The global economy is expecting a financial crisis from Argentina
19/5/2018 12:00 am
[rtl]Capitals / follow-up
The world may not be ready for a new global financial crisis, but the crisis may be ready to face the world, said Robert Samuelson in an analysis published by The Washington Post.
In the modern history of financial crises, they always arise in vague corners of the financial system, which are ignored at first because they seem harmless and then suddenly the crisis explodes.
The historical examples to prove this are many, most notably the Thailand crisis in 1997, when the bet against the local currency was "pale" in the end to the crisis in South Korea, Indonesia, Brazil and Russia.
The US subprime mortgage crisis of 2008 led to the collapse of global credit markets. In Greece, when the debt crisis occurred in 2010, it threatened the entire euro area. In Argentina , the current crisis is in Argentina, which is experiencing a sudden decline in confidence. Since mid-April, its local currency, the peso, has lost about 12 percent of its value against the US dollar.
In the face of the currency collapse and to convince investors not to sell for the dollar, the central bank raised interest rates to 40 percent from the previous 27.25 percent.
Argentina has moved to get a $ 30 billion IMF loan as a bailout. The obvious goal of those steps is to gain confidence by demonstrating that the country has its abundant dollar reserves to meet its debt.
The most important question is whether this crisis is limited to Argentina alone or a harbinger of a wider global financial crisis.
"The problem is mostly limited to Argentina at the moment. When Mauricio Macri took power in Argentina in 2015, it was burdened with economic mismanagement that varied from high inflation, unemployment and fiscal deficits," said Monica de Paley, an analyst with the Institute for International Economics.
Cristina Fernandez de Kirchner, the former president of Argentina, has destroyed the economy by supporting, controlling prices and printing money. Borrowing hard currency Argentina was unable to borrow hard currency from international markets due to its debt default in 2001 and entered into a bitter struggle with its creditors. It became difficult to know the exact conditions of the economy because the government stopped announcing many economic data, and the inflation rate reached 40 percent. In the presence of the new president of Argentina, he managed to convert many of these policies, reaching a settlement with many creditors, reducing the budget deficit and inflation rate. "There is a sense of optimism and things are on track, but this path has become gradual and deliberate, leaving the economy vulnerable to negative developments," says Monica de Pali.
This is evidenced by the fact that the budget deficit and the current account account for about 5 percent of GDP, inflation is around 25 percent, and new negative factors have recently taken place. The US interest rate is lower, which has reduced the attractiveness of Argentine debt. US President Donald Trump's threats have cast a dark shadow on Argentina.
The rise in the value of the US dollar caused the debt to rise, which eventually led to the difficult growth of Argentina's economy, prompting investors anxious to get rid of the peso. Is the crisis widening? The concern now is that what happened to Argentina could happen to other countries. For the past two years, foreign investors have injected money into emerging market countries such as Argentina, Brazil, Mexico, India and Indonesia.
According to the International Finance Institute, total flows to 25 countries, including the above-mentioned countries, totaled $ 1.2 trillion in 2017.
If these flows are halted or slowed down significantly, this will have a more negative effect on the global economy. Countries may increase interest rates to protect Currencies.
At some stage, the herd market may overcome investors who may buy or sell financial instruments such as stocks, bonds and currencies because they believe others will buy or sell the same instruments.
What is particularly worrisome, according to economist Desmond L. Lacman of the American Enterprise Institute, is the sudden shift in market sentiment, as investors who have recently been enthusiastic about emerging markets are avoiding risk.
We may or may not be on the brink of another financial crisis, but no matter what you think, there is room for skepticism in one way or another.[/rtl]