Argentina’s Latest Looming Crisis

Argentina tends to elicit extreme views from economic analysts and commentators, ranging from reborn enthusiasts that marvel at the country`s unexpected performance to the point of promoting an “Argentine solution” to European problems, to sceptics that continue to expect a sudden stop to the ongoing bonanza. However, as Paul Krugman (an enthusiast) recently pointed out (Krugman 2011), a “consistently negative tone of reporting on Argentina” seems to be the rule. “Betting on another Argentine default may be going too far. But betting on a hard landing may not be,” concluded a recent piece in the Financial Times.

Schematically, Argentina’s latest looming crisis would stem from a currency loop – a narrowing trade surplus (due as much to an import boom in an overheated economy as to two-digit inflation and the resulting real appreciation) leading to capital flight (in anticipation of a faster depreciation), leading to a fall in central bank reserves (the flipside of the government`s reluctance to let the peso float), feeding back into depreciation expectations, capital flight and reserve losses. In short, nothing that a small dose of the hard-earned exchange-rate flexibility cannot solve. 

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