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  • Argentina was once one of the richest countries in the world.

  • But over the last half century, it has been hit by a major economic crisis roughly once every decade.

  • For citizens of South America's second-largest country,

  • this boom and bust cycle is a situation that is all too familiar.

  • So why does Argentina seem to be stuck in this pattern?

  • Argentina's most recent economic turmoil began in August 2019,

  • after a surprising result in its primary elections set off a shockwave in financial markets.

  • That's because the sitting president, Mauricio Macri lost to his rival by a far bigger margin than expected.

  • The business-friendly incumbent has since been ousted by the opposition ticket of centre-left

  • candidate, Alberto Fernandez, and his running mate, former president Cristina Fernandez de Kirchner.

  • A return of the left to power has set alarm bells ringing for international investors,

  • with many concerned it could herald a new era of government intervention.

  • The primaries on August 11 had a dramatic effect on Argentina's stock market, known as the Merval.

  • It collapsed by 48% in dollar terms the very next day.

  • That marked the second-biggest one-day fall anywhere since 1950.

  • The market chaos was so extreme that Argentina was estimated to

  • have lost $3 billion in reserves in just two days.

  • The government has since restricted foreign currency purchases in an attempt to steady the ship,

  • putting financial restrictions on companies as well as the country's citizens.

  • But unfortunately for Argentina, this kind of economic turbulence is all too familiar.

  • In addition to wine, steak and tango dancing, Argentina is known for enduring economic meltdown.

  • To understand why, we first need to look back at its long history.

  • A century ago, Argentina was one of the 10 richest countries in the world.

  • The resource-rich nation boasted vast amounts of highly fertile land and was able to capitalise on this

  • to become one of the most important exporters of grain and meat.

  • By 1910, its trade amounted to 7% of the global total, making it the so-calledbreadbasket of the world."

  • Then the Great Depression arrived in 1929 and global trade took a huge hit.

  • Latin American trade declined by nearly 40%,

  • and Argentina's meat exports to Europe fell by more than two-thirds.

  • While its competitor, the United States tackled the problem with programs like the New Deal,

  • Argentina was paralyzed and began to move toward nationalism and protectionist policies.

  • Tariffs jumped in the 1930s, with the average import tariff increasing from 16.7% in 1930 to 28.7% in 1933.

  • The government also began manipulating exchange rates in an attempt to protect the local industry.

  • The government deepened these policies during World War II and with General Juan Peron's rise to power.

  • After a long history of policies that favored the rich, Peron and his second wife Eva became

  • beloved figures among the country's urban workers, thanks to a wide range of new social welfare benefits.

  • And his legacy lives on, with many of Argentina's politicians throughout the years calling themselves

  • Peronists, including its newly elected leaders.

  • While the U.S. and Europe lowered the barriers to trade,

  • Argentina sought industrialization within its borders.

  • Unfortunately, that wasn't enough to kickstart its economy,

  • with industrial productivity increasing at an average of 2.6% between 1946 and 1963

  • and then actually declining at an annual rate of half a percent until 1974.

  • The government was increasing spending and discouraging exports,

  • meaning it had to borrow more and more money to keep everything running.

  • Gradually, what was once one of the world's most stable economies became one of the most volatile.

  • To date, Argentina has defaulted on its debt eight times,

  • and on two separate occasions already this century.

  • In fact, over the last 70 years, Argentina has spent 33% of the time in recession.

  • By comparison, its biggest neighbour Brazil has seen recession 12% of the time over the same period.

  • The perennial tendency for Latin America's third-largest economy to slip into crisis-mode

  • has made hyperinflation, currency devaluations and bailouts from the International Monetary Fund

  • very much part of the routine.

  • This long series of economic crises has made Argentina the only nation in modern history

  • to regress to developing country status.

  • But, it was perhaps the historic economic collapse of 2001 that saw Argentina really hit rock bottom.

  • At that time, the country earned the dubious distinction of recording what was then

  • the biggest debt default in history.

  • People were pulling out more money from the banks than they had,

  • and widespread civil unrest led to deadly street riots.

  • The economic collapse famously led to the former head of state Fernando de la Rua

  • escaping the presidential palace roof by helicopter, just moments after presenting his formal resignation.

  • Later that same year, Argentina proceeded to fall even deeper into crisis.

  • The country had four presidents in two weeks and defaulted on nearly $100 billion in debt.

  • Nearly a generation later and the warning signs on Argentina's economy are flashing red once again.

  • And, in the spring of 2018, the IMF readily- stepped in to offer a record-breaking bailout.

  • Argentina's chequered past with the IMF stretches back more than six decades.

  • Since it first sought the fund's help back in 1958, Buenos Aires has signed 22 agreements

  • with the global crisis lender, most of which have ended with bad blood on both sides.

  • Nonetheless, in the midst of another economic storm and just a year before the 2019 election,

  • President Macri controversially signed Argentina up to the biggest loan package in the history of the fund.

  • The whole point of the bailout was to get investors to feel confident about putting money into the country

  • and hopefully attract enough new funding from the private sector to continue spending on imports.

  • That program, and the austerity measures that came with it, was rejected at the primaries.

  • And the subsequent chaos in financial markets has forced the country to delay payments on

  • around $100 billion of local and foreign debt and restrict foreign currency purchases.

  • By the end of August, the super-sensitive peso, seen by some as a guide for Argentina's economy,

  • had tumbled more than 51% against the dollar since the start of the year.

  • Some analysts argue it is the twin mistakes of Argentina's government and the IMF

  • that are to blame for the country's current problems, others claim it has fallen back into crisis mode

  • for the simple reason that it hasn't changed enough since the last debacle.

  • The latest downturn has stoked fears that Argentina could soon register its ninth credit default,

  • making it a pariah among global investors once more.

Argentina was once one of the richest countries in the world.

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Is Argentina heading toward economic crisis – again? | CNBC Explains

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    Summer posted on 2020/08/12
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