It is an increasingly embarrassing dossier that Christine Lagarde would doubtless rather forget. In July 2018, as managing director of the International Monetary Fund (IMF), Lagarde, who had been France's finance minister under Nicolas Sarkozy and who is now at the helm of the European Central Bank (ECB), approved a loan that would eventually total 56 billion dollars to Argentina. It was the biggest loan ever granted by the international financial institution.
Yet a few days ago, on February 19th 2020, five months after Lagarde's departure, the IMF was forced to admit that Argentina's levels of debt were “unsustainable”. The financial body also said its staff “emphasized the importance of continuing a collaborative process of engagement with private creditors to maximize their participation in the debt operation”.
The new government of Alberto Fernández, who took up office as president of the South American country in December 2019, had been impatiently waiting for such an assessment. The president has inherited from his predecessor, the economic liberal Mauricio Macri, an economic situation that is simply untenable; the country is in recession, inflation hit 53.8% in 2019 – one of the highest levels in the world – and the country's debt levels are unsustainable.
Enlargement : Illustration 1
Even before he was elected, Alberto Fernández was open about his view that Argentina's debt would have to be restructured. This is an ominous prospect for the creditors of a country that has already defaulted eight times since the start of the 20th century.
But rather than seeking to negotiate and put forward a plan judged 'credible' by the financial world, the new Argentine president has allowed doubts to creep in about his real intentions and about the government's future economic policies.
In the middle of February the Argentine finance minister Martín Guzmán simply issued some broad principles the government would follow. It would, he said, refuse to reduce its fiscal deficit in 2020 and warned that the country may not see a budget surplus of 1% before 2026.
For anyone who knows the IMF handbook these declarations amount to a virtual declaration of war. All the broad principles set out in the context of the so-called Washington Consensus on liberal economics are being defied.
And yet the IMF now seems to agree with the finance minister. “... Argentina’s debt [is] unsustainable... [T]he primary surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible,” it said in its statement on February 19th 2020, after its team had spend several days in Buenos Aires reviewing Argentina's financial situation.
During its earlier review in July 2019 the IMF had stated that the country's debt was “sustainable, but not with high probability”. But at the time Mauricio Macri, who was liked in financial circles for applying neoliberal economic precepts to the letter, was still president. And no one imagined he might not be re-elected, despite the economic and social drama the country was experiencing.
At the time, too, Christine Lagarde, who had given Mauricio Macri financial support that was unprecedented in the IMF's history, was still the institution's managing director.
To justify its change of mind, the IMF explained in its February statement that everything had changed in Argentina in the intervening six months. The country's currency, the peso, had depreciated by more than 40%, the rate of interest on Argentina's debt had increased by 11%, currency reserves had fallen by two thirds and the GDP had fallen by more than anticipated, it said.
The IMF then added: “As a result, gross public debt rose to nearly 90 percent of GDP at end-2019, 13 percentage points higher than the projection at the time of the Fourth Review. In addition, with the realization of the identified financing risks, since August 2019 the authorities have introduced capital flow management measures, imposed maturity extensions on certain debts, and resorted to central bank financing of the fiscal deficit.”
It is not the first time that the IMF has erred in its forecasts for a country. Indeed, it has even become something of a habit. One glaring example of this is Greece, whose economy was supposed to recover after an 18-month austerity cure. Eight long years later and Athens has still not managed to claw back the fall of more than 20% in its GDP.
But the rewriting of history in Argentina's case is even more blatant. The country's economy, which is hugely dependent on its agricultural exports, in particular to China, started to slow down in 2018. It is struggling to get over a deep recession that began in 2016 after a programme of deep structural reforms implemented by the Macri administration after it came to power in 2015.
This economic slowdown was made worse by the fact that the Argentine government was wrong-footed over its monetary and financial policy. In order to 'give confidence back' to international creditors, who were still 'traumatised' by Argentina's default in December 2001 and then President Néstor Kirchner's default to the IMF in 2003, Mauricio Macri decided to sign a compromise deal with creditors as soon as he came to power. These creditors included many vulture or hedge funds which had refused the debt restructuring imposed by Buenos Aires in the 2000s. This agreement with the Macri administration was seen as a victory by the IMF and financial circles around the world. Argentina once again had access to international capital markets.
Mauricio Macri made full use of this and increased the country's indebtedness at top speed. Public debt which stood at barely 33% of GDP in 2014 leapt to more than 50% in under two years. Moreover, these new loans were in dollars. As long as the monetary policy of the United States' Federal Reserve was accommodating this was fine; international financiers, awash with cash, bought Argentine debt in dollars which gave them a much higher return than American debt. In 2017 the Argentine government even succeeded in selling a 100-year bond on the markets with a return of 7.1%. This was a sure-fire success in a world where interest rates were at 0%.
But everything started going off the rails when the Federal Reserve began to tighten its monetary policy and put up its rates. Financiers no longer saw any point in investing in a risky country such as Argentina when they could benefit from the same or nearly the same rates by buying US Treasury bonds which are considered to be the safest investment of their type in the world. The value of the peso plummeted as Argentina had to continue to service its debts in dollars.
