

Inflation rate is increasing every day in this Latin American country. According to official projections made by the government of Argentina, inflation will reach approximately 53 per cent at the end of this year, or even more. This issue triggered people to lose faith in the Macri government because of a loss of their purchasing power.

The other problem is the exchange rate between the currency -peso Argentino- and the US dollar which devaluated sharply after the primary elections (August 2019). This devaluation began with greater pressure at the beginning of May 2018 at 25 pesos per dollar and in present day is almost at 60 pesos per dollar. In order to control the exchange rate, the Central Bank of Argentina has been using an average daily of about US$300 million in reserves to support peso, according to local media. The position of Argentina, which suffers from an insufficiency of foreign currency, has been aggravated by the outflow of capital from this country. But its intervention in the exchange market has not been able to halt the devaluation.

In a desperate attempt to prevent the collapse and depletion of the Central Bank’s dollar reserves, Macri’s team imposed exchange control. The government restricted foreign exchange purchases by companies, which have to request permission from the central bank to sell pesos and buy foreign currency and to make transfers abroad. With this « exchange clamp », Macri wants to reduce the Central Bank’s intervention in the market, helping it preserve international reserves. All of this led to the emergence of an informal foreign exchange market and what was known as the « blue dollar » or parallel dollar.

High Interest Rates & Government Debt

With the intention of halting the great devaluation of the Argentinian currency with respect to the dollar, the Central Bank of Argentina seeks to put a brake using the classic recipe of raising interest rates by trying to use them as a hook to generate confidence among the investment community. The Central Bank decided to raise the interest rate by 10% to reach 74% annually, the same policy that was applied in 2002. This increase of the interest rate is one of the highest in the world (including Venezuela).

With respect to the public debt, which already exceeded 100% of GDP, the highest level in 12 years (increasing in real terms) and the largest rise in the world. Between 2015 and 2019, the debt-to-GDP ratio practically doubled from 52.6% to 100%, which means that the whole GDP of Argentina is its public debt. Also, we have to consider that whenever there is a devaluation, the public debt ratio increases suddenly. Regardless of that, devaluations have a negative effect on the sustainability of public finances, since they make maturities more expensive, as they have 80% of the public debt in foreign currency.


Due to Argentina’s economy contraction, approximately 3 million people found themselves in poverty and consequently, many people migrated mainly to Europe. This massive exodus is not new because it is not the first time that Argentinians have sought refuge in Europe in times of economic uncertainty. Hundreds of thousands of people migrated to the old continent to escape hyperinflation in the early 1990s and economic collapse in 2001 and 2002. This time, with Macri´s crisis, people are not only running away to Europe but also to neighboring countries such as the United States, Canada, Mexico, Brazil, Paraguay, Bolivia, Peru and Colombia, because of low budgets.

Short-Term Solutions?

The solution applied by Macri’s government is orthodox, the same as that which was applied by his predecessor De la Rúa, which is to have more public debt, have a zero deficit, and increase income through taxes, all in order to achieve a balance but without considering the high social cost. All these policies are translated in the precipitous fall of salaries, like a car without brakes, whose effect generated the migration of the population to other countries in search for better jobs, or at least stable jobs. Meanwhile, the public debt continues to rise and with more and more interest rates that the government of Argentina cannot pay. The scenario does not leave too many options. Many believe that the cause of the crisis is Mauricio Macri, although this crisis has precedents of more than half a century, Macri undoubtedly is walking on hot coals.

Wilma Ticona Huanca