The Argentine government has requested financial assistance from the IMF to tackle the consequences of a huge foreign exchange crisis. Doubts about the country’s foreseeable future are re-emerging. Español
A few months back, in an article published in democraciaAbierta, we gave an account of the current Argentine crisis, highlighting the excessive vulnerability the economy was being exposed to as a result of the impact of the financial opening carried out by President Macri.
Three aspects in particular threatened the country’s future prospects: a strong exchange deregulation policy that failed to stop the flight of capital, a boom in foreign debt (at record level among emerging countries) and the promotion of speculative capital inflows to carry trade (buying a title issued by the Central Bank called LEBAC).
When international conditions worsened and the carry trade circuit came to an end, the LEBAC bubble exploded and produced a tremendous foreign exchange crisis that shook the Argentine economy, causing a sharp rise in inflation and a severe recession from which the country has not managed to escape.
To curb the flight of currency, the Argentine government ended up requesting financial assistance to the IMF through a stand-by agreement, thus putting an end to the fairy tale of Argentine financial integration emphatically defined by Macri’s as a “return to the world”.
Worse still, in the last few days, the pressures on the Argentine foreign exchange market seem to be back. In this context, doubts about the country’s future are re-emerging and have led many observers to feel that the agreement with the IMF should be re-negotiated.
We intend to analyze here in more detail what the Argentine agreement with the IMF consists of and to suggest, in the context of current financial strife in many emerging countries, a more structural rather than conjunctural vision of a possible new dawning for the IMF as a regulatory agency of the difficult Latin American transition.
The role of the IMF
In order to decipher the current situation, it is essential to take a step back, and analyze briefly the role of the IMF in the recent past.
In general terms, from the beginning of the 2000s until quite recently, the Fund had been pushed into the background of the international and regional political game board. This was due to several causes.
First, the Fund had to pay a certain cost in terms of its own reputation for the Argentine default in 2001 and, later, for repeatedly criticizing the subsequent debt restructuring process, which turned out to be very successful.
Second, there was the loss of the IMF’s centrality as a financial institution in Latin America. It is worth remembering that in December 2005, Brazil and Argentina canceled all of their debt with the Fund, making it clear that they were unwilling to submit to any sort of restriction on their economic policies.
Finally, after the outbreak of the crisis in 2008, the global expansion of liquidity and low interest rates generated a very favorable scenario for external debt of emerging countries.
And even though the emergence of the G20 in the definition of the international agenda restored some of the IMF’s lost prestige, the Fund never recovered its old role as the privileged lender.
So much so that the IMF’s technical offices began to look for a new role for their bureaucrats, trying to redirect them from technical review tasks (the so-called “ex-article IV” missions) towards developing technical assistance agreements with central banks and “comprehensive global models” for global forecasting.
At the present stage, the situation seems to be changing. First, there has been a sharp increase in financial volatility (caused by a long series of disastrous events such as the crisis of European banks, Brexit, the Catalan crisis, and the Trump-China trade war, among other things).
Second, the tightening of the FED’s monetary policy and the end of the so-called tapering has led to a reversal of the global capital flows towards the central countries. These capital movements have severely affected emerging countries, causing crises and strong foreign exchange rate tensions.
This is the context where the opportunity for a new dawning of the IMF appears, after a long decade of marginalization: the Fund could fulfill the role of guaranteeing an orderly exit of global capital from the emerging countries and restoring market discipline.
And this issue seems to be centered once again in Argentina, expanding from there to other countries. Proof of this are the market pressures on Turkey to get it to accept a deal with the IMF, which finally did not happen. In the Turkish case, the exit of the crisis was the regulation of operations in the Lira derivatives markets and a dollar deposit agreement with Qatar.
In this sense, the kind and apparently open to discussion attitude of the Fund’s director Christine Lagarde during her several meetings with the Argentine government should come as no surprise.
However, the fact that the IMF has had to change some of its traditional key points should not lead us to think that “this time it’s going to be different”. A short review of the terms of the agreement with Argentina should be enough to prove it.
Stand-by me, Argentina
Argentina’s current deal with the IMF is a stand-by agreement for a period of three years for a total amount of 50,000 million dollars to be disbursed in pre-scheduled instalments.
There was a first major foreign exchange deposit of 15,000 million dollars in June (equivalent to 30% of the Argentine Central Bank reserves). Quarterly deposits of 3,000 million dollars are expected thereafter, after compliance with the agreement is certified by the Fund’s technicians.
