​Inflation will remain high and the recovery weak in 2022, even if the government can avoid another debt default

ARGENTINA - Forecast 19 Jul 2021 by Domingo Cavallo and Esteban Fernández Medrano

Any economic forecast for the Argentinian economy needs to start by assessing the possibility of avoiding another debt default over the next two years. A default on the dollar-denominated debt would adopt the form of going into arrears with the IMF, thereby blocking the possibility of accessing financing from bilateral (the Paris Club) and multilateral institutions (mainly the IDB and the World Bank). A default on the domestic debt denominated in pesos would adopt the form of a large unanticipated inflation shock that would drastically reduce the debt in real terms at the expense of bank deposits and bonds denominated in pesos. If the two kinds of defaults were to occur simultaneously, the country would enter into hyperinflation and hyper recession, Venezuela style.

If a default only on the dollar debt materialized, but the government could avoid a default of the peso-denominated debt, the current climate of stagflation could continue without an inflationary explosion, but with no chance of recovering stability and growth.

We will present our forecasts assuming that the government will try to avoid both kinds of default. However, we take into account the limitations on the room for maneuver of the economic minister that emerge from the ideas of the Vice President and her associates.

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