For the moment, however, Argentina is still a country with sky-high prices and per capita income at $11,000. Its success in exporting crops and raw materials, along with a more limited ability to attract foreign investment, has allowed this bizarre reality to last until now. With enough cash flowing into the country, the central bank has been able to replenish its reserves and keep buying pesos... just as the government has kept printing them.
But the central bank's capacity to support the peso may finally be running out. For the first time since 2009, its reserves have fallen below $45 billion, or about 9 percent of Argentina's gross domestic product. (Back in 2009, $45 billion would have been about 15 percent of the economy.) Moreover, the government continues to use the reserves to pay its debts and fund its treasury. And though the IMF estimates that Argentina's current account balance -- the net income from trade and other incoming payments from the rest of the world -- might well stay in surplus this year, it forecasts deficits for the next five years. There simply won't be any more hard currency coming in to buy pesos.
At the same time, the government continues to run structural deficits, meaning it isn't balancing its books over the economic cycle. The revelation that thousands of public employees are paid under the table has not helped to foster confidence in its ability to collect taxes, either. Together with its reliance on the central bank for financing, these factors strongly suggest that the Argentine government's debt would not be sustainable in the event of a currency crisis.
The writing is on the wall. Already, the province of Chaco has had to make payments in pesos on a dollar-denominated bond. If that occurred at the national level, it would signal default and devaluation. Global investors can see the writing, too, and some are recommending a complete exit from Argentine assets.
All of this is happening in a country that has yet to close the book on its last crisis. This month, owners of debt left over from the default in 2002 seized an Argentine frigate in port in Ghana, in an effort to force repayment. It would be comical, if it weren't so tragic.
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