The IMF’s $43 Billion Argentina Problem Is About to Get Worse

Great-power politics helped keep IMF credit flowing to its top borrower. But with the economy in crisis on the eve of elections, that may not last

(Bloomberg) — Economics says it’s way past time for the International Monetary Fund to pull the plug on Argentina. Geopolitics helps explain why it hasn’t — yet.

Over the past five years, the Fund has lent $43 billion in repeated bailouts for the Latin American nation — multiples more cash than anyone else has gotten — with dismal results.

On the eve of a pivotal presidential vote, Argentina has 124% inflation and its economy is in deep recession again. The latest IMF program, like so many predecessors, has essentially collapsed.

Read More: Argentina Voters Are on a Collision Course With Hyperinflation

But the country is still getting IMF money — and the escalating cold war between the US and China, with Latin America a key arena of competition, is one reason why.

‘Argentina Is a Battleground’

In the Fund’s fraught relationship with Argentina, according to conversations with insiders at both ends, strategic considerations sometimes outweigh purely financial ones. And Argentina’s growing ties with Beijing have sent rumblings through Washington, where the Fund is headquartered.

“Those who increasingly see Latin America through the prism of a great-power competition are very much aware that Argentina is a battleground,” says Benjamin Gedan, director of the Wilson Center’s Latin America Program.

A good example came in June when Economy Minister Sergio Massa, who’s one of three candidates in the Oct. 22 election, used money borrowed from China to pay off a chunk of Argentina’s debt to the IMF. That had never happened before in the Fund’s eight-decade history.

The cash came out of an $18 billion swap line with the Chinese central bank. Next week, while IMF chiefs and members are meeting in Morocco, Argentina’s outgoing President Alberto Fernandez (who’s not seeking reelection) is due in Beijing — to plead for more of that credit to be made available. Argentina also has an invite to join China and Russia in the BRICS group of emerging nations, seen as a rival to US-led alliances.

It was against this backdrop that the IMF doled out another $7.5 billion installment in August, even though Argentina hadn’t met any of the economic targets that were supposed to be conditions for payment.

One telling indicator that power politics weighed on the decision: In the tense weeks beforehand, the White House’s National Security Council was actively involved in discussions with the IMF to help reach a deal to allow the latest disbursement for Argentina, according to people with direct knowledge.

Losing Patience

The next IMF review isn’t due till after the election, though the timetable is complicated by the possibility of a November runoff if no candidate manages a clear first-round win. The outcome could push geopolitics onto the back burner.

That’s because Massa’s two rivals — Javier Milei, a libertarian outsider who wants to scrap Argentina’s peso and make US dollars the national currency, and Patricia Bullrich of the pro-business coalition — have both come out against BRICS membership. Milei, who’s been the frontrunner since his surprise win in August’s primary vote, has gone as far as saying he’d cut diplomatic ties with China.

If either wins, the focus would likely shift back toward economics. During a volatile election campaign, the IMF was reluctant to trigger a blowup and get blamed for influencing the outcome. Without that shield, any new government will be held to a tougher standard. 

Both opposition candidates are promising the type of pro-market reforms the Fund has insisted on for decades. Milei says he’ll take a “chainsaw” to public spending, which along with money-printing by the central bank is viewed by many economists as the root of Argentina’s woes.

But inside and outside the Fund, there’s a sense among officials that patience has worn thin, and that cutting Argentina’s IMF lifeline could become more than an empty threat.

There’ll need to be a reset after elections, says Mark Sobel, a Treasury official responsible for ties with the IMF from 2000 to 2015, and then the US representative at the Fund until 2018. The US would be willing to let Argentina default, he says.

An IMF spokesperson said in response to questions that they’re assessing the government’s recent actions, and offsetting measures that could help steady the economy. It’s in the interests of the Fund and its members to keep working with Argentina on policies that promote prosperity and protect the vulnerable, the spokesperson said.

The country’s current debt pile to the IMF isn’t primarily a consequence of the Fund deciding to lend lots of money to the left-of-center government of Fernandez and Massa. It’s a hangover from the $56 billion credit line — still the biggest in IMF history — handed to then-President Mauricio Macri in 2018 and 2019.

New Beginning, Old Story

The market-friendly Macri was seen as offering a new beginning, after Argentina had been run by the statist Peronist movement for a decade and a half. He was friends with Donald Trump, who’d done business with his father. The US Treasury and the IMF itself wanted to see Macri succeed, according to people with direct knowledge. So did investors, who poured billions into Argentina.

But Macri’s stewardship of the economy proved disastrous. His agenda of fiscal belt-tightening stalled in congress, markets began to panic over rising inflation and a widening budget gap, and the IMF rescue effort couldn’t turn things around. Voters booted him out of office in 2019.  

Since then, while inflation has more than doubled under Fernandez and growth was hit by the pandemic and a severe drought, Argentina’s IMF programs have basically consisted of rolling over debt without implementing much in the way of reform.

Before receiving the August payment, Massa did agree to devalue the peso by 18% — which has pushed inflation even higher. But within days of getting the money, the economy chief turned his back on austerity commitments and went on a spending spree to win votes. He increased welfare payments and public salaries, and slashed income taxes, triggering a rare public criticism from the IMF.

Argentines are betting that another devaluation isn’t far off once the election’s over. This week, they’ve been rushing to the parallel market to buy dollars — pushing the peso’s unofficial exchange rate to a record 900 per dollar as of Thursday, a slide of almost 13% in just four days.

If Massa loses, it’ll mean another political zig-zag for Argentina — which in the past decade alone has gone from populism to a pro-market stance and then back again — and maybe an even sharper one if the dollarization advocate Milei wins.

These 180-degree turns reinforce a sense that Argentine society doesn’t know which policy framework it’s willing to stick with. The problem stretches deeper into the past, notably including the 2001 crisis when a collapsed IMF program triggered deep recession and social unrest — turning the Fund into a toxic presence for many Argentines.

Read More: This Time Is Different? For Argentina and IMF, It Had Better Be

‘A Failed Bet’

Any post-election IMF program would be the country’s 23rd, taking it out of a tie with Ecuador and into outright first place as the most frequent borrower the Fund has ever had. And it would hinge on the next government taking ownership of tough austerity measures.

Milei and Bullrich both say they’ll do so. The IMF will lack leverage to hold them to their promises, after letting the current administration get away with lax policies, according to Alejandro Werner, who was head of the Western Hemisphere Department at the IMF until 2021.

“Argentina will say, ‘Hey, the program you just approved for Massa in August is much weaker than mine, so there’s nothing to negotiate,” he said.

Extending more credit to Argentina could worsen the reputational blow that the Fund has already taken — by apportioning such a big chunk of its loan book to a mid-income country, stirring resentment among poorer ones, and with little to show for it all.

Geopolitics helped keep the credit flowing. Even so, at some point the lender —  and its biggest shareholder, the US — might call time.

Dollarization could change the calculus, but under the current economic regime “it’s going to be very difficult to provide any substantial resources to Argentina going forward,” says Mark Rosen, the US official on the IMF board from 2019 to 2021. As things stand, he says, “Argentina was a failed bet.”

(Updates with peso’s slump on parallel markets this week.)

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