The Messi state of Argentina's economy!

As the governor of the Bank of England, Mark Carney, makes his latest promise that interest rates will go up from the current level of 0.5% in the coming months to as much as 1% (he has been saying this for 2 to 3 years) Argentina’s central bank has taken things to a whole new level by recently increasing interest rates in the South American country to a whopping 40%. 

On May 4th, the bank hiked rates to 40% from 33.25%.  However, Argentina’s drastic policy actions appear to have paid off.

At the beginning of May, the country was on the ropes. After monetary and fiscal policy mistakes in recent years, the Argentine peso fell to a record low and the country’s government debt (usually a key indicator of economic stability) tumbled in price. Its 100-year bond — issued almost a year ago and lapped up by investors hailing a new market-friendly government — sank from 94 cents on the dollar last month to a low of 83.1 cents. However, the series of substantial interest rate increases and a promise to reduce the budget deficit more quickly have helped stabilise markets, with the “century bond” holding just below 87 cents on the dollar in response the interest rate increases – clear evidence of a quick turnaround of the impending crisis! 

You may think that this must mean that savings accounts in Argentina must be offering fantastic returns for investors, and to some extent you would be right – in that the average yearly return of cash held in banks is now around 20%. However, with inflation in the country at 25%, you would be losing money in real terms for every day that you kept your money in the bank. This has led to some overseas investors who would not be buying goods in the country (and therefore protected from inflationary pressure) speculating that they could achieve a 20% risk free return on capital. However, there is not really any form of risk free investing, especially in emerging markets. The huge risk of a further devaluation of Argentina’s currency, along with tax compilations, and a government not averse at looking to cease money being moved out of the country – would make such a move very risky indeed. 


For advice on more mainstream ways of achieving healthy returns from savings and investments, please contact Adam at Argents Wealth Management on 01603 666132.