The Risks of an Argentine Financial Crisis

Finally! A good old-fashioned emerging-market currency crisis! Well, possibly, anyway. The WSJ headline says it all:

Argentines Rush to Buy Dollars Amid Fear of a Financial Crisis

This, if it happens, will turn out to be the most-forecasted crisis in the history of emerging markets. Argentina's heterodox economic policy angers orthodox economists, who say vehemently that it won't work, it can't work, and that it will all end in tears. But up until now it's been the economists, rather than Argentina, who have ended up with eggy faces.

And although there's no shortage of political tensions in Argentina (the one thing you can be sure of about Argentina is that there are always political tensions), the central bank has so much cash that it can quite easily afford to do things like prop up the peso while covering the country's debt service.

Yeah, prop up the peso: Argentina's now reached the point where the central bank has spent $1 billion in the past two weeks fighting the currency's decline. Quite a change from the competitive-devaluation days of a few years ago, when the Kirchner economic policy was to happily let the peso fall and watch exports soar as a result.

Indeed, the WSJ quotes Morgan Stanley's Daniel Volberg as saying that "the authorities are under some pressure to engineer a devaluation of the peso" - something which would be entirely in line with what the Kirchners have done in the past. That's why Argentines are converting their pesos to dollars right now: it's not so much fear of a financial crisis, as the WSJ's headline would have it, but simply a fear of a devaluation.

Remember, this is Argentina. In this part of Latin America, a devaluation, if it takes place in a country with a current-account surplus, low borrowing costs, and high foreign-exchange reserves, doesn't in and of itself constitute a crisis. Generally, Latin crises do tend to be accompanied by devaluations. But that doesn't mean all devaluations are crises.