Why Argentina Should Take Urgent Measures To Cut Country Risk And How To Do It

Argentina, at the close of this writing, maintains a high country risk. In fact, the second highest in Latin America and the third of the emerging countries if we include Turkey.

What is the country risk? It is the spread between the yield of the sovereign bond of a nation compared with the United States Treasury bonds, the lowest risk asset. Investors demand higher-yielding bonds due to the risk of the issuer’s economy, to compensate for the currency and solvency risk.

Argentina’s country risk increased by 130% in 2018 due to delayed reforms, constant devaluation and loss of foreign exchange reserves. The country risk has fallen significantly from its high of 817 basis points to the current 706. However, it remains the second highest in the region after Venezuela.

The reasons why a rich and high-potential country like Argentina has a higher country risk than allegedly weaker developing countries are easy to explain:

  • The countries with the highest country risk are also those that have abused most of the financing of public spending by the central bank through the printing of currency.
  • Argentina has a higher country risk than apparently more fragile economies due to the constant refusal on the part of the successive governments to adopt a prudent monetary policy and to defend the purchasing power of the currency. When inflation rises and the currency is devalued due to this misguided monetary policy, the purchasing power of that currency is destroyed, and the country’s investor security erodes.
  • Risk increases because investors perceive that no relevant structural reforms are being carried out, and this limits potential growth and increases the risk of inflation and default. The default probability increases with the downward spiral of printing money to finance increasing public and extractive spending, triggering inflation and raising taxes, which leads to lower growth, less investment and more displacement of the private sector.
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Disclaimer: All opinions expressed in the books, interviews and articles by Daniel Lacalle are strictly personal and do not reflect the strategy or philosophy of any specific firm.

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