Argentina was perhaps the biggest success story of “reflation.” Left for dead in global markets as the hammer of the “rising dollar” pounded down on everyone, the country elected new leadership and began taking the right steps toward modern economic integration. That’s the story, anyway.
What really happened was a bit different. The country that had been funding itself at the mercy of global eurodollar banks switched to funding itself at the mercy of global eurobonds. Good choice in 2016. 2018? Bit of a different story.
Argentina’s currency is now getting nearly as much attention as Hong Kong’s. Both are mystifying to conventional, mainstream expectations. Last November, Argentine President Mauricio Marci admitted what is obvious:
We are vulnerable, because we need financing; arguing against that is stupid. We have the best potential, compared with all the others. I am ready to continue if the citizens indicate that they want me to continue running the country.
Confounding conventional thinking even further, Argentina’s central bank began cutting rates in January. This didn’t jive with traditional understanding of currency pressures. The peso was falling, so Economists will tell you to raise benchmarks, not reduce them. Inflation, after all, is still a problem there.
The Argentine central bank’s second straight 75 basis-point interest rate cut on Tuesday has economists and strategists confused about what policy makers have planned for the rest of the year.
What Economists don’t say, because they haven’t learned much from the last few decades, is that Argentina’s economy is beginning to show like Brazil’s. Yes, the peso is dropping but to rescue it means economic growth not shallow “rate hikes.” It’s always risk/return, not interest rate differentials.
This obviously applies universally. The dollar shortage and the dollar short combine to some strange outcomes occasionally, but behind them are very simple perceptions about opportunity and the potential for mostly liquidity risk in trying to take advantage of them. Argentina looks pretty good in 2016 as the dollar shortage seems somewhat better (lower risk) especially via eurobonds, and with globally synchronized growth (opportunity) not just plausible but perhaps likely (I mean, everyone says it’s happening).
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