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How To Repair Argentina's Recurring Debt Disaster


When the Argentine economy grows, imports generally grow faster than exports – unless commodity prices are sky high. What happens next is pretty predictable: Argentina is running out of dollars, the devaluation of the peso ignites inflation, and borrowing runs dry.

The resulting economic recession will eventually reverse current account deficits, but poverty rises and incumbent governments are spending too much to quell social unrest (and win the next election). When a sovereign default is imminent, the government calls the IMF – a request for help that has been made 22 times in Argentine history.

Argentina's last rescue operation took place in 2018. With the coronavirus pandemic and an expected economic slowdown of 12 percent in 2020, Buenos Aires plans to ask the IMF to defer repayments on a $ 44 billion loan for at least three years.

The root of the recurring crisis in Argentina is a lack of competitiveness. Still, every IMF program was based on the assumption that tightening monetary policy would tame inflation and bring Argentines into line with their currency, the peso. That is a big mistake.

About a year ago I had coffee with a senior IMF official in the IMF cafeteria. We talked about Argentina, of course. Then-President Mauricio Macri had just lost the primary elections by a wide margin, and it was obvious that Peronists would win the government. "Argentina is pretty unique," said the official. “For Chileans, it's their peso that moves up or down. In Brazil it is the real and in France it is the euro that goes up or down, but for Argentines only the US dollar moves (mostly up). Why don't you see the peso moving? "

The question surprised me, but the answer is simple. For Argentines, the peso is just a transaction currency and nobody wants to save in pesos. When interest rates are raised, the country's central bank can only shift demand for dollars. Fixed term deposits in pesos are increasing, but only because returns in dollars are increasing. A currency run is always around the corner.

The IMF should know this, but stepped on the same rake again in 2018. However, in one important respect, Argentina's most recent IMF program was unique. Instead of the IMF imposing conditions on Argentina – an often painful process that is anchored in local culture – it was Argentina that imposed the program on the IMF.

How come? The answer leads to US President Donald Trump. Macri and Trump had done real estate deals together; Macri had Trump's ear, and he used it to convince him that a shower of IMF dollars would make his re-election easier and prevent Argentina from falling into Venezuelan-style populism. The argument coincided with Trump's "Will I win?" foreign policy approach, and eventually he helped the IMF approve a $ 57 billion loan (the largest ever recorded) that summoned about 90 percent of the money ahead of Argentina’s presidential election.

Macri was not re-elected, but Argentina did not slip into a Venezuelan dictatorship. Nevertheless, the country is in great trouble. The new Peronist government under President Alberto Fernández inherited an economy in recession, a central bank with dwindling currency reserves and creditors who were preparing for another national bankruptcy. The coronavirus pandemic exacerbated the situation in Argentina, but not everything could be attributed to the virus.

Argentina's economic and political problems are intertwined like never before. Public opinion is highly polarized and the Fernández government has obvious problems channeling political support within its own coalition. Refusing to continue Macri's IMF program, arguing that taking on more debt cannot get out of debt, he appointed an economics minister – Martín Guzmán – with academic qualifications but little experience in dealing with real problems. Rather than drawing up an economic plan and asking for financial support from the IMF, Guzmán decided to first seek moral support from Pope Francis and ask private creditors to prepare for a haircut. He called for a technical assessment of Argentina's external debt, and the IMF predictably concluded that Argentina's debt was "unsustainable".

Negotiations with private creditors began in March 2020, about four months after Guzmán took office, and concluded in late August. In the meantime, the IMF has been very patient and Kristalina Georgieva, the fund's executive director, showered Argentina with lip service. More recently, she called on the government to "establish a credible and comprehensive economic agenda."

A new IMF program must reflect what Macri received thanks to Trump's help: pre-funded support in exchange for reform promises. This, in turn, will require Washington's crucial support, but Fernández's foreign policy is more likely to flirt with Venezuela than the United States. At the Organization of American States, she has refused to accept that the Venezuelan regime is violating human rights (despite a final report by Michel Bachelet, the United States Commissioner for Human Rights) and has refused to call for free and fair presidential and parliamentary elections.

Less than two months after signing an agreement with private creditors, Argentina is again threatened with default. The value of the public debt has fallen below pre-negotiations levels, with alarmed private creditors saying that "policies taken immediately following the debt restructuring have dramatically exacerbated the country's economic crisis".

Argentina's economy cannot be mended in a year or two. Active measures are needed to support startups, develop human capital and, most importantly, reduce the tax burden on those who work in their dwindling private sector. Only about 8 million of Argentina's 45 million people work in the private sector, while public sector employees, retirees and people living on public grants make up more than 20 million. Structural reforms are essential, but always imply trading short-term costs for long-term benefits. The next IMF program should be an expanded fund facility. The commitment to implement reforms that must be continued by the next government, however, requires a rare level of political consensus – a long way to go for a society between Macri and Cristina Kirchner, formally the vice-president but someone in actual power owns, remains polarized.

Kirchner and her husband ruled Argentina between 2003 and 2015. Their legacy has deeply shaped Argentina's relations with the United States. The Kirchner liked Hugo Chavez, the founder of the "Bolivarian Revolution" in Venezuela. And Chavez was the main customer of one of Argentina's main exports: IOUs. Borrowing from a so-called Latin American so-called revolutionary was more politically palatable than dependent on capitalist markets, and Chavez made a sizeable profit selling Argentina's debt to Venezuelan banks in order to circumvent the restrictions he placed on sending dollars abroad. Everyone was happy.

Venezuelan President Nicolás Maduro is not Chavez, but Trump's frequent volleys give him an anti-imperialist legitimacy he doesn't deserve. Not surprisingly, Fernández goes to great lengths to explain that Maduro is not a dictator, but only authoritarian.

With over 40 percent of the population below the poverty line, Argentina urgently needs IMF money. However, this inevitably requires the support of the Fund's major shareholder, the United States. Fernández, who is already too moderate for his "Kirchneristas", doesn't have much leeway to exchange gifts with a transaction president like Trump. On the flip side, US Democratic nominee Joe Biden is more of a multilateralist and is expected to pursue a less confrontational and differentiated foreign policy. Fernández should hope for a Biden victory.

Regardless of whether there is a Trump or a Biden White House in 2021, Argentina's relations with the United States must be built on trust and mutually valued values, and democracy and respect for human rights should be high on the list.

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