In the last few months, Argentina has seen a series of currency crises as an excessive reaction to international events and changes in market conditions. While to some extent the problem is due to foreign shocks, much of it is also due to Argentina’s own wrongdoing. Argentine monetary policy was a crisis waiting to happen. Why did Argentina have a larger currency crisis than other countries, and how did it get there?
When Mauricio Macri took office in December 2015, he found a challenging economic situation. The previous administration, that of Cristina F. de Kirchner, monetized its large fiscal deficits, producing rates of inflation of 20–30 percent. Macri’s administration and the new central bank authorities tried to reduce the inflation rate faster than the fiscal deficit.
During Macri’s first year in office, government spending and the deficit increased in real terms. Only in the second year did the deficit start to fall. The treasury received less assistance from the central bank and issued more foreign debt instead. However, since the foreign debt was denominated in dollars but spending was in Argentine pesos, the central bank issued pesos to buy the dollars collected from the debt issued by the treasury. Then the central bank sterilized the newly issued pesos by issuing its own short-term bonds, Letras del Banco Central (Lebacs). Both financial institutions and households were allowed to invest in Lebacs.