Argentina's flirts with another Financial Crisis

The last months have been pretty difficult for Emerging Markets, one of the main reason is that usually a strengthening of the USD is not good for EMs. The Federal Reserve Chairman added gasoline to the fire last week saying that the Fed interest-rate policy would be set without caring much about the repercussions on Emerging Markets. The consequence of this speech added particular pressure to the Turkish Lira, the Mexican Peso and the Argentinian Peso.

One of the EMs that may be in trouble during the next months could be Argentina. As you can see from the chart below provided by The Economist, the Peso plunged since the start of the year 2018 and as a consequence the Argentinian Central Bank had to increase interest rates.

I think the main problem that Argentina faces is that the majority of its debt is denominated in US Dollars. To be precise, at the moment, 64% of Argentina's combined government and corporate debt is denominated in USD or other Foreign Currencies, according to the Institute of International Finance.

To put things in perspective, Brazil funding in USD is only 16% and Thailand 17%. These countries, having only a fraction of their debt in USD have more flexibility when crises occur. They can reduce interest rates if borrowing costs increase too much or they can allow their currency to devaluate. Argentina can't do so because the more the Peso devalues, the dearer will be to serve their debt in US Dollars.

I don't understand why Argentina during December 2017 decided to loosen their inflation target from 12% to 15%. For sure this move could have contributed to spark this year devaluation.

In the chart below provided by Bloomberg you can see the effect of the increase of Interest Rates and how the dollar gained strength vs the Peso since November 2017.

We will have to monitor during the next months how things will evolve and how the USD will behave.

It is amazing that last year Argentina was successful in issuing a 100 Years Bond with a coupon of 7%. The investors who bought these bond have taken a very big risk, in my opinion.