Fear and loathing in Buenos Aires: will Argentina’s IMF gamble pay off?
Seventeen years ago Argentina was a country in crisis. The economy was in freefall, there was a general strike, there was capital flight and there were middle-class protests on the streets of Buenos Aires because the banks were closed for business. People lost their lives in riots. Presidents came and went with bewildering regularity. Argentina was to the southern hemisphere what Greece was to the northern hemisphere in 2015 – only worse.
The International Monetary Fund was deeply implicated in the crisis. The Washington-based institution had been a strong backer of the country’s hardline economic strategy based around convertibility of the peso into dollars. The idea was that currency discipline would force Argentina to make a decisive break with its inflationary past. What it actually led to by the turn of the millennium was a deep slump. The political backlash against grinding austerity led not only to the abandoning of convertibility but a break with the IMF and all its works.
That was then. This week, Argentina’s president, Mauricio Macri, took the decision to seek a $30bn (£22bn) line of credit from the IMF to help shore up the peso, which has been falling rapidly against the US dollar. The reason for the peso’s slide is simple: Argentina has a big budget deficit, a big current account deficit and stubbornly high inflation. Interest rates were raised from 32.5% to 40% last week but it was not enough to stop the peso falling. Macri, who promised on election in 2015 to return Argentina to the path of economic orthodoxy, following the presidencies of Néstor Kirchner and his wife, Cristina Fernández de Kirchner, has not produced the promised economic miracle.
Macri’s plan involved cuddling up to the international financial markets. He thought that a get-tough approach to inflation and the budget deficit would lead to foreign capital flooding into the country, and that the new investment would boost growth and rebalance the economy.
What Macri has discovered to his cost is that foreign capital can leave the country as quickly as it arrives. Last year, Argentina sought to burnish its pro-market credentials by floating a 100-year bond, which was heavily oversubscribed. But the transformation of the economy is taking longer than expected and the financial markets have grown impatient. For years, there has been speculation that rising US interest rates would cause problems for emerging market economies in the rest of the world that were exposed to a rising dollar. Argentina always seemed to be one of the more vulnerable countries, and so it has proved. Investors have been dumping the 100-year bond as well as selling the peso.
As Macri put it when he announced that he was asking the IMF for help: “During the first two years we have had a very favourable global context but today that is changing, global conditions are becoming increasingly complex due to several factors: interest rates are rising, oil is rising, currencies of emerging countries have been devalued, all variables that we do not control.”
For its part, the IMF is willing to let bygones be bygones. “I very much welcome President Macri’s statement and look forward to our continuing partnership with Argentina,” Christine Lagarde, the fund’s managing director, said. “Discussions have been initiated on how we can work together to strengthen the Argentine economy and these will be pursued in short order.”
Mark Weisbrot, co-director of the Center for Economic and Policy Research thinktank in Washington DC, said that in theory getting a line of credit from the IMF could help because it was like having additional reserves to defend the peso without having to borrow them. “But it depends on what conditions the IMF puts on it. The most likely direction will be to reduce the current account deficit through contracting the economy, which is of course not good for the majority of Argentines. The IMF of course has a terrible history in Argentina, in particular their role in deepening and prolonging the depression of 1998-2001.”
It is the legacy of 17 years ago that makes Macri’s appeal for help such a gamble. Argentina will doubtless get its credit line at below prevailing market rates – but it will come at a cost. The IMF will set conditions and they are almost certain to be painful and unpopular. There are plenty of places in the world where the IMF is unloved. But in few of them is the loathing quite as visceral as it is in Argentina.