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Why Argentina’s new currency crisis shouldn’t affect Brazil

. May 10, 2018
argentina currency crisis dollar imf aid Argentina seeks aid amid currency crisis.
argentina currency crisis dollar imf aid

Argentina seeks aid amid currency crisis.

For the second time this century, Argentina has gone to the International Monetary Fund (IMF) for help. President Mauricio Macri is reportedly negotiating an aid package from the fund that amounts to USD 30 billion. This occurs 17 years after South America’s second-largest country defaulted on its debt – and 12 years after severing its relations with the fund.

The worldwide trend of a U.S. Dollar valorization has hit emerging economies like Brazil, Turkey, and Colombia. But its heavy reliance on USD funding places Argentina in a particularly fragile position. The Argentine Peso (ARS) crashed to a new historic low this week, despite the decision taken by the country’s Central Bank to spend over USD 4 billion to attempt maintaining the value of its own currency.

Argentinians now find themselves in an all-too-familiar place: on the brink of a deep financial crisis.

</p> <p>Over the past year, the Argentine Peso has lost about one-quarter of its value. Inflation in 2017 hit the 25 percent mark, lower only than Venezuela’s – but the latter is undergoing a full-scale political, social, and economic collapse. The Mauricio Macri administration opted, then, for a bitter – but well-known – medicine: raising interest rates from 27.5 to 40 percent.</p> <h3>Will Brazil suffer, too?</h3> <p>Argentina stands as Brazil’s third-largest <a href="https://brazilian.report/2018/04/16/mercosur-free-trade-problems/">trade partner</a>. So how does our neighbor’s new currency crisis affect the Brazilian economy?</p> <p>Not very much, in fact. “Our economy does not rely much on Argentina’s,” explains Lia Valls, a researcher at Fundação Getulio Vargas, a think tank. “Although Argentina is our third-largest trade partner, the gap between the amount of goods we export to China and the United States is huge. The auto industry, however, might be the one who suffers the most.”</p> <p>Fabio Kanczuk, the government’s Secretary of Economic Policy, agrees. He told the press that Brazilian exports to Argentina amount to only USD 14 billion – “around 0.8 percent of Brazil’s GDP,” he said to <em>Valor</em>.</p> <p>During the 1970s and 1980s, economists would say that “when the U.S. sneezes, Brazil suffers from pneumonia.” The phrase illustrates how dependent Brazilian economy was on its richer northern neighbor. This saying, however, doesn’t apply to Argentina.</p> <p>“Over the past decades, international markets have learned to see the differences between Brazil and Argentina,” says Valls.</p> <p><script id="infogram_0_afe397a2-4eb6-4c6a-8f96-a871871b0b3e" title="Global currencies against the USD" src="https://e.infogram.com/js/dist/embed.js?uBb" type="text/javascript"></script></p> <div style="padding:8px 0;font-family:Arial!important;font-size:13px!important;line-height:15px!important;text-align:center;border-top:1px solid #dadada;margin:0 30px"><a href="https://infogram.com/afe397a2-4eb6-4c6a-8f96-a871871b0b3e" style="color:#989898!important;text-decoration:none!important;" target="_blank" rel="noopener noreferrer">Global currencies against the USD</a><br /> <a href="https://infogram.com" style="color:#989898!important;text-decoration:none!important;" target="_blank" rel="nofollow noopener noreferrer">Infogram</a></div> <h3>IMF loans: not Argentina’s first rodeo</h3> <p>While the IMF is generally not highly regarded in South America, the global institution is <a href="https://elpais.com/elpais/2018/05/09/inenglish/1525875218_515281.html">especially reviled in Argentina</a>. The country and the fund have a history that dates back to 1958, when the IMF loaned USD 75 million (in values of the time). But it was the last deal between the two parties that left scars on Argentinians.</p> <p>Between 1998 and 2002, Argentina plunged into one of its deepest financial crises, ever. The IMF came to the rescue, but not without imposing harsh austerity measures as a condition. At the time, unemployment rates rose to 18 percent – and 53 percent of Argentinians were <a href="http://cepr.net/documents/publications/argentina_2002_09_03.htm">living below the official poverty line</a>.</p> <p>At least 22 people died in riots – and between 1998 and 2002, the economy shrank by 28 percent.</p> <p>While President Macri’s decision to ask the IMF for help makes sense in economic terms, it will cost Macri much of his political capital.</p> <p><script id="infogram_0_6f33a8b5-55bd-4b57-a5f3-a3372c4320e4" title="Argentinian crisis" src="https://e.infogram.com/js/dist/embed.js?JMT" type="text/javascript"></script></p> <div style="padding:8px 0;font-family:Arial!important;font-size:13px!important;line-height:15px!important;text-align:center;border-top:1px solid #dadada;margin:0 30px"><a href="https://infogram.com/6f33a8b5-55bd-4b57-a5f3-a3372c4320e4" style="color:#989898!important;text-decoration:none!important;" target="_blank" rel="noopener noreferrer">Argentinian crisis</a><br /> <a href="https://infogram.com" style="color:#989898!important;text-decoration:none!important;" target="_blank" rel="nofollow noopener noreferrer">Infogram</a></div> <p>

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Maria Martha Bruno

Maria Martha is a journalist with 14 years of experience in politics, arts, and breaking news. She has already collaborated with Al Jazeera, NBC, and CNN, among others. She has also worked as an international correspondent in Buenos Aires.

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