In 1895 and 1896 Argentina was the wealthiest country in the world. Since that time it has lurched from one financial crisis to the next defaulting on their government bonds eight times. What happened to make Argentina go from one extreme to the next? Many historians will cite politically instability as the cause. For example, Argentina had enjoyed a civilian constitutional government up to the 1930’s when a military junta took over.
Argentina’s best years were called the “Golden Age”, a term appropriate for the period which coincided with the country relying on a gold standard for financial stability, trust, and low inflation. It is therefore not a coincidence that in 1929 when Argentina abandoned the gold standard, years ahead of many other countries, that problems began to rise in earnest.
Over the weekend, Argentina was hit with its latest bout of financial turmoil. President Mauricio Macri lost to Alberto Fernandez in the primary elections. The actual elections are in October but the primary is widely seen as a reliable preview of what to expect later.
President Macri is a disciplined pro-market leader. He took over the reins from Cristina Fernandez de Kirchner, a socialist politician facing multiple charges of corruption. President Macri has worked hard to stabilize Argentina but in many ways, it was too large a lift with too little of the public understanding the short term sacrifices necessary to improve the long term. In the primary elections, this weekend the citizens of Argentina voted with their stomachs. Socialist candidates promising food and increased wages win votes when people are poor and hungry. These same voters don’t stop to ask the all-important question, “How will my government pay for these new promises?”
Markets showed Argentina in no uncertain terms that they have zero appetite for more government profligacy. In local currency prices, the market crashed over 37% but the local Argentinian peso dropped too. In dollar terms, the market dropped nearly 48%!