Argentina’s Peso Collapses: Is Milei in Trouble?

this video is brought to you by brilliant at first glance it looks like Argentina's president Javier melee has been having a great couple of weeks on May 14th Argentina's statistical Authority announced that month-on-month inflation had fallen to 8.8% in April and a week later a triumphant melee appeared on stage at Buena AR's famous Luna Park Stadium to launch his new book where he belted out a rock song that included the lyrics I'm The King and I will destroy you however at the same time that melee was belting out rock songs the Argentine peso's unofficial rate was collapsing undermining M's plans to unify Argentina's currency and potentially reigniting inflation which is still running at an annual rate of nearly 300% so in this video we're going to take another look at melee's ongoing economic experiment why the peso is collapsing and what this means for melee [Music] politically before we start if you haven't already please consider subscribing and ringing the bell to stay in the loop and be notified when we release new videos so as we see melee has broadly three objectives the first is a short-term economic objective to stabilize Argentina's economy the second is a more long-term economic objective to poiz the Argentinian economy and the third is a political objective to remain sufficiently popular throughout all of this in order to stay in office which is something that previous Argentinian reformers have struggled to do anyway to understand the pesos collapse we need to start with the first objective stabilizing the Argentinian economy in effect this involves doing three things firstly cutting the fiscal deficit I.E making sure that the government spends less than it takes in tax revenues secondly cutting the current account deficit I.E making sure that Argentina doesn't import more than exports which it has done historically and third and finally bringing down inflation which has been a chronic problem for Argentina for most of modern history now to his credit melee has made pretty good progress towards balancing the fiscal deficit thanks to various Cuts government spending has fallen by over 10% allowing Argentina to run its first quarterly Surplus since 2008 although it's worth noting that the Surplus fell from roughly 700 million to 300 million in April as weak growth took its toll on tax revenues however balancing the current account has proved more difficult the main way that melee wants to do this is by devaluing and unifying the peso for context Argentina currently has basically two exchange rates the official rate claimed by the government and the unofficial or actual rate known as the blue rate which is is basically always lower than the official rate before melee took charge for instance the official rate was about $370 to the dollar while The Unofficial rate was about $1,000 to the dollar to unify these two rates in December melee cut the official rate to $800 to the dollar and said that he would devalue it by a further 2% every month until it matches the unofficial rate which he's since done now melee hopes that are unified albeit weaker peso will eventually reduce the current account deficit by reducing Imports and encouraging foreign investment but the immediate effect of the devaluation was a spike in inflation year-on-year inflation I.E the change in prices relative to a year ago jumped above 200% in December and is now running at nearly 300% the highest in the world now usually when inflation is high countries increase their interest rates however Mele has instead been cutting rates this is in part because he doesn't want to exacerbate the ongoing recession or discourage investment but it's mainly because of the vast quantity of short-term interest bearing liabilities known as leic currently held by Argentina's central bank now leics are basically like Central Bank bonds that mature very quickly with interest rates that match the central banks because this they're basically the safest asset in Argentina and safer than government bonds which makes them ridiculously popular and they today represent around 10% of GDP and are three times Argentina's entire monetary base now when interest rates go up the central bank has to pay out a whole load more money to creditors via those leics which means more money in the system and therefore higher inflation lower rates therefore also paradoxically help lower inflation in Argentina's case and also make it cheaper for the Argentinian government to buy up these leics something that melee wants to do now originally it looked like this strategy was working despite cutting rates from a high of 126% in December to just 50% in miday month on-month inflation I.E the change in prices relative to a month ago fell steadily reaching a new low of 88.8% in April the day after this data was published melee optimistically cut rates by another 10% to a 2-year low of 40% having cut them from 60 to 50% just a day earlier however a week after The peso's Unofficial rate began sliding falling from about 1,100 to the dollar at the beginning of the week to nearly 1,300 by Thursday now this is by no means a disaster given that it's mostly an unsurprising reaction to the Steep interest rate cuts which have made it even less attractive to hold pesos nonetheless it's a worrying sign for melee for three reasons firstly the widening gap between the official and unofficial rates will make it harder for melee to unify the peso second other analysts have suggested that it might also reflect investors anxieties about melee's legislative struggles for context because melee's party only hold about 15% of the seats in Congress he struggled to pass some of his more controversial reforms now he's been able to get a surprising amount done via presidential decree and last month finally got watered down version of his Omnibus Bill through the lower house but the bill still faces staunch opposition in the Senate and melee has failed to negotiate a much anticipated deal with Argentina's powerful provincial Governors but thirdly a declining currency risks reigniting inflation so far ordinary argentinians have been remarkably tolerant of melee's policy program despite the fact that it exacerbated both inflation and poverty morning consult polling from April for instance suggests that melee's approval ratings have held strong around 60% since his inauguration making him one of the most popular leaders in the world and polling from Argentinian Think Tank anomia suggests that even among the half of Argentine struggling to make ends meat 30% still support melee this is in part because they accept that radical reform is required but also because melee touts the declining monthly inflation rate as proof that things are getting better and last month promised in an interview with Time magazine that Argentina's recovery will be v-shaped and that the country is currently at the bottom of the V if inflation position however public patience could Wayne and melee risks suffering the same fate as previous Argentinian reformers and this is actually an acute concern given that last week melee laid out his new plan for dollarization proposing that instead of doing it all at once melee would let the dollar and peso circulate at the same time and then let the dollar slowly overwhelm the peso while this is in some sense more feasible given that it doesn't require an enormous pre-prepared sore of doar to buy up all the pesos letting the two currencies circulate at the same time will almost definitely put more downward pressure on the peso all in all while the peso's decline isn't catastrophic it's something worth keeping an eye on especially if melee tries to dollarize anytime soon when making videos like this we rely on tons of data analysis to interpret crucial economic data and understand political decisions but this kind of analysis isn't just crucial for our jobs as well because more driven by Ai and data your job will likely 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Channel: TLDR News Global

Views: 185,754

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Length: 9min 52sec (592 seconds)

Published: Fri May 31 2024