Months after Buenos Aires defaulted on the largest amount of debt in history in 2001, Brazil’s economy took a turn for the worst. As Argentina finds itself in a similar economic storm, some fear financial contagion could spill over into emerging markets once again.
The Argentine peso has shed more than 30% versus the dollar this year, prompting the country to hike interest rates to 40% and reach for a controversial bailout by the IMF this month. While contagion risk is currently “contained,” according a group of Citi Research analysts led by David Lubin, the rising US dollar could change that.
“If broad sentiment in EM turns or the situation in Argentina deteriorates, the pressure to increase portfolio liquidity may lead to contagion to other EM countries,” Lubin said. “Further dollar appreciation might be the most likely trigger for this risk to materialize.