What is the cause of the economic crisis in Argentina and how likely is it that other developing nations will experience a similar financing crisis.
In this episode you’ll learn:
- What has led to successive economic crisis in Argentina.
- What is a funding crisis.
- What is a current account deficit.
- Why emerging market countries are in a better financial position then decades ago.
Show Notes
A Century of Decline – The Tragedy of Argentina – The Economist
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Episode Summary
Host David Stein walks through the pros and cons of an emerging markets economy with a case study on Argentina’s emerging markets crisis. David explains that some of the reasons behind Argentina’s predicament can be traced to their inability to meet their current account and dollar debt payments due to not having enough foreign currency reserves available. However, not all emerging markets economies suffer from an insufficient foreign currency reserve, and many have thrived. What helps an emerging markets economy survive, and what causes it to fail? Listen to the full episode for an in-depth exploration of what has caused Argentina to fall into a major funding crisis while similar economies flourish.
Is the emerging markets crisis in Argentina likely to occur in other emerging market countries?
Fortunately, no! David explains that Argentina’s crisis is partly due to three contributing factors:
- Argentina didn’t take advantage of the wealth they had accumulated in the first half of the 20th century when they were one of the richest countries in the world.
- The political instability of Argentina has caused the economy to swell and fall with forced inflation – mostly due to the numerous military coups that have held power throughout the last century. As David points out, “You need stability politically for an economy to thrive.”
- Argentina’s wealth was highly mismanaged, creating an economy with a large debt default and the inability to borrow from other countries.
Argentina’s unfortunate situation can be a lesson to other emerging market countries. Listen to the rest of the episode to discover how this crisis has been averted in the case of many other emerging market economies.
What’s a funding crisis and how do you get out of it?
Argentina found itself in a funding crisis, where their currency was being steadily devalued due to capital outflow. Outside investors lost faith in Argentina’s stock and bonds and withdrew their support, causing the Argentine peso to dive down in value. This left Argentina without a way to obtain the dollars needed to pay their deficits. David gives some advice on how to get out of a funding crisis:
- It’s best to borrow in dollars because of its greater stability as a currency.
- In order to obtain those dollars to pay off dollar-denominated debt and finance current account deficits, you must attract capital. One way to do this is in the form of outside investors.
- Exporting more than you import can help funnel the dollars from the surplus exportation into a foreign currency reserve, which you can use to meet account payments.
Why some emerging market economies are avoiding the crisis
Many emerging market economies are thriving, David Stein points out, such as China, Russia, and Brazil (just to name a few). Why is this? It is because they have sufficient foreign reserves and are able to stay on top of their accounts. They saw the need for reserves and modeled their economic policies to obtain those reserves. This has caused an abundance of wealth in these countries in recent years. Even Capital Economics points out that, “the number of emerging market crises has declined…” To gain a better understanding of what makes a successful emerging market economy, listen to the full episode!
An emerging markets crisis doesn’t have to be imminent
While there are some countries that have fallen into an emerging markets crisis, not all of them have. Many are doing quite well and have promising valuations. Even though we are in a current situation of volatile markets, emerging markets economies are likely to pull out of the current slump much better because of their foreign currency reserves. Even the US, which has a persistent current account deficit, is still mostly in the green because of a strong presence of outside investors and the desire of people to own dollars. The US borrows in dollars, not in foreign currency, escaping the default that Argentina has unfortunately fallen into. Listen to the entire episode for the full figures and facts on this current market concern.
Episode Chronology
- [0:20] Why the Argentine peso has decreased 47% in value.
- [3:41] 3 Reasons why Argentina is unique and has suffered such sharp economic decline.
- [10:23] What we can learn from Argentina’s funding crisis.
- [13:51] How to tell when the market is losing confidence.
- [19:43] Why are some emerging market economies thriving?
- [22:20] Emerging market economies are not destined to fail.
- [27:04] What Argentina can do to pull itself out of the crisis.
- [27:48] Why the US isn’t in the same fix as Argentina.
