The Argentine economy is on the verge of another default less than two decades after the last one, in 2002. The forthcoming elections, in October 27, will most likely bring back the Kirchnerist opposition back to power, and they will have to negotiate with the International Monetary Fund (IMF), that has the power to prevent a crisis.
Argentina has a long and turbulent history with the IMF that dates back to the country’s entry in the organization in 1956 and to the first loan that was received the following year, after the military coup that brought down the Peronist government in 1955. Since then, the country has been an adept user of IMF resources, ranking among the countries that signed the most agreements. The loan of approximately $57 billion, reached in 2018, is the largest in the IMF’s history, and is a Stand-By arrangement, since it comes with the imposition of economic policies designed by the IMF. This contrasts with the period in which Néstor Kirchner and his wife Cristina Fernández de Kirchner were in power.
In 2006, the government of Néstor Kirchner paid its debt with the organization, and stopped the regular article IV consultations, which allow the IMF’s economists to monitor macroeconomic policy in the country. In contrast, in 2016, the newly elected president Mauricio Macri’s invited the IMF for a renewed article IV visit. In other words, during the Kirchner years there was no IMF influence on Argentine economic policy.
Since Argentina is on the verge of a default, the IMF holds all the cards in its hand. If they continue to disburse the loan to Argentina, the country might have a fighting chance of avoiding a crisis, and even start on its path towards recovery. That would also be necessary to reduce the levels of unemployment and poverty that have soared in the last few years. But if the IMF presses on with austerity policies and withdraws support, Argentina will descend into chaos.
From 1956 to 2006, there were only very brief periods in which the influence of the IMF on macroeconomic policy was not felt. In this last cycle of IMF influence, the degree of influence of the IMF has been stronger than was necessary, given the economy was in good shape overall when Macri was elected in 2015.
In particular, whether the IMF provides the next installments of the money that were agreed upon—which often depends on whether the country has followed the conditionality imposed by the IMF—is crucial for the financial stability of the country. Conditionality is the term used to define the macroeconomic policies required by the IMF to disburse the loans. What the international organization requires from its borrowers is essentially austerity policies.
The economic influence of the IMF is crucial for the economic and political sustainability of the next government. Note that the IMF Board depends on the members with higher quotas—generally the United States and Western European nations that are always at the helm of the institution—including now, with the recently designated Kristalina Georgieva for the position of Managing Director. The question is what would happen now that a Kirchnerist government is poised to win the election, and the tutelage of the IMF is all but inevitable to preclude default. Getting an overview of the history of the troubled relationship between the Argentina and the Bretton Woods institution might be relevant to understand the current impasse.
The IMF and the Developing World
In the 1950s, countries joined the IMF with the hope that being on good terms with the institution would allow it to have access to resources in dollars, both from the IMF and the World Bank, which were seen as essential for the process of development. In particular, Argentina needed dollars to buy capital and the intermediary goods for the process of import substitution industrialization. Furthermore, the authorities of the period thought that being seen as well-behaved by the international financial community would lead to flows of foreign direct investment, and that this would also promote development. That proved to be a false hope.
The IMF was relevant to provide funds when reserves were low and to help with short-term balance of payments problems. This was what the institution was designed for, by Harry Dexter White, an economist in the Roosevelt and Truman administrations. The idea was that countries with balance of payments problems received help, but should adjust their external accounts in order to eliminate imbalances. White’s project won over the British model for the Bretton Woods organizations, designed by John Maynard Keynes, which put more emphasis on a reciprocal adjustment of deficit and surplus countries. The IMF effectively operated by imposing restrictive fiscal policies on deficit countries following the model developed by the orthodox economist Jacques Polak, who held the position now referred to as Economic Counsellor.
But in the 1950s and 1960s, the IMF was not central for economic policies in the developing world. The Cold War, and the fear of the Soviet alternative, in Latin America vividly embodied by the Cuban Revolution and the Argentina-born Che Guevara’s peripatetic revolutionary exploits, created some space for autonomous national development policies at home. Countries used exchange controls to minimize the need for dollars, and the trade and industrial policies allowed for additional reduction of the need for foreign reserves.
This all changed in the 1970s, after the collapse of Bretton Woods, the elimination of capital controls, and the increasing financialization of the global economy. The dollar remained the key currency, and capital flows increased drastically after the deregulation of financial markets. Many developing countries borrowed significant amounts of dollars, in order to deal with the two oil shocks. Argentina was not particularly hard-pressed for resources, since it was essentially energy self-sufficient at that time. But the military government of the period— which together with the Chilean government of Pinochet was one of the first to promote neoliberal policies of deregulation, liberalization, and privatization—borrowed significant amounts. Foreign debt in dollars ballooned and it went mostly to consumption and to finance capital flight.
