The IMF And Argentina, Part 2: Blaming The Fund

There should be no doubts that the International Monetary Fund bears an important part of the blame for its failed 2018 standby agreement with Argentina. The largest-ever bailout provided by the IMF was politically motivated given ideological proximity between Donald Trump and then president Mauricio Macri, aiming to reduce the chance 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 where they essentially acknowledged the extravagance of the affair, but noted it passed every single internal requirement, shifting the blame to the Argentine government. No one has ever expected the IMF to own its mistakes.

Yet, that shouldn’t excuse the Argentine political class, which is the main guilty party here. “IMF” has become a four letter word in Argentina after countless programmes since the mid-twentieth century, and the 2001 implosion where the Fund precipitated the economic implosion of Argentina and the largest-ever sovereign debt default in the world at the time. The lightweight Peronist ideology of blaming the Empire has made it easy for leaders to enter into the narrative of the IMF as the bad guy representing US financial interests (which is true), allowing them to mask their incompetence in economic policymaking.

The main protagonist of this cataclysm is Mauricio Macri, who ousted Mrs. 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 horrible. Macri and his main economic policy makers (Alfonso Prat-Gay, Luis “Toto” Caputo, Federico Sturzenegger, and Nicolás Dujovne) never managed to tame inflation, despite Macri boasting it would be an easy task, neither did they reduce the monetary financing of the deficit, or the deficit for that matter (until the market did it for them). The promise of structural reform didn’t materialize, and when Macri tried to push 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 run which originated in Turkey, Argentina was an easy target. Macri’s government financed the deficit with foreign debt in US dollars, a disastrous tradeoff for a country with a constantly devaluating currency. While Macri may have had no option but the IMF at the time, his economic management left the nation in ruins and massively in debt, with the last minute fireman, Hernán Lacunza, at the Economy Ministry trying to manage a market-mandated economic correction.

Macri’s failure, though, was the consequence of the Cristina Kirchner’s ruinous second term. While the Peronists love to blame the Macri administration for taking on reckless amounts of debt, they forget that Mrs. Fernández de Kirchner racked up a massive fiscal deficit which she financed by raiding state coffers left and right (pension funds, social security, national energy company YPF, Central Bank reserves) and the printing machine. Cristina’s government was (fortunately) locked out of international debt markets given her longstanding battle with “vulture” holdout 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 ticking time bomb which, as mentioned previously, he quickly defused then armed back again.

Two years into the Alberto Fernández administration, and with the promise of a moderate like Martín Guzmán at the Economy Ministry, things haven’t gotten better. While they faced the dual impact of Macri’s economic debacle and the global pandemic, their policy making has relied on short-termism without really tackling structural issues which result in the negative feedback loop of greater deficits and higher inflation. Today, Argentina faces an impossible debt schedule in the first quarter of the year which makes an agreement with the IMF a must if the nation is to avert another sovereign debt default. Almost everyone agrees it is the lesser evil, but it still hasn’t materialized.