Wednesday, April 20, 2016

Moody's upgrades Argentina credit rating status

Mainly because of their "expectation that Argentina will settle holdout creditor claims which will result in a lifting of court injunctions and clear the way for Argentina to access international capital markets." Fair enough, access to capital markets would lift the balance of payments constraint, even if the agreement is a complete surrender to the Vultures demands. But the most interesting argument for the improvement in the credit rating is that it results from "economic policy improvements since the Macri administration took office last December." So what happened since December (btw, mostly what I said it would).
The figure above from The Economist shows that inflation went up, and the economy was thrown into a recession. Fiscal deficits will likely increase, in spite of spending cuts, and reduction in public employment, since with the recession revenue will fall (Moody's expects the deficit to be about 5% GDP).

And yes fiscal deficits in domestic currency are mostly irrelevant for the discussion of ability to pay foreign obligations in dollars (the only reason to care is if the deficits are caused by more spending, and lead to current account deficits, which do increase the needs for foreign currency, which is not the case in Argentina now). Actually, I also think that the economy will eventually improve (that was the plan all along), just in time for the next presidential election.

The problem of course is that growth will accelerate very likely with an increase in current account deficits, as much as it happened during the Menem years in the 1990s. A more depreciated currency will do very little to solve that problem, which will likely be possible because the government will push ahead with international borrowing. Foreign debt driven growth essentially. But we know what tends to happen with this kind of policy.

There is a long history of external debt cycles in the country. This kind of frivolous economic policies, that push short term political gains (Macri's reelection like Menem in the past) at the expense of sustainable policies (it's the current account, not the fiscal idiot!) is what should be termed populism. Current account populism that is.

PS: Moody's does not even say anything about Macri's name appearing in the Panama papers.


  1. If you have sharp current account deficit how a country should solve it?

    For example my imposing tarrifs and export subsidies or what?

    1. these measures are almost impossible, given WTO. With Bilateral Trade Agreements, like the ones the US signs, they are completely impossible. But there are things that a government can still do that the Doha round has failed to accomplish. Mostly associated with industrial policy, including government procurement policies, certain rules about national content, and of course finance from public banks, that should stimulate both import substitution (a bad word), and export promotion (generally accepted as good).

  2. Matias: it is over. The left failed in Argentina. It is gone bye bye

    1. Unlikely. Note that the US, in spite of the decline in the left, still very much lives in the world of the New Deal. The fact that several New Deal institutions (e.g. unemployment insurance, Social Security, etc.) were in place lessened the blow of the Neoliberal 2008 crisis. The same is true in Argentina, Cristina is popular, and she might come back. Btw, try to provide ideas in your comments (and that goes for anybody commenting). Not just uninformed opinions. Those will usually not be published.


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