In other words, the dollars were bought mostly by the Argentine elites, and used to obtain assets in dollars, kept mostly abroad. This was done with full knowledge and some degree of cooperation from the United States administration, as well as international organizations, like the IMF, that were helping banks lend the so-called petrodollars, the funds that oil rich countries deposited in banks in advanced economies, and that were sitting idly in their vaults.
Up to that point the IMF’s role had been minimal, and at the margins. But in 1982—after Paul Volcker increased interest rates significantly to reduce inflation in the United States—Mexico, which was also heavily indebted in foreign currency, defaulted. That led, by a process of contagion, to banks cutting loans to all Latin American countries.
Argentina had just returned to democracy, and the new government of Raúl Alfonsín expected that some reduction on the debt service was possible. The origins of the debt were considered illegitimate and connected to the dictatorship. The country did not have enough reserves, and it imported more than it could pay with exports. The IMF supported the banks, and the fears of a default led to persistent depreciation of the local currency. The large depreciation of the currency, which increased the price of imported goods, and the pressures of a newly democratic situation—with a strong union movement that demanded higher wages—fueled the inflationary process, leading to hyperinflation and the collapse of the Alfonsín administration before the end of its term.
The IMF traditional solution, which was to demand reduction in government spending to reduce imports and save dollars for the repayment of debt, sent the country into a decade of low growth. The infamous lost decade was indelibly connected to IMF-sponsored policies. It was only after the new government of Carlos Menem, committed to pro-market reforms, assumed its functions that a combination of IMF funds, and the adoption of the Brady Plan—which allowed for the renegotiation of the external debt—that exchange rates were pegged to the dollar, in what was known as the Convertibility Plan. The inflationary pressures stopped.
The 1990s marked the pinnacle of the IMF’s influence on economic policy. But even if growth increased, compared to the lost decade of the 1980s, the performance of the economy was poor following the structural reforms associated to the Washington institutions, such as the IMF, the World Bank, and the U.S. treasury. This was known as the Washington Consensus. In particular, the liberalization of the economy, in a period in which the Asian economies were industrializing at a rapid pace—and with considerably lower real wages in dollars—led to a significant blow to local manufacturing production, massive unemployment, and increasing trade deficits, which had to be covered by large amounts of borrowing in foreign currency. Argentina was seen as the poster child of the Washington Consensus, but the persistent trade deficits and the series of international crisis that started with the “Tequila Effect” in Mexico in 1995, and was followed by the Asian and Russian crises in 1997 and 1998, and the Brazilian crisis in 1999, created the perception that the country would not be able to repay its debts.
The IMF was essentially in charge of Argentine macroeconomic policy. The international organization demanded that fiscal deficits were eliminated, the notion being that in order to pay the foreign debt in dollars the government should save more than it spent in pesos. Clearly the issue was that the Argentine exports—the only secure source of dollars—were based on a narrow specialization on the export of commodities. They did not generate enough resources to pay for interest on debt, or for imports of essential capital and intermediary goods. By 2001, it was clear that the situation was unsustainable. In late 2001, the IMF decided to withhold a relatively small tranche or installment of the agreed Stand-By loan. The notion that the IMF had lost the confidence on the Argentine government led to a frenzy of speculation, and the economy collapsed.
Argentina defaulted in December of 2001, and by February the massive depreciation of the currency led to spiraling inflation as well as to the contraction of the economy. Note that a depreciation, by increasing the price of imported goods, reduces real wages, and consumers' capacity to buy goods and services. The fall in consumption reduces the level of activity, and the economy collapses. In the case of Argentina, the collapse was the worst in recorded history, with a 10 percent collapse of output in 2002 alone, and an accumulated decline of almost 20 percent over the whole crisis, throwing millions into unemployment and poverty. Once again, the intervention of the IMF was associated with one of the worst economic experiences in the history of Argentina.
The Era of the Kirchners and Macri
Néstor Kirchner was elected more than a year after the default, in 2003. He and his wife, Cristina Fernández de Kirchner, who succeeded him in 2007, renegotiated the external debt with almost 93 percent of the bondholders, and obtained a significantly reduction in payments. They also paid the debt with the IMF. With that, between 2006 and 2015, when Mauricio Macri was elected, the Argentine economy lived the longest period without the interference of the international organization since Juan Domingo Perón decided not to join in the late 1940s. A combination of a decrease of the foreign debt burden, an expansion of social spending, and good international conditions, along with higher prices for commodities that increased the value of exports, led to high levels of economic growth, reduced unemployment, and decreased inequality. The absence of the IMF not only did not appear to matter—it seemed to be beneficial.