On a closer look, the agreement with the IMF consists of three large areas of quantitative monitoring on Argentina: fiscal policy, inflation and the Central Bank’s reserves. To this a series of complementary measures are added, which were called “structural agenda” in the past.
Regarding the areas of quantitative monitoring for 2018, Argentina must meet a fiscal adjustment objective equivalent to a reduction of primary deficit by 1.5 GDP percentage points; second, a maximum annual inflation rate of 32%; finally, a minimum Central Bank reserve floor of 53.600 million dollars.
By 2019, if the first part of the agreement has been successfully fulfilled, the requirements would be a lower fiscal adjustment, an inflation ceiling of 28%, and a minimum Central Bank reserve floor of 55.600 million dollars.
As far as the structural agenda is concerned, the complementary measures include a commitment to change the Central Bank’s balance sheet by eliminating the LEBAC titles (which drove the foreign exchange run in May), a new organic charter for the Central Bank reinforcing its independence, the limitation of Treasury financing and the passing of a fiscal responsibility law at sub-national level to prevent debt issuance by the provinces.
As in all stand-by agreements, non-compliance of any of the quantitative monitoring measures in any revision of the agreement entails the immediate freezing of future disbursements, the raising of a formal apology – known as waiver - before the IMF board, and re-negotiation of the agreement.
In any case, it should be said that before the latter were to happen, the consequences for the Argentine economy would be catastrophic, given the strong increase in the country-risk rate, the ten-year bond yields and, above all, the intensity of the capital flight that a negative IMF review would trigger.
Considering that currently both the country risk rate and the interest rate on bonds are at dangerously high levels (almost 700 basic points and 10.1% respectively), if we are to speculate on possible future scenarios we need to see, first of all, if a breach of the agreement with the Fund is likely.
On the part of the Argentine government, what prevails is a strongly optimistic mood and a rhetorical celebration of the agreement, which is presented as a clear sign of recovered international confidence.
However, a substantial part of the story is lost through the fiscal approach to the problems of the Argentine economy which characterizes the Macri administration. From the government’s perspective, the agreement with the IMF guarantees the availability of the funds necessary for the refinancing of debt maturities until 2021. The rest of the funding is expected to come from budgetary re-balancing.
But the current difficulties encountered in reducing the deficit of the balance of payments indicate that we should be concerned with at least three aspects. First, it is very unlikely that the country will be able to comply with the inflation ceiling of 32% given that currently projected inflation is 31.8% and the foreign exchange market continues to show a strong devaluation of the peso, which in Argentina has traditionally had a direct effect on prices.
Second, by dismantling the perverse mechanism of LEBAC, the government could be generating a new risk, since it is encouraging the private sector to compete in dollars – worse still, short-term dollars from the Treasury.
This implies a substitution of debt in local currency for debt in foreign currency and, if the climate of strong uncertainty were to remain, a greater pressure on the dollar through the flight of small investors, on top of the flight of institutional investors.
As a result, the Central Bank reserves have fallen sharply over the last weeks at a rate averaging 500 million dollars per day as a consequence of a massive shift of savers from LEBAC to dollars.
This decrease in reserves leads us to the third aspect to monitor: the minimum level of reserves established by the agreement with the Fund. Currently, Argentina is very close to non-compliance.
As can be estimated by adding debt maturities and capital, and being optimistic about the current account deficit and capital flight, an additional 4800 million dollars would be needed for 2018 and at least 14,200 million for 2019, especially between the months of March and June, just as the campaign to renew executive posts begins, which makes it difficult to think about strong adjustment policies.
So, what the Argentine government needs is not only for financial support to be sustained, but also for it to be strengthened, which seems highly unlikely given the persistence of the currency crisis, capital flight and the current account deficit.
In such a context, the fragile stability of the Argentine market is only guaranteed in the short term and only by the injection of dollars corresponding to the first stage of the agreement with the IMF.
In the near future, even if we were to assume that Argentina will meet all the agreement’s requirements, IMF dollars will simply not be enough to meet the financing needs of the economy.
Vice versa, if this flow were to be interrupted, it is very likely that the country will enter the terminal stage in the crisis process which started a few months back.
Roberto Lampa is a professor and economist, researcher of CONICET, University of San Martín, Buenos Aires.