Argentina's new financial crisis has some haunting similarities to its last one, but also some key differences

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argentina 2001 crisis lootingAP/Daniel LunaLooters carry away merchandise from a supermarket on the outskirts of Buenos Aires, Wednesday, Dec. 19, 2001. Jobless Argentines stormed supermarkets, shops and kiosks on Wednesday as Argentina's long-festering economic crisis boiled over on the poor fringes of Buenos Aires.

  • The 2001 economic crisis in Argentina resulted in the biggest sovereign default in history.
  • Some are drawing connections between the economic and political conditions in Argentina then and now.
  • But there are also some key differences that analysts say could prevent the current crisis from spiraling to 2001 conditions. 

A significantly overvalued currency, soaring twin deficits, debt largely denominated in dollars, and cutting deals with the International Monetary Fund. There are some haunting similarities between the 2001 financial and economic crisis in Argentina, which resulted in the largest sovereign default in history, and what's happening in the country now. 

"The 2001 crisis is having a major psychological impact on how current events are seen," Jill Hedges, a senior analyst on Latin America at Oxford Analytica said. "People remember 2001 very well and are already beginning to worry about whether a similar outcome could happen."

Further stoking flashbacks, earlier this month, President Mauricio Macri reached out to the IMF - which was widely blamed for worsening the country's economic crisis in 2001 - reportedly for a $30 billion credit line. In 2004, an independent evaluation office within the IMF authored a 193-page report pointing to where it went wrong during the crisis.

Hedges said both foreign investors and Argentines are "very wary" of another crisis, but added that there are a few "critical" differences in economic and political conditions now and in 2001. 

"As such, policymakers have more tools to help prevent the unfolding currency crisis from morphing into something more severe," Capital Economics analyst Edward Glossop said. 

Free-floating exchange rate

Previously, a currency board held the Argentine peso at a fixed exchange rate. This played "the central role" in turning Argentina into a crisis country, the IMF said in a 2003 report. Trading one-to-one with the dollar, Glossop said it provided "much-needed stability" in the 1990s but left policymakers powerless once investor confidence faltered.

President Mauricio Macri lifted currency controls in 2015, allowing the peso to float. The central bank is now able to hike interest rates, potentially shoring up capital inflows. The IMF, as it prepares to aid Argentina once again, said it supports a floating exchange rate this time around.  

As the peso spirals, the Central Bank of Argentina has raised rates three times this month to 40%

Gross domestic product

The economy had been in a deep recession for four years leading up to the 2001 crisis. Real gross domestic product fell by around 20% over three years, according to IMF data.

GDP rose most of 2017, expanding by 4% over the year in December. Still, economists are expecting GDP to fall in 2018 due to major cutbacks in government investment and a drought that could dampen agriculture output. Capital Economics recently revised their growth forecast for Argentina this year to a 0.5% contraction from 2.5% growth.

Screen Shot 2018 05 15 at 9.31.34 AMCapital Economics

Employment levels

Unemployment in Argentina reached as high as 25% in 2001, which is more than three times that of the most recent levels on record. Jobless claims were at 7.2% in December 2017, CEIC data shows, and averaged at 8.3% over the past decade and a half. 


FX debts and debt reservicing

FX debts are still significantly high at 35% of GDP, but not as high as in 2001. And with private-sector foreign debt at less than 5%, the risk of liquidity problems in the banking sector - which were a large part of the 2001 crisis - is lower.

Debt servicing requirements have fallen over the last decade. Though still high, they are not as overwhelming as in 2001. It's notable that as BCRA raises rates, it could become more difficult for the country to service debts. 

Political conditions

The current government is becoming increasingly unpopular, with about 40% of Argentines approving of President Mauricio Macri, down from 63% in December. But it isn't yet as discredited as the 2001 administration under President Fernando De la Rua, whose approval rating sank as low as 18%, according to BBC News

"This could change," Hedges noted. "Macri's approval ratings have dropped sharply and there is very widespread disapproval of the IMF deal. And as Macri and his policies become more unpopular, there will be less and less motive for the opposition - principally the Peronists - to support him and his legislative initiatives."

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