Argentina and the IMF: Cautious steps toward a new deal – Juan Pablo Spinetto

Argentina's tumultuous relationship with the International Monetary Fund (IMF) is marked by 22 credit programs over 65 years, yielding disappointing economic outcomes. Despite recent progress under President Javier Milei, who advocates for severe budget cuts to curb inflation, the path to a new agreement remains fraught with challenges. Misaligned incentives and historical failures suggest caution, emphasizing that a hasty deal could be more detrimental than delaying negotiations for a more effective solution..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..Join us for BizNews' first investment-focused conference on Thursday, 12 September, in Hermanus, featuring top experts like Frans Cronje, Piet Viljoen, and more. Get insights on electricity and exploiting SA's gas bounty from new and familiar faces. Register here..By Juan Pablo Spinetto.In the world of finance, few relationships are more toxic than the one between Argentina and the International Monetary Fund. .___STEADY_PAYWALL___.With 22 credit programs in slightly more than 65 years, the IMF has played a role in the most disappointing decades of the Argentine economy. To say the results of this partnership have been disastrous is an understatement: Since 1950, the South American nation has spent more time in recession than any other country and — depending on how you see it — the IMF was there either as a hapless spectator or incompetent accomplice..Argentina's current program with the Washington organization stems from the controversial $57 billion stand-by arrangement given to the business-friendly administration of President Mauricio Macri in 2018 — the fund's largest ever. That plan collapsed without making a dent in Argentina's troubles, leaving the country in a state of emergency and the fund with a massive unpaid bill. The ensuing four years of the Peronist government of Alberto Fernández, between 2019 and 2023, were an endless procrastination tango..Read more: 🔒 The Economist: Javier Milei has turned Argentina into a libertarian laboratory.President Javier Milei's arrival in December changed the situation dramatically: For the first time, an Argentine leader reached power with the conviction and popular mandate to undertake drastic budget cuts — even harsher than what the IMF staff would have suggested — to tame triple-digit inflation and recover investor credibility. Those circumstances would seem to favor reaching a new agreement between debtor and funder. Yet as Milei's administration embarks on negotiations over a new IMF agreement, there are good reasons for both parties to take a more cautious approach and delay a new deal. Let me explain.Six months into Milei's rule, Argentina is getting unusually high marks from the IMF. "The program is firmly on track," the IMF staff wrote last month, noting Argentina's fiscal and external surpluses. "All quantitative performance criteria through end-March were met with margins, with good progress made in meeting structural benchmarks.".In IMF-speak, this is like scoring an A+. .With Argentina not having to make principal payments on the loan — currently worth about $42 billion — until late 2026 and Milei pledging to continue the fiscal adjustments that the IMF likes so much, a path should open for a smooth program renegotiation, right?.Well, not so quick..The reality is that incentives for both sides over a new deal are not yet aligned: Argentina seeks fresh funding (say, $8 billion to $15 billion) to boost its low international reserve levels and dismantle the capital controls that have swaddled the economy in byzantine regulations. Yet it also wants to keep setting its exchange rate policy instead of leaving it entirely to the market — the other pillar of Milei's economic plan..The IMF, in the meantime, tends to distrust government-managed exchange policies, particularly if they lead to an appreciation of the real exchange rate as appears to be happening with Argentina now. While the fund favors free-floating regimes, that proved to be catastrophic in 2018-2019 given Argentina economy's bi-monetary features (the peso is the legal tender but for generations now Argentines have used the US dollar for big transactions and savings). .Moreover, is the mercurial Milei really ready to give up on his admittedly impractical campaign pledge of dollarizing the country? Dollarization would likely be a big no-no for the IMF, which wouldn't want to deal with the consequences of a Group of 20 economy becoming a haven for money laundering, among other drawbacks..Other disincentives also confront the IMF board: After seeing Argentina flirt with default, the board likely doesn't have much political appetite for greater exposure to the bad boy of emerging debt markets — despite Milei's fiscal reassurances and market-driven beliefs. The 2018 loan put about a third of the institution's lending with a country whose politics are as volatile as they can get, dedicating huge technical resources to an improbable mission. That rightly annoyed other IMF members. Recent reports from Buenos Aires suggest an alternative would be to give the extra funding to allow Argentina to boost its reserves while prohibiting it from using the funds for any FX interventions..In any case, the final decision will be taken by the masters of global politics, particularly the fund's top shareholder, the US, which may be influenced by its own political succession in November..Read more: Argentina's $10m severance battle: Milei's labour law overhaul vs union resistance in senate.Of course, not having a new agreement in hand could also be costly for both parties: Argentina's attempts to reduce its risk premium will be harder, especially with a heavier post-2026 debt repayment calendar; meanwhile, the fund's capacity to influence the policies of its main debtor will be limited. Good or bad, Argentina will be a creditor of the IMF for many years to come, so it's better to remain engaged, that argument goes. Maybe the strongest case for a new deal is that Argentines are making heroic efforts to correct years of economic imbalances: If the IMF won't support a member country when it's finally undertaking the difficult decisions, then when will it do so?.And yet, I am not convinced this is the best path for both sides. Yes, there is hope that on its 23rd attempt Argentina does a Greece and finally turns the corner from its turbulent economic past. I cross my fingers and pray. But prayers only get you so far, especially when they fly in the face of history. .So before sealing a new agreement, Argentina and the IMF should grapple with what such an agreement could realistically achieve. With the reviews of the current plan closing by the end of the year, there is time to digest what the new program should look like, even if that means delaying it through 2025. After so many failures, a bad agreement now would be more damaging for everybody than no deal at all. Perhaps as a result of this process, Argentina will come to realize that some of the measures it needs to take — such as passing a new fiscal responsibility law to institutionalize Milei's budget-cutting strategy — are for its own good and not just to keep the IMF technocrats happy. The landmark legislation approved by Congress last week is a step in the right direction as Milei's administration starts what it calls the second phase of its economic plan..One way or another, there can be no more hiding: The IMF-Argentina partnership is a marriage gone wrong. If divorce is not currently feasible, then they should try a civilized coexistence for some time while they resolve their pending business. The split is necessary and inevitable. Better to start preparing for it now..Read also:.Argentina's Milei eyes swift end to FX controls, promises 'rock-solid' PesoArgentina's Milei grapples with strikes as Austerity agenda sparks controversy🔒 Argentina's president Javier Milei faces economic turbulence as inflation soars.© 2024 Bloomberg L.P.

Argentina and the IMF: Cautious steps toward a new deal – Juan Pablo Spinetto

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