By Arturo C. Porzecanski* The austerity measures that President Mauricio Macri announced yesterday to deal with the sharp depreciation of the Argentine peso and acceleration of inflation in the past couple of months are a belated but entirely appropriate effort to stem the country’s massive capital flight. His administration intends to lower government spending and […]

via Argentina: From Gradualism to Shock Therapy — AULA Blog

A government-imposed austerity measure affects everyone differently. The measure is usually designed to restore an economic balance between affordability and politically popular programs. At some point, a country must govern by implementing financially viable programs and not engage in risky deficient spending. Most citizens support governments that offer them services and benefits whose costs are not passed on to them. Elected offices prefer to cut costs rather than raise revenue by increasing taxes.

Former Argentine Presidents Nestor and Cristina Kirchner governed for 12 years based upon a populist mandate. As with all socialist endeavors, there comes a time when “the bills must be paid and accounts balanced.” President Marci has tried to eliminate gradually costly subsidized programs. Dr. Porzencanski makes the case in this post that time has run out for Argentina to slowly put its finances in order. I believe that Dr. Porzencanski’s analysis is intellectually sound. What was not discussed in the post was Argentina’s ability to pay back the money it had just borrowed. Do investors believe that Argentina can pay the political price for financial stability? The peso will continue to lose value as long as investors believe that Argentines will not accept Greece-like austerity programs. It is unreasonable to expect investors to automatically have confidence in Argentina’s ability to repay the money it has already borrowed.

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