The Three Letters Behind Argentina’s Collapse: IMF

As reported earlier today, in response to the unprecedented drop in the Argentina Peso, the Argentina Central Bank (CBRA) decided to engage in an “emergency” rate hike, and as the peso collapsed to 39/USD, it unexpectedly raised the key 7-day leliq rate to 60% (a 1500bp hike). The rate was last hiked from 40% to 45% on Aug 13th. The bank also confirmed there will no rate cuts until December.

Unfortunately for Argentina, the dramatic rate hike is not enough, and with the market expecting some fiscal intervention, the ARS has resumed its slide and was trading at session lows at last check, hitting 40/USD for the first time ever.

But what about the IMF backstop? Well, the market does not appear to be giving the IMF too much credibility, and there may be a reason why as Constantin Gurdgiev explains. Here are his thoughts:

After a short wait, @IMFNews are back in business of taking over small and large-ish countries… and it’s next M&A target is its favourite one: #Argentina, one country that IMF can never cure of itself.

Greek Government spokesperson: “Greece is not Argentina”

In SIX IMF programs of 1992-1999 period, Argentina fulfilled NOT ONE of the IMF conditions for lending in… err… all 6 of these programs. Of the 61 years between 1956 and 2017, the country was under an IMF program for 40. In year 62, it is in program year 41…

By the ENTIRE history of Argentina, new IMF lending to the country is the most perfect exemplification of doing the same thing for 62 years, yet expecting a different outcome.

But do not despair: IMF lending to #Argentina will not completely wasted. It will feed caviar & champagne to an army of advisers, analysts, lobbyists, specialists, technical experts and similarly useless economists inhabiting Washington DC and environs.

Of course, this time, all will be different. The new IMF facility – agreed June this year is the LARGEST IMF loan in history to any state – USD50bn. Argentina’s Government deficit was 6.46% of GDP in 2017 (Italy’s, for comparison was 1.93%). ARG gross Gov debt is at ca 52.6% which is a slim shadow of Italy’s 131.5%. But, ARG current account balance is -5.1% of GDP, while Italy’s is +2.6%. As large as the IMF facility is, it will ONLY cover 14 months of Argentine Current Account Deficit.

All of which means one simple thing: after the last large scale IMF program (excluding subsequent lending to prop up post-program failures), ARG entered a period of economic Depression.

In conclusion: This time, it won’t be much more different, folks.

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Author: Tyler Durden

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