As Warren Buffett says, “You never know who’s swimming naked until the tide goes out.” For the emerging economies, the financial tide is being pulled by the strong dollar, driven by the perilous blend of a loose US fiscal approach and tightening monetary policy. This is familiar. So who is swimming naked? Argentina, still recovering from the 12 years of the Kirchners’ leftwing populism, is today’s leading example. That, too, is familiar. Is Argentina unique? Alas, possibly not.
The central bank in Buenos Aires has blown $5bn of foreign exchange reserves in a week and enacted three shock rate rises in an attempt to halt the slide in the value of the peso. Yet the decision to raise its official rate from 27.5 per cent to the unsustainable level of 40 per cent is more likely to exacerbate panic in the market than calm it.
Argentina’s crisis need not spell disaster for other markets. When Argentina abandoned its currency peg and defaulted on its debts at the turn of the millennium, other emerging market currencies were relatively unscathed. Yet this time, Argentina’s woes are not isolated. Not only is there a global cause, in the stronger dollar and rising US interest rates. But there is also fairly widespread weakness.