The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jon Sindreu
LONDON, Nov 6 (Reuters Breakingviews) - Borrowing in dollars is the “original sin” of emerging markets, the economists Barry Eichengreen and Ricardo Hausmann declared back in 1999. While many developing economies have worked to enlarge local currency debt markets, Argentina has sabotaged its own. For President Javier Milei, and for other countries still tethered to hard currencies, it's a lesson in what not to do next.
Despite a rally following mid-term elections, the Argentine currency has weakened again and remains near the 1,500 pesos per dollar lower band set by the government. One underappreciated problem for Milei is that the peso market is too tiny to keep money in.
Argentina had roughly $450 billion in outstanding government debt in September. Of that, only 44% was denominated in local currency. This compares to 91% for aggregated Latin American countries and 94% for emerging markets overall, using 2022 data from the Bank for International Settlements. Many countries scarred by the Asian crisis of the late 1990s used the popularity of emerging markets after 2000 to reinforce their monetary sovereignty. Argentina did the opposite.
Leftist presidents Néstor Kirchner and Cristina Fernández eroded foreign investor confidence by inflicting haircuts on bondholders and nationalising big companies. But supposedly pro-business rulers have been worse. Mauricio Macri, who was president from 2015 to 2019, not only presided over the massive surge in dollar debt that landed Argentina in its current predicament, but also torpedoed the local-currency market by unilaterally postponing payments on short-term peso debt at a time when international investors had piled in. Ever since, the country's Treasury bills carry a risk premium.
Undaunted, Milei tried to push more banks into holding those bills by halting the central bank’s issuance of short-dated instruments, called Leliqs, in an attempt to curb what he saw as excessive money supply growth. The result has been wild swings in interest rates and further depletion of Argentina's foreign exchange reserves. As economist Pablo Bortz puts it, “the causality between a strong local currency market and reserve accumulation goes both ways.” Peru offers a counterfactual: larger reserve buffers provided reassurance to investors, allowing the local market to expand and thus also bringing in more dollars.
Shedding their reliance on hard currencies has made other emerging markets more resilient. Yet the BIS [https://www.bis.org/publ/work1075.pdf], as well as Eichengreen and Hausmann, have warned in recent research [https://link.springer.com/article/10.1007/s11079-022-09704-3] of a growing gulf between larger economies and smaller ones that have failed to develop local currency markets. Even when they succeed, risks don’t disappear, because the participation of overseas investors makes exchange rates more volatile in stress periods. The lesson for Milei, though, is clear: while it helps to cozy up to international dollar lenders, providing security to local investors is ultimately more precious.
Follow Jon Sindreu on X [https://x.com/jonsindreu] and LinkedIn [https://www.linkedin.com/in/jon-sindreu-67352448/].
CONTEXT NEWS
Argentine president Javier Milei is reshuffling his cabinet after the landslide victory by his party Liberty Advances in the congressional elections on October 26. The country’s currency, which initially jumped to 1,430 pesos per U.S. dollar, traded at 1,450 pesos per U.S. dollar on November 5.
Argentina has failed to develop a deep local currency debt market https://www.reuters.com/graphics/BRV-BRV/egpbbkdeepq/chart.png [https://www.reuters.com/graphics/BRV-BRV/egpbbkdeepq/chart.png]
Small markets with big foreign participation beckon volatility https://www.reuters.com/graphics/BRV-BRV/jnvwkenrxvw/chart.png [https://www.reuters.com/graphics/BRV-BRV/jnvwkenrxvw/chart.png]
(Editing by Peter Thal Larsen; Production by Shrabani Chakraborty)
((Jon.Sindreu@thomsonreuters.com [Jon.Sindreu@thomsonreuters.com]))
