Argentina is facing an economic crisis and the central bank has hiked interest rates three times in a span of eight days. On May 4, the interest rate was hiked to 40% from 33.25%, a day after it was raised from 30.25%, which shows an abnormal increase on any economic parameter. The situation has arrived as peso has reached a record low of 25 against the dollar (9% decrease). To make up for this downfall in the first week of May the central bank of Argentina has spent $3 billion on stabilizing its currency.

Financial Institutions Observing the Movement

Seemingly, IMF is irked by this policy of the Argentinean government as it does not make sense to it. The institution is not sure whether in case of another depression, IMF should come forward or not. In 2001, when the institution failed to rescue the country, Argentina went into a sovereign debt default. So, this time, Argentinean president Mauricio Macri has indicated that he would like a flexible credit line which is risky and political in nature. The country has a history of hyperinflation, bank deposit confiscation which has reduced the importance of the currency.

Credit Suisse Argentina strategist has observed that this step has basically given two signals. Clearly, the government is willing to use all instruments that are available like interest rate and FX interventions. Secondly, with this kind of drastic measures, it can crumble the market in the short to medium term. Indonesia, which had a similar story in February and March, used $126 billion to reduce the weakening rupiah. But the move with rate hikes did not stabilize the market. Brazil continued with currency swaps from 2013 to 2015 but failed to stabilize the rial.

So globally it is a proven fact that this measure of increasing the interest rates does not work but the president has asked for a $30 billion credit line. Protests are on as previously the tough conditions imposed by IMF resulted in a large number of job losses. Investors have also been selling off the 100-year peso bond.