Obviously, there were problems. After the Global Financial Crisis of 2008, the prices of commodities fell, in particular after 2011. Furthermore, the Central Bank of Argentina did not accumulate enough reserves in dollars, in part because interest rates were low or even negative in real terms. And even though the government maintained for the most part primary fiscal surpluses or small deficits and no significant borrowing in foreign currency, the external situation was deteriorating. Note that primary fiscal results are the ones that discount the payments of interest, meaning that the fiscal accounts of the government were not in disarray, with the government spending more or less in balance with revenue. The government of Cristina Kirchner opted to maintain low levels of growth in the last years, which reduced the need for imports, and maintained the situation under control. However, this partially caused her candidate to lose the elections in 2015. In 2015, when Macri assumed the government, there were enough reserves to service the short-term obligations of the country, and no risk of default was imminent.
Macri promised to bring back the country into the world, meaning greater integration with the global economy, following the old policies of the Washington Consensus. He liberalized the foreign exchange markets and renegotiated the foreign debt with the few holdouts—essentially the so-called Vulture Funds— which had bought Argentine debt for a pittance and sued in New York courts for full payment. He paid what was demanded so that the country could borrow in dollars. The notion was, once again, that foreign funds would flow, and that this would lead to growth. The IMF was brought back, as a seal of approval for good governance. Interest rates remained low, and often negative. The combination of low interest rates, and the absence of foreign exchange controls, meant that people could freely buy dollars, which led to capital flight and significant depreciation of the peso, as before.
Initially, the depreciation was seen positively, even if Macri’s economists did not admit it. Again, one must remember that a depreciation reduces real wages, and that was seen as necessary by Macri and his economists, in order to make the economy more competitive. Also, the depreciation and the fiscal adjustment—pursued at least formally—to control inflation, threw the economy into a recession with higher unemployment. This again reduced workers bargaining power, and had the desired effect of reducing real wages. But the worst part was that foreign debt more than doubled during the next three years, from close to $70 billion to about $160 billion, with no significant increase in exports. This increase in debt essentially financed capital flight, meaning dollars were borrowed in international markets and immediately sold to the public, which caused further depreciation of the currency.
By 2018, the government was trying to stop the depreciation, since it was running low on reserves, and the inflationary pressures were out of control. Instead of reducing inflation from the 35 percent of the last Kirchner years, inflation accelerated to more than 50 percent, breaking one of Macri’s key campaign promises. The IMF mega loan was negotiated at this point. Up to the primary election of last August, the money went essentially to capital flight. Many believed, not unreasonably, that the IMF was trying to help the government stop the runaway depreciation and inflation, and propping up Macri’s chances in the election. Furthermore, whether the IMF disburses the next few tranches of the loan this year, one before and another after the election, could presumably lead to a default, and affect either the electoral result, or the ability of the next president to manage the economy. It is clear that without IMF money, the Argentine economy will be on the verge of a collapse, and the next government will have to deal and negotiate with the IMF.
Macri’s large defeat in the primary elections suggests that Alberto Fernández, Néstor Kirchner’s former cabinet chief, and his vice-presidential candidate, Cristina Kirchner, will win in late October. The question is whether the IMF and a Kirchnerist administration can work together to solve the Argentine problems. After all, Kirchnerism was associated with the reversal of IMF policies and its interference in the managing of the economy.
But contrary to what could be expected from history, and some misinformation spread by the financial press—for example, the Wall Street Journal reported incorrectly that Kirchner had defaulted on debt—everything indicates that a Fernández government would try simply to reprofile the foreign debt, which would basically lengthen the period of repayments and reduce the burden of servicing debt, but maintain all legal commitments with bondholders. It would then try to get from the IMF more space to pursue expansionary policies, trying to focus the policies towards an increase of exports, particularly in relation to the possibility of expanding the production of natural gas. The question is what the IMF, with its new Managing Director and under the influence of an unstable White House, would do. For the sake of Argentina, and its own reputation, one would hope the IMF decides to play ball. Hope springs eternal.
Matías Vernengo is a Full Professor of Economics at Bucknell University, and was Senior Research Manager of the Central Bank of Argentina between 2012 and 2013.