Some brief thoughts on Argentina’s ongoing crisis and the IMF’s role in it

Argentina's peso depreciated significantly after the primary elections last month, with the clear victory of the opposition. The crisis has come full circle now with the re-imposition of capital controls, and with the default on domestic bonds, the latter a puzzling and clearly unnecessary measure, since it was in domestic currency (Standard & Poor's says it's a selective default, whatever that means, and Fitch called it a restricted default). So here a few things that might be useful to understand what is going on.

So how did we get here? As I noticed recently here, the collapse has nothing to do with fiscal problems. They hardly ever do, since the debt that matters is the one in foreign currency. First, let's clarify what were the problems that Macri faced in December of 2015, at the beginning of his term. Yes, inflation was high, but real wages were not low, and in many ways the persistent depreciation of the peso, during Cristina Kirchner last term, and the increases in wages explained that. Note that inflation did not cause the low growth during the last part of the previous administration. So inflation was less of a problem at that point, and one that Macri should have emphasized less (contrary to what most think, as I said even before the government started, Macri had no intention of reducing inflation, at least not initially, since the plan was to let nominal wages adjust by less than it, and reduce real wages).

The real cause of low growth was the Balance of Payments (BoP) problem. More specifically, the current account that was negative, and in the absence of reserves, imposed a constraint on growth. Imports of essential goods, basics like energy, and the service of debt, at a time that Vultures closed access to international markets, were the real problem that he faced. But there were no issues about a possible default. Reserves were low, but sufficient to face short term obligations, and low growth allowed the current account to be under control. There was NO POSSIBILITY OF A DEFAULT. What Macri proceded to do, eventually with the support of the International Monetary Fund, is what caused the current crisis.

Actually, during the governments of Néstor and then his wife Cristina, from 2003 to 2015, total debt in foreign currency fell, and the ratio of foreign denominated debt to exports, which measures the sustainability of debt, since exports provide the dollars needed to service the debt, went down significantly from about 450 to below 100 percent. This was the result of two renegotiations of debt (in 2005 and 2010), and of the recovery of the economy and exports too. But note that even after the end of the commodity boom in 2011, the ratio did not go up again.

So the problem was lack of growth and not default. And all the conventional media coverage about the fears of a return of a Populist government are evidently bogus on the face of that graph. It is clear that the borrowing in foreign currency, the one that Argentina has problems paying, were during the Macri government. He is the irresponsible one, and not because of excessive fiscal expansion for social programs, but simply for borrowing in foreign currency.

The question is then why did the Macri administration borrow huge amounts of dollars. Foreign debt went from around US$ 70 to close to 160 billion, btw. And while one can speculate about motives, the fact is that most of the money went to capital flight, in oder words, the central bank sold the dollars to try to preclude the depreciation of the currency. Mind you, Macri said back in 2016 that lifting capital controls was fine, and that contrary to the Cassandras, nothing bad happened. Yes, not immediately, but the point was exactly this. Now we are on the verge of a default.

The IMF largest package in its history, of about US$ 56 billion, was provided to Argentina in 2018, and it has essentially supported the capital flight strategy of Macri. Again, one can speculate about the IMF's motives, but the fact is that they have provided the money for the policies pursued by this administration, and given the circumstances that the next government will inherit, it will have a great deal of power in allowing the country avoid or not a default. Note that when the loan was provided, the IMF requested austerity, and did not ask about capital controls. So for all the talk about changes at the IMF, this was essentially your grandma's IMF.