NEW YORK (Reuters Breakingviews) - Mauricio Macri, the pro-market leader of Latin America’s No. 3 economy, has been doing the right thing for Argentina’s long-term prosperity since coming to power in December 2015. But he’s only ever been one step ahead of disaster. Now unchecked inflation, drought and soured investor sentiment threaten his economic reclamation plan.
Macri already called in the International Monetary Fund in May as investor jitters about emerging-market economies side-swiped the peso. The response was a $50 billion package in return for promises of tighter fiscal discipline. That now doesn’t look enough. Macri sought to provide reassurance in an address to the nation on Wednesday night by saying IMF disbursements would be speeded up, but he achieved the opposite, feeding investor concerns that Argentina might not be able to pay its debts. A hike in the central bank’s benchmark interest rate to 60 percent from 45 percent early on Thursday was equally ineffective. The currency plunged more than 15 percent, suggesting investors don’t believe the country can bear such punishing rates.
The more the peso falls, the harder it will be for Argentina to pay its foreign-currency debt, making its issue of a 100-year dollar bond last year look more over-confident than prudent. The price of those bonds has fallen by nearly a third this year, driving the yield up almost 3 percentage points to 9.96 percent. More belt-tightening, which the government announced on Thursday, will exacerbate the country’s problems, reducing stimulus such as infrastructure spending and causing more pain for voters already hit by slashed energy subsidies and an inflation rate of over 30 percent.
Investors should be careful, though, in what they wish for. Reining in the unsustainable social spending and statist meddling of Macri’s Peronist predecessor, Cristina Fernandez, was always going to spark political opposition. Back when the economy was expected to grow 3 percent this year, Macri was seen as a strong favorite to beat Fernandez, now weakened by a corruption scandal, if she tried to return to power in October 2019 elections. Now with the peso in free fall and GDP likely to shrink at least 1 percent this year, he might not beat even a less controversial Peronist candidate.
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