The president of Argentina should look sick. Argentina is again an emerging market disaster. It is a dozen years since the financial crisis of 2002 when it last had a major devaluation and defaulted on its debt. It seems that no one learns from past mistakes.
Exports have slowed. Foreign reserves declined in order to support the currency to levels that could not be sustained. Hence, the devaluation. Without central bank support, the Argentinian peso fell 12 percent in a day on January 23rd.Foreign reserves fell to a seven-year low while inflation is now in the range of 30% for the official rate. It is much higher in the street..
Central bank rates have been raised by 5% to 26% to tighten monetary conditions. Policy mistakes of the past have now caught up with the government. This is not a Fed taper problem but just an old fashion currency crisis based on poor government management. There is spill-over to other emerging market countries and to Argentine's closest trading partners like Brazil.
The word is out - do not hold EM currencies and central banks are responding with policy tightening. This is a global issue that will not go away soon.
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