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Argentina’s Crisis

Argentina’s Crisis. Q: Why is Argentina in a recession? A: Because everyone expects the peso to fall and charges Argentina high interest rates to compensate for this expected loss of value. High interest rates mean low investment, and low investment means recession.

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Argentina’s Crisis

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  1. Argentina’s Crisis • Q: Why is Argentina in a recession? • A: Because everyone expects the peso to fall and charges Argentina high interest rates to compensate for this expected loss of value. High interest rates mean low investment, and low investment means recession. • Q: Why does everyone expect the value of the peso to decline? • A: (i) Argentina’s government has been running deficits that have led to expectations of inflation and devaluation; and (ii) Argentina’s costs are well above its trading partners’. • Q: Why hasn’t Argentina simply devalued • A: First, it promised not to--fixing the peso to the dollar was the way Argentina solved its inflation problem. Second, Argentinian debt are denominated in dollars: devaluing the peso to, say, half its current value would double the peso value of debts and send most Argentinian companies into bankruptcy. High interest rates reduce investment. Near-universal bankruptcy reduces investment even more.

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