INFLATION in Argentina Was intense, IMF The cost of living has increased by almost 50% in the intervening years. “The most important source of inflation,” the fund explained, was “government-deficit spending, financed by loans from the central bank.” Deficits, in turn, reflect the failure of the country’s utilities to raise prices in line with excessive wage demand and costs. The year was 1958. To that end, Argentina turned to funding for its first “standby system”, a line of debt with plans to stabilize the economy.
Sixty years later, in June 2018, Argentina returned to its 21st arrangement: $ 50 billion in debt, then increased to $ 57 billion, backed by the government’s commitment to reduce the budget deficit and strengthen the central bank in hopes of controlling and stabilizing inflation. The peso debt was the largest IMFIts history. This has kept Argentina so close to funding that the country will need a new long-term loan to help it repay its existing debt. Despite its size, the rescue failed to save Argentina from default and frustration. This has made the fund too open to a single country when many other emerging economies may soon need its help.
The IMFIts dance with Argentina has attracted a lot of criticism over the decades. The organization has been described in many ways as very pathetic and very punitive, very kind and very cruel. Conservative critics feel that the fund has been lured by its dance partners, wasting public money in a futile battle with market power. Leftists, on the other hand, view the fund as neo-colonial (i.e., too authoritarian) and neoliberal (i.e., too attracted to the free market).
The latest critic of the fund is the fund itself. Shortly before Christmas it released a lengthy assessment of the 2018 arrangement with Argentina, led by staff who were not involved. It concludes that the rescue was not “strong” enough to withstand the potential risks it posed. The Argentine economy, the report noted, is suffering from some chronic structural weaknesses. Its public finances are notoriously fragile (paying only 15% income tax to workers, OECD, And energy is heavily subsidized). Its financial system is shallow, which tempts the government to borrow from unscrupulous foreigners instead. Its export scope is narrow. Inflation responds appropriately to stubbornly high and tight monetary policy. Argentines prefer to keep their deposits in dollars. And they often pay the price for things that are mentioned. This means that when the peso falls, inflation rises sharply.
Mauricio Macri’s government, which requested IMF Debt, facing severe political constraints. His party did worse than expected from opinion polls, which saw them at gaining about a third of the seats in the lower house. In light of these difficulties, the fund knew the loan was risky. Yet it did not emphasize adequate ancillary planning, the assessment indicates. Initially, the fund hoped that a large loan would restore the confidence of foreign investors, stabilize the peso, and allow the government to roll over its dollar debt on reasonable terms. Then it will be easier for the government to bear the responsibility and the confidence of its creditors will be self-evident. Moreover, Argentina need not draw IMF Credit line as a whole, leaving the fund less open to the country than the proposed title amount.
This gambling soon fails. Foreign capital continues to retreat, the peso continues to decline and inflation continues to rise. The assessment assumes that size IMFIts debt can even be “self-defeating”, it lowers confidence rather than motivates, because foreign investors knew the funds would be repaid before them.
In October 2018, once it became clear that Argentina would need all the money it could get IMF Agreed to increase the amount of debt and disburse it more quickly. The new plan calls for even smaller deficits and even tighter monetary policy. At times, the revised plan seemed to work. But a surge in inflation in early 2019 took everyone by surprise. And when it became clear that Mr. Macri would lose that year’s election, any hopes of success were dashed. In his last months, his government had to impose capital controls to prevent capital flight. His successor, the left-wing government, has defaulted on the country’s foreign debt.
What kind of contingency plan should the fund emphasize? The valuation is combined with a “preliminary” debt restructuring (in which the government tells its lenders to accept a delay or reduction in debt repayment) and capital control to prevent money laundering from the country. This would have eased Argentina’s debt burden. And it may have more left IMF Money for the latter helps strengthen the country’s foreign exchange reserves and rebuilds confidence after debt repayment.
But if such a plan were to become public, it would shake the confidence of the market, which was designed to limit its propensity for loss. And it could also violate the government’s “red line,” which rejects such measures because it considers them a feature of Argentina’s incredible past. The assessment acknowledges that stabilization plans do not work if governments do not consider them “owned”. But “ownership”, it says, should not be construed as a desire to delay [a government’s] Priority for choosing the best policy. ” IMF In other words, the government should not be allowed to make its own mistakes with the money.
The assessment indirectly points to another of its underlying goals IMF In Argentina: To salvage his own dismal reputation in the country. If it insists on an initial debt restructuring with capital control, it may further distance itself from its reputation for free-market fundamentalism. But if such a plan were to be imposed against the will of Argentina’s democratically elected government, its reputation for power would be tarnished. In the case of Argentina, a less neo-liberal outlook would have been more neo-colonial. 3
Read more from Free Exchange, our column on economics:
New research calculates cost of Sino-American trade war (January 1)
Has the epidemic shown inflation as a financial phenomenon? (December 18)
Why Demographic Transitions Are Accelerating (December 11)
For more expert analysis of the biggest stories in economics, business and markets, sign up for our weekly newsletter Money Talks.
This article was published in the print edition of the section “Blood on the dance floor” in the section on finance and economics.