To say that Argentina has a troubled history with the IMF is an understatement. A relatively wealthy nation, the South American grain exporter has negotiated no fewer than 21 IMF deals since joining in 1956. Most have failed. There is little reason to think that a 22nd agreement now under negotiation will be any more successful.
To be sure, both sides have pressing reasons for wanting a deal to restructure $44.5bn in debt owing from the IMF’s ill-starred bailout to Buenos Aires in 2018. Argentina’s economy is in dire straits, with inflation running at more than 50 per cent a year, fuelled by central bank money-printing to finance an unsustainable budget deficit. Net international reserves are perilously low and with payments of $19bn to the fund due this year, default is a matter of time.
The IMF is keen to put behind it the embarrassing failure of its biggest-ever bailout, avoid the spectre of Argentina falling into arrears and show sensitivity to the need for stronger social policies as countries rebuild post-pandemic.
The roots of the latest crisis run deep. The Peronist government inherited a mess when it took office in 2019. The economy was mired in recession and the mountain of foreign debt run up by the previous president, Mauricio Macri, was unpayable. The IMF erred in lending so much in 2018 on over-optimistic assumptions without insisting on a private debt restructuring and measures to prevent capital flight.
President Alberto Fernández succeeded in restructuring $65bn of private creditor debt in 2020 but internal divisions within his party stymied efforts to follow this up with a rapid IMF deal. Radical Peronists argued that the original bailout should not be repaid in full because it violated IMF statutes by financing capital flight (the fund denies rules were broken).
As the economy deteriorated further amid the strains of the pandemic, the pleas from Buenos Aires for special treatment grew louder and the commitment to resolving long-running structural problems weaker.
Last Friday’s outline agreement did little more than paper over the cracks. The IMF would refinance the $44.5bn it had lent Argentina with a four-and-a-half-year grace period. In return, Buenos Aires would gradually reduce the budget deficit over three years and curb central bank money-printing.
Little was said about the distortions imperilling the economy: ineffective price controls, an official exchange rate of less than half the parallel rate and unsustainable subsidies for public sector tariffs. But the fundamental issue was whether a divided and unpopular government facing elections next year could deliver even on these minimal conditions.
The ink was barely dry on Friday’s agreement before a key Peronist politician gave his answer. Announcing his resignation as party leader in the lower house of congress, Máximo Kirchner delivered a withering critique of the deal. He speaks for a powerful faction that believes no deal with the IMF is preferable to accepting limits on spending. Kirchner is the scion of a political dynasty: both his parents were presidents and his mother Cristina is now the powerful vice-president. Last week she excoriated international lenders for promoting austerity policies that she said encouraged drug trafficking.
Faced with such an unenviable task, it is easy to understand why the fund is willing to do a fresh deal with Argentina involving minimal conditions. But to proceed without insisting on broader measures to tackle the economy’s fundamental structural problems is to extend and pretend. The IMF should think again.