The IMF and Argentina, part 2: blame the fund

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BUENOS AIRES, ARGENTINA – OCTOBER 28: Trade unions and civil society organizations participate in … [+] protest against the International Monetary Fund (IMF), as they march towards the National Congress building in Buenos Aires, Argentina, October 28, 2021. (Photo by Muhammed Emin Canik / Anadolu Agency via Getty Images)

Anadolu Agency via Getty Images

There is no doubt that the International Monetary Fund bears a significant part of the responsibility for the failure of the 2018 stand-by agreement with Argentina. The biggest bailout ever provided by the IMF was politically motivated given the ideological proximity between Donald Trump and President Mauricio Macri, with the aim of reducing the chances of Cristina Fernández de Kirchner’s return to power, as explained in a previous column. Its catastrophic failure was analyzed in a recent IMF report in which they essentially acknowledged the extravagance of the case, but noted that it passed all internal demands, blaming the Argentine government. No one ever expected the IMF to admit its mistakes.

However, this should not excuse the Argentinian political class, which is the main culprit here. “IMF” has become a four letter word in Argentina after countless programs since the mid-twentieth century and the implosion of 2001 where the Fund precipitated Argentina’s economic implosion and the biggest default of sovereign debt to the world at the time. The light Peronist ideology of blaming the Empire made it easy for leaders to enter the IMF narrative as a villain representing American financial interests (which is true), allowing them to mask their incompetence in shaping economic policies.

The main protagonist of this cataclysm is Mauricio Macri, who ousted Ms Fernández de Kirchner after twelve years of populism and promised a new era of growth and global integration. While his intentions seemed genuine, his execution was gruesome. Macri and his main economic decision-makers (Alfonso Prat-Gay, Luis “Toto” Caputo, Federico Sturzenegger and Nicolás Dujovne) have never succeeded in bringing inflation under control, although Macri boasts that it would be an easy task, they did neither have they reduced monetary financing of the deficit, or the deficit for that matter (until the market does it for them). The promise of structural reforms did not materialize, and when Macri tried to push through legislation after the 2017 midterm elections, it was too little too late. At the first sign of danger in early 2018, when emerging markets suffered a race that originated in Turkey, Argentina was an easy target. The Macri government financed the deficit with foreign debt in US dollars, a disastrous compromise for a country with a constantly devaluing currency. While Macri may have had no choice but the IMF at the time, his economic management left the country in ruins and heavily in debt, last-minute firefighter Hernán Lacunza of the Economy Ministry trying to manage an economic correction imposed by the market.

Macri’s failure, however, was the consequence of Cristina Kirchner’s ruinous second term. While the Peronists like to blame the Macri administration for incurring reckless debts, they forget that Ms Fernández de Kirchner ran up a huge budget deficit which she financed by plundering state coffers left and right ( pension fund, social security, national energy company YPF, central bank reserves) and the printing machine. Cristina’s government was (thankfully) excluded from international debt markets given her long-standing battle with “vulture” creditors like Paul Singer’s Elliott Management, so she racked up intra-government debt. This led to currency controls and an artificially imposed value for the dollar-peso exchange rate. She handed Macri a time bomb which, as mentioned earlier, he quickly defused and then rearmed.

Two years after the administration of Alberto Fernández, and with the promise of a moderate like Martín Guzmán to the Ministry of the Economy, things have not improved. While they were faced with the dual impact of Macri’s economic debacle and the global pandemic, their policymaking has relied on the short term without really addressing the structural issues that drive the negative feedback loop of larger deficits and higher inflation. Today Argentina faces an impossible debt schedule in the first quarter of the year, making a deal with the IMF essential if the nation is to avoid another sovereign debt default. Almost everyone agrees it’s the lesser evil, but it still hasn’t materialized.

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