According to the Buenos Aires-based consulting firm 1816 Economia & Estrategia, Argentina is on the brink of financial collapse as it has depleted all of its liquid international reserves and has reportedly spent an additional estimated $1 billion.
Argentina’s fight to prevent its problematic currency from a total meltdown is leaving the central bank, by some estimates, broke.
The South America nation has already spent all of its liquid international reserves, plus another estimated $1 billion, according to Buenos Aires-based consulting firm 1816 Economia & Estrategia — raising the stakes as the nation contends with a historic drought and impending recession.
Without easy-to-spend cash on hand, questions are swirling about how much longer the government can continue to defend the peso from an all-out collapse. At risk is a currency devaluation that stands to fan 104% inflation and exacerbate high levels of social unrest ahead of October’s presidential elections.
“Fewer reserves leads to more pressure on the exchange rate, which in turn leads to more pressure on inflation,” said Fernando Losada, a managing director at Oppenheimer & Co. “I see no possible scenario under which inflation goes below three digits this year.”
Argentina has struggled to build and keep international reserves at healthy levels for decades, running through cash piles to combat rising prices and juggle obligations on overseas bonds.
The nation now technically has less than $34 billion in total foreign reserves, but the majority is locked up in less-liquid assets — such as gold, credit swap lines with China and the Bank of International Settlements and the dollars Argentines have in their savings accounts.
That’s a problem for a country in need of ready-to-spend cash. Argentina’s liabilities in foreign currency already exceed total reserves by about $1 billion — the worst such ratio since the nation was wracked by economic crisis in the early 2000s, according to the 1816 firm’s report last week.
According to data from the US Treasury, California owes the most debt at $18.6 billion and has defaulted on it.
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Banking knowledge is often treated as esoteric information. But compound interest seems to punish irresponsible borrowers worse than any other financial arrangement.