'The IMF invested a great deal … and not just money'
Along with a slowing economy, a fall in the currency and ever greater debt, the country also expreienced social issues, as Argentina found itself back in a grim spiral of economic and financial collapse. The country was already on the brink of explosion by the spring of 2018. Its central bank was forced to raise its lending rate to 40% to stem the fall of the peso which lost around 30% of its value against the dollar in three days.
But it seemed impossible for US president Donald Trump and the financial world to abandon Mauricio Macri, who supposedly represented the rekindling of neoliberal economics in South America. Everything possible was put in place to help him: and, as the head of the IMF, Christine Lagarde backed the move. With a few days the IMF had released a 50 billion dollar line of credit which was increased later to 56 billion.
The financial institution had never been so heavily involved with and committed to one country before. “Argentina .. was in a tough place, and we were the only game in town,” Lagarde later said, arguing they had a responsibility to help a member country.
The IMF's unconditional support was supposed to calm the situation, especially as the institution had, as is its habit, attached conditions to the financing. It imposed its 'automatic' programme of financial and budgetary stabilisation – tax rises, reduced subsidies, a reduction in social benefits. It did so unquestioningly. Yet the story of the country's previous failures might perhaps have given it pause for thought.
“The IMF invested a great deal – not just money but also its prestige – to avoid a default. The fact that the programme isn't working well is an embarrassment,” said Hector Torrres, former IMF director for South America in the summer of 2019. The embarrassment was in the fact that, once again, the IMF's formula showed itself to be ill-adapted and even counter-productive for Argentina. Recession returned while inflation did not go down, unemployment levels exploded and the peso continued to fall.
Part of the embarrassment also stemmed from the fact that, from as early as August 2019, it had become clear that Mauricio Macri would not be re-elected in November as previously assumed and that politicians espousing Peronism – named after the late former president and nationalist Juan Perón and seen as bogeymen in financial circles – were going to return to power. The embarrassment was made complete by the fact that the IMF which had, since the 1980s, played the role of gendarme for the world's international private creditors, suddenly found itself completely implicated in Argentina's current collapse.
Enlargement : Illustration 2
Today the new Argentine government has inherited an old debt – 44 billion dollars were released out of the 56 billion promised – which under IMF rules can neither be restructured or reneged on. Yet just to repay the IMF it is estimated that Argentina will have to set aside 25% of its export revenue for 2022 and 2023. On top of that there are the private creditors. This year the South American country already has to find 38.7 billion dollars to pay its debts. In essence it means that the current financial situation is impossible. Debt restricting is inevitable and one cannot rule out a partial or total default if no agreement is found.
The new government is preparing to make an offer to its debtors on March 15th and hopes to conclude an agreement by March 31st. The discussions over the debt are set to be heated and perhaps difficult: the reconstruction of the debt could result in a debt devaluation – known in finance jargon as a 'haircut' - of more than 50%. “It risks being difficult to sell, because time is on the side of the creditors,” said an executive from the Emerging markets investment manager Ashmore Group, which holds Argentine bonds, quoted in the Financial Times.
However, one should always treat the concerns of private creditors with some caution. After Argentina's default in 2002 the big funds cried blue murder. It later appeared that most of them had hastened to sell their holdings, at a slight loss, during the negotiations.
Most of Argentina's debt was held by savings or pension funds and the losses were in fact borne by small savers, in particular Italians, who inherited shares without asking any questions. Seeing the fall in Argentine bonds – they are selling at a half of their nominal value – some already seem to have anticipated the restructuring and taken action.
By announcing that Argentine's debt was no longer “sustainable”, the IMF has put itself on the country's side. Under its rules it is no longer authorised to lend more money to Argentina and not even to pay the rest of the money – 12 billion dollars – planned in the agreed 2018 programme, as the country has not shown satisfactory financial stability nor seemed to have taken part “in good faith” in an economic recovery programme. Such rules, however, leave open considerable scope for interpretation. Will its approach be different to the one it adopted towards Greece? Will it accept a renegotiation or a staggering of the debt payments over time?
Even though the IMF says it is ready to be involved with the negotiations with creditors, it seems at this stage as if it wants to keep its distance from the Argentine dossier, which is becoming increasingly awkward for it. The IMF's new managing director, Kristalina Georgieva, former chief executive of the World Bank, has announced that she wants to reassess some of the institution's advice in relation to emerging markets. And two key figures from the Lagarde years – David Lipton, who was number two at the IMF for nine years, and Poul Thomsen, who handled the Greek dossier, are leaving and retiring respectively.
But rethinking the IMF's role and rebuilding its credibility is likely to take a lot of time, certainly as far as Argentina is concerned. This fresh impending economic collapse by Argentina illustrates how the automatic measures recommended by the IMF for each country are not necessarily the magic solution for every problem, contrary to what the IMF itself has said for more that four decades.
In the meantime the institution will have to explain its actions over Argentina, actions which have put it in financial difficulties. The issue was discussed at the recent G20 meeting of finance ministers in the Saudi capital Riyadh on February 22nd and 23rd. In bilateral discussions economy minister Martín Guzmán told the IMF's Kristalina Georgieva that Argentina would initiate formal consultations with the IMF that could lay the groundwork for a new programme.
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- The French version of this article can be found here.
English version by Michael Streeter