Markets are all about the timing – and Argentina got clocked
Timing is everything in financial markets. And Argentina’s embattled president, Mauricio Macri, just got it spectacularly wrong.
Late on Wednesday, it emerged that Macri had asked the International Monetary Fund to speed up the disbursement of its $50bn (£38bn) rescue package for South America’s second biggest economy. Coming at the end of a day that had seen the peso fall heavily against the US dollar, the announcement was intended to shore up confidence.
Currency dealers didn’t see it that way. Working on the assumption that Argentina’s problems must be even worse than they thought, they dumped the peso in even bigger quantities when the market in Buenos Aires opened for business. That triggered the next line of defence from the central bank: an increase in interest rates from 45% to 60% coupled with a commitment to hold borrowing costs at that punitive level until December.
This didn’t really work either. That there would only be a modest rally in the peso was only to be expected: Argentina is on course for an almighty recession and that could spell curtains for Macri in next year’s presidential election. The country faces a toxic mix of financial, economic and political uncertainty.
As if to prove the truth of Tolstoy’s dictum that all unhappy families are unhappy in their own way, the other emerging market in the firing line this week has been Turkey. Recep Tayyip Erdoğan, the president, does not like high interest rates and will not let the central bank use them to combat high inflation or to defend the currency. Nor does he want to enlist the support of the IMF.
In the light of what happened to Macri when he tried to do things by the book, Erdoğan probably now feels his unorthodox approach has been vindicated. But so far his strategy has amounted to getting a $15bn loan from Qatar and that will not be nearly enough. The next update on inflation due next Monday looks like being a pivotal event.
For years, there have been worries about what would happen to the emerging markets once global financial market conditions started to tighten. Countries that had borrowed heavily in US dollars – as many have – were inevitably going to find life a lot tougher when US interest rates started to rise. Those risks have now started to crystalise.
Argentina and Turkey are particularly vulnerable, which is why they have been picked off first. But they are not alone. Other countries to keep an eye on over the coming weeks include South Africa, Ukraine, India and Indonesia. The IMF has already warned that debt in some of the world’s poorest countries has risen to risky levels.
For those with long enough memories, August has seen a worrying pattern emerge. Investors take fright at the deterioration in key economic indicators in countries that have seen hefty capital inflows in the past, and decide to shift their money somewhere safer. The resulting fall in the currency makes imports dearer and adds to inflationary pressure. Companies that have borrowed in foreign currency see their debt burdens increase. Recession bites and the contagion spreads to other countries deemed to be vulnerable.
This is not yet a full-blown crisis to match that of the late 1990s but there are enough warning signs – trade tensions, high debt levels and a global economy losing momentum – to suggest that is the way things are heading.