Just when the markets thought that Argentina, the third largest economy of Latin America, would get out of their debt problems, the president gets into a row with the central bank president. Last year it was the nationalization of pension plans. Earlier this year, it lost its status as an emerging market stock market and became a frontier market with MSCI. Investors are only going to get 33 cents on the dollar from the 2001 default while Argentina will be able to again access international capital markets. The debt restructuring began in 2005.
Does it make sense to use all powers possible to gain access to international markets? Yes. The avenues for gaining access is through increasing revenues through taxes or cutting expenditures. Neither seems like a good idea for the populist president so using international reserves seems to make sense. Raid the central bank. Of course, the central bank is viewed as independent so this taking of reserves would break the sense of Independence. Lenders would also say that if you are going to raid the central bank then you can pay-back more that the 33 cents which was negotiated under the view that international reserves were not available.
This creates again uncertainty about the fiscal behavior of Argentina which may affect its ability to again gain access. The bond investors have been fooled before by the government. They could be fooled gain but they are getting wise to some of these tactics.
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