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After weeks of relentless pressure against the peso, on May 8 Mauricio Macri announced the beginning of discussions with the International Monetary Fund (IMF) for a credit line. The decision might placate financial markets and provide time for the government to continue its gradual reforms. But the deal will come with a heavy price: The IMF is infamous in Argentina – rightly or not – as the main culprit of the economic, social and political collapse of December 2001.
The origin of the present financial crisis was the shift of short-term financial investments from emerging markets towards developed ones, in response to the U.S. Federal Reserve’s policy of raising interest rates. As a result, the currencies of many emerging countries – including India, Russia and Turkey –devaluated sharply against the dollar in the past few weeks. This turbulence was felt in Argentina like a mighty storm, jeopardizing the future of Macri’s gradual approach to reform.
The South American country is particularly vulnerable to this external shock for two reasons: First, because it depends on issuing debt to sustain its high current account deficit; and second, and most important, because of the recent erosion in the market’s trust in the government’s capacity to continue implementing economic reforms. This lack of confidence comes from economic factors – such as persistently high inflation and the unimpressive growth rate of around 2 percent expected for 2018 – and political ones, including differences within Macri’s Cambiemos coalition about the reduction of subsidies for utility bills.