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INFLATION IN ARGENTINA had intensified, the IMF lamented. The cost of living had increased by some 50% over the course of the year. “The most important source of inflation”, the fund explained, “was government-deficit spending, financed by borrowing from the central bank.” The deficit, in turn, reflected excessive wage demands and the failure of the country’s utilities to raise prices in line with costs. The year was 1958. At the end of it, Argentina turned to the fund for its first “standby arrangement”, a line of credit accompanied by a plan to stabilise the economy.
Sixty years later, in June 2018, Argentina was back for its 21st arrangement: a $50bn loan, later increased to $57bn, backed by the government’s promises to cut the budget deficit and strengthen the central bank in the hope of quelling inflation and stabilising the peso. The loan was the largest in the IMF’s history. It has left Argentina so in hock to the fund that the country will need a new longer-term loan to help it repay its existing one. Despite its size, the rescue failed to save Argentina from default and despair. It has also left the fund heavily exposed to a single country when many other emerging economies may soon need its help.
The IMF’s dance with Argentina over the decades has attracted plenty of criticism. The institution has been variously described as too indulgent and too punitive, too kind and too cruel. Conservative critics think the fund has been seduced by its dance partner, wasting public money in a futile battle with market forces. The left, on the other hand, thinks the fund is both neocolonial (ie, too bossy) and neoliberal (ie, too enamoured of free markets).
The fund’s latest critic is the fund itself. Shortly before Christmas it published a lengthy evaluation of its 2018 arrangement with Argentina, led by staff who had not been involved with it. It concludes that the rescue was not “robust” enough to withstand the foreseeable risks it faced. Argentina’s economy, the report points out, suffers from some longstanding structural weaknesses. Its public finances are notoriously fragile (only 15% of the workforce pay income tax, according to the OECD, and energy is heavily subsidised). Its financial system is shallow, which tempts the government to borrow from fickle foreigners instead. Its range of exports is narrow. Inflation is stubbornly high and responds only fitfully to tighter monetary policy. Argentines like to hold their deposits in dollars. And they often price things with reference to it. That means that inflation rises quickly when the peso drops.
The government of Mauricio Macri, which requested the IMF loan, also faced tight political constraints. His centre-right party did not hold a majority in the legislature, and he had to stand for re-election in 2019, before any painful economic reforms would have time to bear fruit. Given these difficulties, the fund knew the loan was risky. Yet it did not insist on adequate contingency plans upfront, the evaluation points out. At the outset, the fund hoped that a big loan would restore the confidence of foreign investors, stabilising the peso and allowing the government to roll over its dollar debt on reasonable terms. The government’s liabilities would then prove easier to bear and the confidence of its creditors would be self-fulfilling. Moreover, Argentina might not need to draw down its IMF credit line entirely, leaving the fund less exposed to the country than the headline amount suggested.
This gamble soon failed. Foreign capital kept retreating, the peso kept falling and inflation kept rising. The evaluation speculates that the size of the IMF’s loan may even have been “self-defeating”, eroding confidence rather than inspiring it, since foreign investors knew the fund would be repaid before them.
In October 2018, once it became clear that Argentina would need all the money it could get, the IMF agreed to enlarge the loan and disburse it more quickly. The new plan called for an even smaller deficit and even tighter monetary policy. At times, the revised plan seemed to be working. But a jump in inflation in early 2019 caught everyone by surprise. And any remaining hopes of success were dashed when it became clear Mr Macri would lose that year’s election. In its last months, his government had to impose capital controls to stem capital flight. The leftist government that succeeded his defaulted on the country’s foreign debt.
What kind of contingency plans should the fund have insisted on? The evaluation singles out an “early” debt restructuring (in which the government would have asked its creditors to accept a delay or decrease in repayments) coupled with capital controls to prevent money fleeing the country. That would have eased Argentina’s debt burden. And it might have left more IMF money for later, helping bolster the country’s foreign-exchange reserves and rebuild confidence in the aftermath of the debt write-down.
Own goal
But if such a plan had become public, it would have rocked market confidence, precipitating the damage it was designed to limit. And it might also have violated the government’s “red lines”, which ruled out such measures because it regarded them as a hallmark of Argentina’s uncreditworthy past. The evaluation concedes that stabilisation plans do not work if governments do not feel they “own” them. But “ownership”, it says, “should not be understood as a willingness to defer to [a government’s] preference for suboptimal policy choices.” The IMF should not, in other words, let governments make their own mistakes with the fund’s money.
The evaluation alludes indirectly to another implicit goal of the IMF in Argentina: to rescue its own dismal reputation in the country. Had it insisted on an early debt restructuring coupled with capital controls, it might have distanced itself further from its reputation for free-market fundamentalism. But to have pressed such a plan on Argentina, against the wishes of its democratically elected government, would have entrenched its reputation for bossiness. In the case of Argentina, a less neoliberal approach would have been more neocolonial. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Blood on the dance floor”
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