How to Fix Argentina’s Recurrent Debt Crises
When Argentina’s economy grows, imports generally rise faster than exports—unless commodity prices are sky-high. What happens next is fairly predictable: Argentina runs out of dollars, the depreciation of the peso kindles inflation, and borrowing dries up.
The resulting economic recession eventually reverses current account deficits, but poverty soars and incumbent governments overspend to quench social unrest (and win the next election). When a sovereign default is imminent, the government calls in the IMF—a plea for help that has taken place 22 times in Argentina’s history.
Argentina’s last such bailout took place in 2018, but in the face of the coronavirus pandemic and an expected 12 percent economic contraction in 2020, Buenos Aires is looking at asking the IMF to defer its repayments on a $44-billion loan for at least three years.
The root of Argentina’s recurrent crisis is a lack of competitiveness—yet every IMF program has been premised on the assumption that tightening monetary policy would tame inflation and reconcile Argentines with their currency, the peso. This is a big mistake.
About a year ago, I was having a coffee at the IMF’s cafeteria with an IMF high official. We were, of course, discussing Argentina. Then-President Mauricio Macri had just lost the primary elections by a wide margin, and it was evident that Peronists would win the government. “Argentina is quite unique,” said the official. “For Chileans it is their peso that moves up or down; in Brazil it is the real and in France it is the euro that rises or falls, but for Argentineans it is only the U.S. dollar that moves (mostly upwards). How come you don’t see that it is the peso that moves?”
I was taken aback by the question, but the answer is simple. For Argentines, the peso is just a transactional currency, and nobody wants to save in pesos. When it raises interest rates, the country’s central bank can only postpone demand for dollars. Fixed-term deposits in pesos increase, but it is only because returns in dollars rise. A currency run is always around the corner.
The IMF should know this, yet it stepped again on the same rake in 2018. However, in one important aspect, Argentina’s last IMF program was unique. Rather than the IMF imposing conditions on Argentina—an often painful process ingrained in the local culture—it was Argentina that imposed the program on the IMF.
How so? The answer leads to U.S. President Donald Trump. Macri and Trump had done real-estate business together; Macri had Trump’s ear and he used it to persuade him that a shower of IMF dollars would facilitate his reelection, preventing Argentina from sliding into Venezuelan-style populism. The argument aligned neatly with Trump’s “Do I win?” approach to foreign policy, and eventually he helped cajole the IMF to approve a $57 billion loan (its biggest on record), frontloading about 90 percent of the money before Argentina’s presidential election.
Macri was not reelected, but Argentina did not slide into a Venezuelan-style dictatorship. Even so, the country is in deep trouble. The new Peronist government run by President Alberto Fernández inherited an economy in recession, a central bank with dwindling foreign reserves, and creditors bracing for yet another sovereign default. The coronavirus pandemic compounded Argentina’s predicament, but not everything could be blamed on the virus.
Argentina’s economic and political problems are intertwined as never before. Public opinion is deeply polarized, and Fernández’s government has evident problems in lining up political support within its own coalition. He refused to continue with Macri’s IMF program, arguing that one doesn’t get out of debt by taking on more debt, and appointed an economic minister—Martín Guzmán—with academic credentials but little experience in dealing with real problems. Rather than putting together an economic plan and asking for IMF’s financial support, Guzmán decided to start by marshalling Pope Francis’ moral support and by asking private creditors to prepare for a haircut. He requested a technical assessment of Argentina’s foreign debt and, predictably, the IMF concluded that Argentina’s debt was “not sustainable.”
Negotiations with private creditors started in March 2020, about four months after Guzmán took office, and concluded in late August. Meanwhile, the IMF was very patient and Kristalina Georgieva, the fund’s managing director, showered Argentina with lip-service support, but more recently she asked the government to “put in place a credible and comprehensive economic agenda.”
A new IMF program will have to mirror what Macri obtained thanks to Trump’s help: frontloaded financial support, in exchange for promises of reforms. This will again require Washington’s decisive support, but Fernández’s foreign policy is flirting with Venezuela rather than the United States. In the Organization of American States it has refused to accept that Venezuela’s regime is violating human rights (despite a conclusive report from Michel Bachelet, the U.N. Human Rights Commissioner) and abstained from supporting a call for free and fair presidential and parliamentary elections.
Barely two months after striking an agreement with private creditors, Argentina is once again threatened by default. The value of public debt has fallen below the levels it had before negotiations concluded, and alarmed private creditors stated that “policy actions taken in the immediate aftermath of the debt restructuring have dramatically worsened the country’s economic crisis”
Argentina’s economy cannot be fixed in one or two years. It needs active policies to support startups, the formation of human capital formation, and above all, to reduce the tax burden on those that work in its dwindling private sector. Only about 8 million of Argentina’s 45 million population work in the private sector, while public sector workers, pensioners, and those living on public handouts add up to more than 20 million. Structural reforms are indispensable, but they always imply trading short-term costs for long-term benefits. The next IMF program should be an Extended Fund Facility. However, committing to implement reforms that must be continued by the next government will require a rare degree of political consensus—a long shot for a society that remains polarized between Macri and Cristina Kirchner, formally the vice president but someone who actually holds real power.
Kirchner and her husband ruled Argentina between 2003 and 2015. Their legacy left a deep imprint in Argentina’s relation with the United States. The Kirchners were fond of Hugo Chávez, the founder of Venezuela’s “Bolivarian Revolution.” And Chávez was the prime client of one of Argentina’s main exports: IOUs. Borrowing from a fellow Latin American so-called revolutionary was politically more palatable than depending on capitalist markets, and Chávez made a handsome profit by selling Argentina’s debt to Venezuelan banks eager to circumvent the restrictions he imposed for sending dollars abroad. Everybody was happy.
Venezuelan President Nicolás Maduro is not Chávez, but Trump’s frequent salvos lends him an anti-imperialist legitimacy he does not deserve. Not surprisingly, Fernández takes much pain in explaining that Maduro is a not a dictator, but rather just authoritarian.
With over 40 percent of its population under the poverty line, Argentina desperately needs IMF’s money. Yet that will necessarily require the support of the Fund’s main shareholder, the United States. Fernández, already too much of a moderate for his fellow “Kirchneristas”, does not have much wiggle room to exchange gifts with a transactional president like Trump. On the other hand, U.S. Democratic contender Joe Biden is more of a multilateralist, and is expected to have a less confrontational and more sophisticated foreign policy. Fernández is said to be hoping for a Biden victory.
Either way, whether 2021 sees a Trump or a Biden White House, Argentina’s relations with the United States must be edified on trust and mutually cherished values, and democracy and respect for human rights should be at top at the list.