Argentina has to pull off a next-to-impossible trick

Mauricio Macri made history on Sunday in Argentina by ending the 12-year executive rule of the Kirchner family and its party.

He will take office on December 10, and from the moment he does he’ll have to pull off a next-to-impossible trick: putting out a number of pressing fires consuming the Argentine economy all at once.

Macri, a millionaire businessman famous for running an Argentine soccer club, leans to the right of his predecessor, and he’s promised to move the country in a different direction.

He says he wants to implement “shock therapy” to fix Argentina’s crumbling economy, improve relations with the US, and change the country’s image as a pariah of global markets.

The problem is, even a shock may not be enough to stop the country’s precarious situation from deteriorating further. That’s because Macri will have to do a number of things seemingly all at once to keep the economy running.

His regime will have to do the following quickly.

  • Devalue Argentina’s strong currency.
  • Slow its double-digit inflation rate.
  • Make peace with angry creditors.
  • Replenish dwindling currency reserves.

This would be an incredibly difficult political feat in the most unwelcoming of environments. Standing in Macri’s way will be a legislature in which his political opposition has control of the upper and lower houses.

“In any event the markets will move against Argentina, unless they are very clever in their tactics (unlikely) or move very quickly (difficult),” economist Claudio Loser, founder of think tank Centennial Group, told Business Insider by email.

The situation is dire

Argentina defaulted on its debt in 2001, with most investors swapping those notes for new ones. Some did not, however. Led by billionaire Paul Singer of Elliott Management, they refused to take a haircut on over $US1 billion worth of Argentine sovereign debt, with these funds coming to be known as the “holdouts.”

President Cristina Fernandez de Kirchner took a hard line against paying the group and called them “vultures.” The holdouts sued the country up to the US Supreme Court and won, tipping the country back in to technical default in 2014. But still Argentina wouldn’t budge and pay the “vulture” money managers.

Since then, any and all of the country’s attempts to raise money on the international market have been held up by a US court and its economic situation has worsened.

The government has held down the official peso-to-dollar exchange rate to about 1 peso to $US9, but the unofficial “dolar blue” rate — the rate most Argentines recognise in their daily lives — has climbed to about 1 peso to $US16 over the past few weeks. Inflation is sitting around 20%.

Because inflation is so high, demand for dollars has skyrocketed among nervous Argentines eager to get their money to safety, and the country’s foreign reserves have fallen to $US28 billion. Over $US10 billion of that is part of a currency swap line with China it agreed in 2014.

Until Argentina settles with its creditors — all of its creditors — it will not be able to raise money on the international market and fix this situation.

“Agreement with bond holdouts: regaining access to global credit markets would be one of the biggest achievements in the next administration,” wrote economists at Oxford Economics.

“Without such a deal, Argentina would remain left out of global credit markets, making it harder to achieve strong growth for a prolonged period of time.”

Both Macri and his opponent, Daniel Scioli, promised to take care of these issues. Scioli, however, insisted that this change would be gradual. Macri wants to do it all as a shock.

Now there is a split within the opposition party that will benefit Macri, but the refusal to pay the so-called vulture hedge funds has become a point of nationalistic pride within the country. The die-hards won’t go down without a fight in the legislature, and fights take time. Argentina doesn’t have time.

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