Argentina, Economic Science and this year's "Nobel"

Trump wanted the Peace one, Milei the one in Economics

A few random thoughts about some recent news. Today, Javier Milei met with Donald Trump at the White House. Trump reportedly warned that the United States “will not be kind” to Argentina if Milei does not win the upcoming elections. That statement seems to suggest that the much-discussed “rescue” of the Argentine peso may be tied to domestic electoral results — something that Treasury Secretary Bessent had already hinted at when he announced the possibility of a US Treasury rescue package for Argentina.

No surprise there. But the situation brings back memories of earlier crises — particularly the 2001–2002 collapse, when Argentina defaulted after a long neoliberal experiment of liberalization, deregulation and privatization under the Menem administration. The current crisis, which began with the 2018 IMF program, is in many ways a continuation of that same process.

Back in 2002, the crisis caught one economist in particular by surprise: Rudi Dornbusch. Writing in the Financial Times, Dornbusch argued that Argentina could not be trusted to govern itself and proposed that its fiscal and monetary policy should be overseen by a foreign board of central bankers — a shockingly neocolonial suggestion, even for that time ["I'm shocked, shocked I tell you"]. I wrote a short letter to the Financial Times in response, which you can find here, mocking this absurd idea.

Two decades later, we are still dealing with the same problems. The “cleanup” of the 2002 mess took place under the so-called populist governments of Néstor and Cristina Kirchner, through two major debt renegotiations in 2005 and 2010. During that period, Argentina’s debt-to-export ratio — a measure of repayment capacity — improved significantly [see my piece on Challenge on that and the Vulture Fund negotiations that Macri ended up finishing in a favorable way to the Vultures; you know on what side he is]. Yet the Macri administration (2015–2019) more than doubled the foreign debt once again, setting the stage for the current crisis [on the doubling of debt see this piece with Matias De Lucchi; whole issue, scroll down].

In short, the same set of economic elites have crashed the economy multiple times. Domingo Cavallo, Menem’s finance minister and architect of the 1990s convertibility plan, reappeared at the end of the De la Rúa government in 2001. Federico Sturzenegger, who was at the central bank during Macri’s failed experiment in 2018, is now serving as Milei’s Minister of Deregulation. This revolving door of orthodox technocrats has brought Argentina back to the IMF, and now possibly to a US Treasury rescue, for the third time in a generation.

What’s frustrating is how the narrative never changes. The mainstream explanation — repeated recently by a well-known economist from the Di Tella University — is that Argentina’s problems are caused by irresponsible “populists.” In his version, written in academic jargon about sunspots and expectations, the blame somehow always falls on Peronists, whether they are in power or not. If the economy collapses, it’s because investors fear a Peronist comeback; if it booms, it’s despite them. Don't worry, it won't.

This kind of argument says a lot about the state of the economics profession, perhaps more than about Argentina’s actual economy. Instead of looking at straightforward indicators — who increased the foreign debt, how exports performed, whether external repayment capacity was sustained — many economists hide behind highly subjective assumptions disconnected from reality.

This is part of a broader problem in Latin American economics: what my colleague Franklin Serrano calls “brain damage” — not “brain drain.” The issue isn’t that talented economists leave the country, but that many return from US PhD programs armed with orthodox models that have repeatedly failed our economies. They bring back the intellectual framework that justifies the very policies that keep generating crises.

This brings me to another bit of recent news: the so-called Nobel Prize in Economics (technically, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). This year’s award went to Philippe Aghion Peter Howitt, and Joel Mokyr for their contributions to what’s broadly called “Schumpeterian growth theory” — work that connects innovation and technological change to economic growth. Surprising and soul crushing news to Milei, who wanted the prize for stabilizing the economy (a miracle according to Niall Ferguson).

Aghion and Howitt's models attempt to explain long-term growth by endogenizing productivity — the famous Solow residual. They borrow Schumpeter’s language of innovation and creative destruction, though often in a far more formal framework. In that sense, the connection to Schumpeter is more symbolic than substantive. Still, compared to some recent laureates, this year’s selection is a relatively defensible choice. Their models are certainly more in line with Schumpeter that some of the heterodox neo-Schumpeterian models.

