MercoPress. South Atlantic News Agency

US Citibank says Argentina's economy is “getting muddy”

In a report limited to top clients US Citibank forecasted last week that Argentina probably faces “an inflation acceleration accompanied or preceded by a flight of capital, leading to a forced landing”, if the current administration refuses to take measures to contain inflation.

The administration of President Cristina Fernandez de Kirchner accuses the Citibank of leading a speculative run on the Argentine peso when Economy minister Martin Lousteau was forced to resign following the rejection of his tentative package to cool the Argentine economy. On that day the Argentine Central Bank was forced to sell 300 million US dollars. According to the Citibank April 29 report, Argentina faces two possible scenarios in 2008: the first with a 55% chance is stag-inflation which is a blend of inflation with a slowdown of the economy. In this case real inflation would range between 15 and 25% and the economy's growth falls from 8% to 3 to 5% with chances of a recession in the second half. The US dollar exchange rate would climb from its current 3.20 to 3.80 pesos. The other scenario with high inflation, probably reaching 45%, means annual growth declines to 3%, maybe even 1% and inflation climbs steadily from its current 20%. Full recession in the second half of 2008 is highly probable and the exchange rate for US dollar above 3.30 pesos. "Last year when the presidential election we said that the main issue would be if the next government would become the first administration of Cristina Fernandez or if Nestor Kirchner would continue holding on to power; four months later, the second option seems the case", says the Citibank report. The report was done by an Argentine economist Marcos Buscaglia, working for the bank's office in Buenos Aires who admits the report is "the most pessimistic" of foreign reports with a virtually non existent margin for "positive surprises". The report accordingly is titled: "Argentina: from muddling trough to getting muddy". "Under the current circumstances of Argentine economic policy, inflation can only accelerate further", adds the report, adding that even if a reasonable agreement is reached with the striking farmers, the conflict marked an inflection point both from an economic and political point of view. Finally the report reveals that the rate of bank deposits has slowed and an increase in interest rates is anticipated to attract more deposits. However if no agreement is reached and farmers' dollars don't head for the banks, "interest rates will have to increase abruptly". The Kirchner administration accuses Citibank not only of leading the speculation against the Argentine peso which lost up to 20 cents to the US dollar during the Lousteau resignation incident, but also of dumping Argentine bonds in the market. Citibank currently figures as the fourth foreign leading bank in Argentina with 8.6 billion pesos in deposits, although in the nineties the bank was the main financial operator for the former president Carlos Menem administration. Also last week Standard & Poor's Ratings Services lowered its outlook on its sovereign credit ratings on Argentina to negative from stable reflecting the government's rejection of policies to correct the country's overheating economy. The negative outlook indicates that downside risk to the ratings on Argentina now predominates. S&P said it expects current policy to increase the likelihood of continued acceleration in inflation, which could both fray social cohesion and lead to additional direct governmental interventions in the economy. Rising inflation expectations and distortions in the economy through price controls, subsidies, and regulation will hurt growth prospects now that Argentina's output gap has narrowed, the release added. S&P also affirmed Argentina's 'B+' long- and 'B' short-term ratings