The president, Alan Greespan, former head of the Federal Reserve when there was the Tequila effect
A study by three Dallas Federal Reserve economists places the Argentine economy latest position perspectives facing a list of developing countries to face an interest rate hike in the United States.
Argentina, according to research by Scott Davis, Michael Devereux and Changhua Yu, is one of the two economies with an inadequate level of reserves, this is negative, if you subtract from the currencies held by the Central Bank, the debt amounts in short dollars -term (basically to the IMF) and the balance of payments result. The other country in a similar situation to Argentina is Turkey.
The work of the Dallas Fed researchers is relevant for two reasons. First, due to the local context in which the financial crisis is worsening. Blue hit $ 301 yesterday. Second, the Fed would raise rates for the second consecutive time next week and do it again by 0.75 percentage points.
The US Federal Reserve (the central bank of the world’s largest economy) is going through a period of rate hikes to placate the rise inflation which in June was 9.1% annualized, the highest since 1981. So far this year, its monetary policy committee has raised the rate three times (March, May, June) and is expected to repeat the same in July. After some rumors that it would apply a one percentage point hike (which the Fed has never decided since it has been using rates as a guide to manage inflation since 1990), everything indicates that next week it would be a 0 hike. 75 for fear of causing a slowdown in activity higher than expected (mortgage rates reach 5% per year and this would cause a further drop in consumption).
The impact of this adjustment of US monetary policy on the rise in prices recorded in their country will have an impact in one way or another on emerging economies and in particular on Argentina. This has happened in the past, such as in 1994 when the Fed (its chairman was Alan Greenspan) unleashed the so-called tequila effect.
The work of Davis, Devereux and Yu found that most of the developing or emerging countries that were affected in ’94 are better off and out of the woods this time around. Although the 2022 correction would be larger than that of 1994 (for a quarter of a point). The reason? They have learned their lesson: they have reserves to pay off debts and imports. The work does not represent the vision of the Fed system (made up of 12 regional banks, including Dallas) but of its authors.
The Tequila crisis (the first in the financially integrated world after the fall of the Wall) had its epicenter in Mexico. Its economy had been exposed to high dollar-denominated debt and insufficient reserves.
“Emerging markets must decide what level of reserves is adequate to protect their currency”lifts the work.
Davis, Devereux and Yu cite the work of the Argentine economist Pablo Guidotti, former Treasury Secretary and current professor at Di Tella University. Guidotti came to a conclusion popularized by Greenspan himself. In a 1999 speech, the American summed up the rule by stating it “Countries must manage their external assets and liabilities in such a way that they can always live without new foreign loans for up to one year”.
Since then, this reserve adequacy measure has been called Guidotti-Greenspan rule.
“Today an increase in the US rate would not have the impact of 1994 because emerging countries accumulated sufficient reserves and understood the risk of being excessively dependent on the financial market”Guidotti himself explains. “In the case of Argentina, for example, it has no significant deadlines until 2025. But the numbers continue to show a fragile economy because it does not have sufficient reserves and does not have access to the market”.
Equilibra consultancy makes estimates net reserves today at -1,071 million US dollars. And by the end of the year the red would intensify: -2.724 million dollars.
The increase in US rates would have a greater impact on Argentina than the financial one: the dollar will strengthen more and the prices of the goods they will continue to fall.
Ezechiele Burgo
Source: Clarin