Joel Mokyr, a historian, has written extensively on the cultural roots of the Industrial Revolution. His work offers a deeply Eurocentric — also, and more importantly, culturalist and supply-side — interpretation of why growth took off in Europe. While I disagree with much of that perspective, it’s undeniable that the Industrial Revolution did begin in Europe, and any serious account must explain that historical specificity. The problem is less Eurocentrism per se than the exclusive focus on supply factors, ignoring the demand and institutional dimensions that Keynesian and structuralist economists once emphasized. In that sense, I welcome the recognition of a historian among the laureates. But I also lament the profession’s retreat from the richer, more historically grounded analyses of scholars like David Landes, whose The Unbound Prometheus offered a more balanced view of the Industrial Revolution — one attentive to the demand aspects of economic growth.

Perhaps the real lesson — both from Argentina’s crises and from this year’s “Nobel” — is that economics still struggles to learn from its own history.

How the IMF and US helped loot and entrap Argentina with debt

 

Friends with benefits 

By Thomas Palley

Argentina is back in the news with renewed financial turmoil spurred by President Milei’s poor political standing. That poor standing is the product of anger with Argentina’s dire economic performance and massive corruption within Milei’s administration, and it augurs poorly for his party’s performance in the forthcoming October 2025 election.

In response, the IMF and US have jumped into action to save Milei’s government. The IMF had already provided a $20 billion bailout in April 2025. Now, the US government has provided another $20 billion (in the form of a central bank currency swap line). Furthermore, the US has expressed willingness to provide additional stand-by credit and even purchase Argentine government debt.

The media has focused on Argentina’s long troubled financial history, the difficult inflation situation President Milei inherited, and President Trump’s political affinity with Milei. However, that fails to explain why the IMF and US have provided such huge assistance to Argentina, given its lack of credit worthiness.

The support for Milei should be understood as a continuation of past lending to Presidents Macri (2015-2019), and Menem (1989-1999). The purpose is to entrench Neoliberalism in Argentina and entrap it with dollar debt. It is supported by local elites because they are the beneficiaries of Neoliberalism, and they also get to loot the Argentine state via the process of debt entrapment.

Read rest here. 

Argentine crisis on Organized Money Podcast

I was on the Organized Money podcast, hosted by David Dayen and Matthew Stoller, discussing the Argentine crisis, and some of its implications in the United States.

 

I was joined by Rohit Chopra, former director of the Consumer Financial Protection Bureau. Enjoy!

Currency substitution in Argentina

 

"I have invited an economist that was active in the dollarization of Ecuador to illustrate the wonders of the process."

A paper with Santiago Graña on dollarization in Argentina published in the PSL Quarterly Review. From the abstract:

Currency substitution defined as the use of foreign currency in the domestic economy is a relatively common phenomenon in developing countries. While mainstream economics has analyzed it in some detail, the same is not the case in heterodox economics. This paper proposes an analytical approach to evaluate the effects of currency substitution and its relationship with exchange rate dynamics; it provides an empirical investigation of orthodox and alternative views for the case of Argentina. The orthodox view emphasizes the role of fiscal deficits financed by monetary emissions, while alternative views emphasize the importance of external vulnerabilities, both associated with current and financial account deficits as the source of currency substitution. We find some support in favor of the alternative or heterodox perspective on currency substitution or dollarization.

Read the full paper here.

Argentina on the verge

The big question in the case of Argentina, as always is when it will explode. If the current developments are an indicator of anything, it should be sooner rather than later. Note that the fundamental problems regarding the possible crisis and default are associated to the external debt in dollars (one has to repeat this all the time). It does not mean that there weren't other problems with the Argentine economy, but the domestic issues do NOT lead to a default (yes, that means the fiscal problems).

In spite of all the criticism of the Fernández government, and some of that is certainly correct (but not the fact that they didn't do fiscal adjustment or not enough industrial policy; it's the reserves idiot!), the increase in debt happened all during the Macri administration (2015-2019). Milei's 'plan' was to make a fiscal adjustment and devalue the official exchange rate to close the gap between it and the parallel exchange rate (the blue). The notion was that fiscal adjustment would solve the inflationary problem, caused in this view by monetary emissions to cover the fiscal deficits. Regarding the devaluation the logic was that the official rate was incompatible with the market determined one, and, hence, this was inevitable.

