Argentina and the IMF step in to stop a crisis
If you are going to go, go big, and get on with it. This advice applies widely, if not universally. Certainly it fits economic interventions. Argentina and the IMF, thankfully, have followed it.
The IMF’s financing deal for Argentina, a country facing a falling currency and brutal inflation, was expected to take about six weeks to agree; it took a month.
Speculation pegged the value of the package at $30bn or so; it came in at $50bn.
The market’s initial response to the surprise has been positive. Argentine bonds rallied on Friday morning.
While the peso fell a few per cent, that is to be expected, given that one condition of the funding was the government discontinue is big interventions to prop up the currency.
The package was not only big and timely. It showed political sensitivity, as well. It was not the sort of no-strings-attached credit line that, under IMF lending standards, are used as insurance for stable countries rather than those facing imminent trouble.
The money comes with conditions: halting the currency intervention, submitting legislation to give full independence to the central bank and, most importantly, putting an end to the funding of the federal deficit though money-printing.
These are all wise — and in line with the plans the government of Mauricio Macri had in place. Mr Macri favoured a gradual programme of fiscal consolidation. Under the IMF plan, he will have to close the primary deficit in four years rather than six. IMF head Christine Lagarde’s claim that the plan was “owned and designed by the Argentine government” is credible.
This will, with any luck, reduce the pressure on the government, which faces an election next year. Many Argentines bear a grudge against the IMF, whose rescue programme for the country failed in 2001 as the country slipped into default.
The prospects are better now. Mr Macri has made some mistakes — for example, increasing the country inflation target late last year when it refused to decline quickly enough — but he is as close to economically orthodox as any president in decades. When he replaced the government of Cristina Fernández de Kirchner in 2015, he inherited significant current account and budget deficits.
That government had borrowed and printed money and fiddled the official statistics to obscure the inflationary consequences. Unlike in neighbouring Brazil, there is a thin domestic market for the country’s bonds. This leaves Argentina highly dependent on foreign investment to fund itself.
A history of financial crises means markets were always going to flinch at any sign of trouble. A strong dollar, the spectre of rising US interest rates, and a market that has lost its appetite for emerging markets had more to do with Argentina’s recent troubles than any policy of the current government.
The IMF package relieves the funding problem for the time being. But the government is still not in the clear. It will need to return to the debt markets eventually, even before it has fully drawn down the IMF funds, if for no other reason than to show it can. Inflation is still running at about 28 per cent, and it will continue to run hot for some time.
Solving the funding problem will help avoid a crisis, but does not alter the fact that the country needs to make painful economic adjustments.
The government’s approval ratings have fallen but are hanging steady near 40 per cent, and a budget containing the new fiscal target must be pushed through Congress. Mr Macri has a fight ahead. He deserves support, both at home and from abroad.