Dangerous monetary arithmetic, version 2020

ARGENTINA - Report 26 Oct 2020 by Esteban Fernández Medrano

Capital markets remain concerned about Argentina’s economic and political outlook, despite the successful international debt swap and the more recent oversubscribed domestic dollar-linked debt placement. The failure of the long-term lockdown to avert the spread of the COVID virus and the consequential toll on economic activity has put fiscal and monetary policy under stress once again. As in a déjà-vu, the fiscal deficit monetization combined with the central bank's attempt to curb inflation through sterilization has put the BCRA debt at dangerously high levels.

But it is not only the fiscal front that is showing signs of concern. Along with the economic recession, a decline in the government’s acceptance rate and worries regarding the power balance in Congress after the midterm elections next year have has stirred the more fervent Kirchnerists in the government coalition. They are pressing ahead with political and judicial reforms to protect Vice President Cristina Fernandez de Kirchner (CKF) from judicial prosecution, despite the strong rejection such measures are generating among non-Kirchnerist voters. This has generated large-scale public protests against the government. From early in his mandate, President Alberto Fernández (AF) has had to endure his mentor’s political costs on top of mistakes of his own making. The clearest thermometer for such nervousness is the FX rate, particularly the spread with the free market rate (either the informal or the blue-chip swap rate), which has reached new historical records.

This report starts with a summary of the battle against COVID, followed by the economic impact of the lockdown, and it closes with an analysis of monetary, FX, and political/judicial events and concerns.

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