Milei depreciated the official exchange rate by more than a 100 percent, to reduce the parallel market premium, and implemented a draconian fiscal adjustment, that he claims has led to a balanced budget. In reality his adjustment is a bit of a sham, an accounting gimmick. For example, the distributor of electricity, privatized in the 1990s, has stopped payments to the producers, and the government is negotiating the bill, which will not be zero, even though that is what they show in the balances. Many other cuts are unsustainable. In this case, even the IMF has suggested that the measures have gone too far, and might have severe social consequences. Note that fiscal adjustment and depreciation are the traditional IMF policy prescriptions.

As a result of his measures, inflation accelerated to more than 25 percent per month in December right after the depreciation, and as the exchange rate depreciation moderated, inflation has decelerated, remaining for now more or less at the same level as before Milei’s inauguration, which corresponds to an annualized rate of about 180 percent. However, in the last month inflation increased again, from 4.2 percent in May to 4.6 in June.

More importantly, the exchange rate premium has started to increase again, as the parallel exchange rate depreciates more than the official one, and reaching a gap of 60 percent, before falling back to somewhere in the 40 something percent.

Of course the devaluation only managed to accelerate inflation, and reduce real wages, and the blue continued to devalue, since the expectations that the government will be able to stabilize the exchange rate are minimal, given the lack of reserves. The central bank is now intervening in the foreign exchange markets to reduce the gap. But all hinges on the ability to obtain dollars. And that's why we are on the verge of a crisis. The IMF will probably not pony up more dollars, even if Trump gets elected, which seems to be Milei's bet. And now Argentina will have to start make significant payments servicing the debt. Default is imminent, and there is an increasing need to acknowledge that the Argentine debt is unsustainable.

Dollars & Nonesense: Milei and the risk of hyperinflation

Javier Milei will be Argentina’s next president. Milei is an extreme right-wing populist, with authoritarian, some may say Fascistic, tendencies. He is an admirer of Trump and Bolsonaro. He is rumored to talk with his deceased dog, that he had cloned. His party’s proposals range from the dangerous – like dollarization, the closing of the Central Bank, the drastic reduction of social spending, the loosening gun ownership laws, and the criminalization of abortions – to the insane – like instituting a market for human organs, or allowing fathers to opt out of the paternity obligation to pay parental support. Some of his views are outright despicable, like his minimization of the human rights violations of the last dictatorship. He has also has played fast and loose with all his proposals, suggesting that he may not do anything that he promised to do, with the exception of one. He has maintained that dollarization is not negotiable.

The dangers of dollarization could not be minimized. Dollarization implies getting rid of the domestic currency, and being forced to borrow only in dollars. Debt in foreign currency can only be repaid with the dollars obtained from exporting, which would limit drastically the ability of the government to borrow, in particular since Argentina is already deeply indebted with the International Monetary Fund (IMF) and private creditors, as a result of the presidency of Mauricio Macri. Macri is Milei’s main political sponsor within the Argentine establishment, and during his presidency he more than doubled the debt in foreign currency (on Macri see this paper). If the idea is to dollarize to reduce debt accumulation and the problems associated with it, it must be noted that to eliminate the central bank and the peso as the legal tender for domestic transactions does nothing to increase the exports needed to service foreign debt, which would be the only way to obtain more dollars.

If the idea is to dollarize to stop inflation, which it might do, it would only be reasonable if inflation, which is running at almost 140 percent annually, was caused by the central bank and the printing of pesos. In fact, Macri believed that was the problem, and promised to stabilize the economy back in 2015, when inflation was around 25 percent. The president of the central bank appointed by him, Federico Sturzenegger, a possible finance minister of Milei, instituted inflation targeting and prohibited the monetary financing of the Treasury. However, inflation still more than doubled and was at 50 percent at the end of Macri’s government. The reason for that is that inflation results from the depreciation of the peso, which raises the price of imported goods, and leads to demands for higher wages. Dollarization may resolve the problem by essentially precluding any depreciation of the currency.

To dollarize Milei will need to obtain large amounts of dollars. And if the dollars are obtained, the central bank could intervene in the foreign exchange rate market, stabilize the currency and stop inflation. In other words, dollarization is only possible in a context in which it would not be needed anymore. Dollarization would reinforce the problem, already exacerbated in the Argentine case, of borrowing in foreign currency.

