Letter: Argentina faces painful adjustments if it is to end its debt crisis

Letter: Argentina faces painful adjustments if it is to end its debt crisis

From Danny Leipziger, Professor of International Business, George Washington University, Washington, DC, US

The FT Big Read on Argentina’s clash with the IMF (November 11) serves as a lesson in how all can get it wrong on bailouts — country officials, lenders and the IMF. There can be no doubt that Argentina is, contrary to Peronist rhetoric, not “on the right path”, and that the current mix of rampant inflation, imploding exchange rates and poor policies will leave most Argentines worse off.

This is a rerun of a movie seen all too often in Argentina. There is also little doubt that the fund’s programme and its disbursement of large amounts was ill-advised and unlikely to succeed.

The IMF’s own debt analysis would have shown this and should have been heeded. Programme failures of government and design faults of the IMF led to huge capital outflows after the programme’s announcement rather than the confidence boost that former President Mauricio Macri expected. Even a massive debt rescheduling didn’t do the trick. And now Argentina wants to play hardball with the fund on its repayments?

Going into arrears, as Greece briefly did, is not the answer. Neither is a sham programme that papers over differences and sets a terrible precedent. One clear indication of the unviability of the current Argentine policy stance was that its announcement saw the price of Argentine debt falling below the renegotiated price of the 2020 $65bn debt deal.

What next? One option, unpalatable to many, would be to dollarise the economy. Of course, this goes one step beyond the failed 1991-2001 currency board experiment. However, since Argentina has been unable to manage its inflation, and the black-market rate is again double the official rate with net official reserves low, are there other viable options?

Dollarisation is not the most likely outcome, however, since it may serve all sides to pretend that the emperor is fully clothed, when that is surely not the case. Rather than undergo the necessary adjustments that other insolvent economies have endured, Argentina seems to prefer painfully damaging episodes repeated every decade or so that leave the country, endowed with enormous riches and potential, at the mercy of its creditors, including the fund for whom defaulting is not an option.

The political economy of Argentina needs a fundamental reset, and neither the international financial community nor the citizenry should accept anything less.

Danny Leipziger
Professor of International Business, George Washington University,
Washington, DC, US

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