The risk now is that Milei might announce his dollarization plans, and markets might  anticipate it, and a rush to the dollar might follow. In fact, Milei has openly said that the more the peso depreciates the better. He suggested that he would allow the exchange rate to depreciate as much as possible before dollarization, essentially causing a hyperinflation. He would cause the whole economy to collapse in order to stabilize it. He would cure the disease, but kill the patient.

On the Argentinean debt renegotiation (in Spanish)

My interview on Led.fm with María Iglesia and Cecília Camarano for the program Reperfiladas (in Spanish, obviously) on the Argentinean debt restructuring.

Restructuring Argentina’s Private Debt is Essential

JOSEPH E. STIGLITZ, EDMUND S. PHELPS, CARMEN M. REINHART

Argentina's creditors are being asked to accept a proposal that would reduce their revenue stream but make it sustainable. A responsible resolution will set a positive precedent, not only for Argentina, but for the international financial system as a whole.

Read rest and list of signatures here.

Argentina and the IMF

Alberto Fernández, who will assume as the next president in less than two weeks, has said he will not accept the next tranche of US$ 11billion that were part of the US$ 57 billion deal signed by the outgoing Macri administration. Many progressives see this as a good sign, in particular given the history of the IMF with Argentina. I've emphasized, against a lot of heterodox discussion on the subject, that the IMF remains essentially unchanged when it comes to policy prescriptions. So I do get the point.

Note, however, that the best argument for not using it, is NOT the fact that this would increase the leverage with the IMF. It would hardly do that. It's kind of a slap on their face. The leverage comes from the fact that the IMF did commit a huge amount of money, and presumably they knew this was not something that could be repaid under the circumstances that it was contracted. The reasons to accept it or not should be pragmatically associated to whether the country will need them to make the payments next year (and Argentina should negotiate to reduce and eliminate most of the payments, certainly with the IMF in the next few years). I assume that calculation has been made, and, hence, the decision. If Fernández, and his advisors, are hoping for a boost in exports, that might be a mistake.

Also, since someone in Colombia last week asked me whether Argentina should default (the person thought it was a no brainer), my simple reply is that this would be a terrible idea. Yes, the debt in foreign currency, that increased significantly in the Macri administration went to finance capital flight, and in many ways is questionable. And, for sure it was unnecessary, and should had been avoided. But to default implies to be cut from any sources of dollars, and that implies that one must ration imports, which implies by definition that a massive recession would take place. So the default should be avoided.

Note that the follow up question (same person), so why you need imports (of intermediary and capital goods). It's obviously a question of degree, but beyond advanced economies, all economies do need dollars, since it is the vehicle currency, and the one in which the key energy commodities are traded in. There's a reason for those 900 or so US military bases around the globe.

So, yep, not necessary to get the money, if the country doesn't need it for short term obligations. But if we do need it, then there's no shame in getting the next tranche, and negotiate strongly with the Fund.

Dollarization in Argentina?

So I have no insider knowledge on what the Argentinean government plans to do. And the White House is a mess; they don't have any knowledge on what they plan to do. But Larry Kudlow, the Director of the National Economic Council, said that the Treasury is deeply involved in a plan to dollarize the Argentinean economy (Guillermo Calvo, an influential conservative economist, has also spoken in favor of dollarization; see here in Spanish).

He supports a Currency Board to solve the run on the currency, and the long-term external problems. That worked well in the 1990s, he said, without a hint of irony. The notion is that the problem, again difficult to believe this type of stuff is still around, is a fiscal problem. So, no fiscal deficits, no printing of money, no inflation, and no depreciation of the currency as the proportion of pesos to dollars increases. The logic of full employment (neoclassical theory), monetarism (Quantity Theory of Money), and a version of Purchasing Power Parity for the determination of exchange rates. It is all very simplistic.

Of course Macri's government promised to do a fiscal adjustment, and to block the central bank to lend to the treasury. But the real problem is external. There is a long-run problem of sustainability of the current account (as I noted earlier). But the real problem now, in the short-run, is the lack of reserves and the forthcoming obligations in dollars (not in pesos). My take on currency crises as being related to external problems here (and the paper here; note that this is about the long-term or fundamental causes, not necessarily the short-run crisis like the one in course now).

I should also say that the fiscal problems that exist have been caused by the government, and not only have nothing to do with the external crisis, they are instrumental, in some sense, in promoting the austerity cuts that allow for the reduction in social spending. As I noted even before the Macri governments started in 2015 (when I wrote it, but published in January 2016)*:

"the coming larger fiscal deficits will most likely be used to try to cut social welfare expenditures, which increased significantly during the administration of the outgoing president Cristina Fernández and her predecessor (and husband) Néstor Kirchner. It would not be surprising if Macri tries to privatize social security once again, something that Menem accomplished in the 1990s, and which had to be reversed in the 2000s as a result of the private system’s complete failure to provide a decent retirement for seniors."

And that is essentially what dollarization would be there to do. Tie the government's hands and help promote an even more brutal fiscal adjustment than the one the IMF (that, yes, has changed a lot, has it not?) can help impose. Why go to the US Treasury, you ask; because it can provide enough dollars to guarantee the stabilization of the currency, and perhaps some lower inflation (by stoping the pass-through to domestic prices), giving Macri or a right wing candidate a fighting chance next year in the presidential elections.

However, dollarization would not solve the long-term current account problems, it will intensify them in fact, and a new collapse like the one from 2001-02 would be inevitable. Argentinean elites, you might think, keep committing the same mistake over and over again. But there again, from their perspective this is fine. The crisis only hits the poor (and the middle classes that are still somehow afraid about the devil of populism). Macri complains about the Kirchner legacy (three years into his government), but dollarization would be truly a terrible legacy. Oh well.

PS: The government has denied plans to dollarize. There again he said in 2015 he would not devalue the currency.

* I also predicted the contraction and the devaluation, which Macri firmly denied back then.

Neoliberalism Resurgent: What to Expect in Argentina after Macri’s Victory*

No need for a helicopter

The election of businessman Mauricio Macri to the presidency in Argentina signals a rightward turn in the country and, perhaps, in South America more generally. Macri, the candidate of the right-wing Compromiso para el cambio (Commitment to Change) party, defeated Buenos Aires province governor Daniel Scioli (the Peronist party candidate) in November’s runoff election, by less than 3% of the vote.

Macri is the wealthy scion an Italian immigrant family that made its money on the basis of government contracts. He went on to work for the family business and later, defying his father’s wishes, became president of the most popular professional soccer club in the country, Boca Juniors. In 2007, he won election as mayor of the capital city, Buenos Aires—the springboard for his eventual election to the presidency.

This is a momentous change in Argentina’s history, since it is the first time that a right-wing party has won the presidency by electoral means. In the past, conservatives had only gained power through military coups or by disguising neoliberal policies under more progressive electoral promises and the mantle of a left-of-center party—as in Carlos Menem’s Peronist government in the 1990s.

Macri’s economic team includes among its most prominent members Alfonso Prat-Gay, an ex-president of the country’s Central Bank who also worked for JP Morgan Chase. He will be the next finance minister. Federico Sturzenegger, secretary of economic policy in the Economics Ministry under infamous finance minister Domingo Cavallo—author of the main economic policies of the 1990s—is likely to be the next Central Bank president. In other words, the economic team clearly signals a return to the market-friendly policies of the 1990s. This is also true on the foreign policy front, were Macri has already announced that he intends to use the so-called “democratic clause” of the Common Market of the South (Mercosur), the regional trade agreement, to exclude Venezuela for alleged violations of democratic norms. (Macri has backed off that plan since the victory of the right-wing coalition in Venezuela’s recent parliamentary elections.) He has also signaled a closer alignment with the United States.

The economic program of the new administration is quite clear, even though Macri tried to hide his economic advisors before the election, to reduce the impact of their unpopular views at the polls. They will unify the foreign exchange market, in which there is currently a large gap between the official and black-market exchange rates. This implies a “maxi-devaluation” of the peso, from around nine to about 15 pesos to the dollar (assuming that the current black market level is their desired nominal exchange rate). The effects of a depreciation of this magnitude will be massive.

In contrast to previous devaluations—most recently in 2002, after more than ten years of a fixed one-to-one peso-to-dollar exchange rate under Cavallo’s so-called “Convertibility Plan”—this one is not caused by an external crisis. While it is true that Argentina’s current account balance is negative, and that its reserves are relatively low, there is no significant danger that Argentina will default on its external debt now.

The current account deficit is not big, by historical standards or in comparison to other countries in the region, and international reserves can cover the country’s immediate obligations. Besides, under current conditions, with low international interest rates, it would be relatively easy to attract capital flows with higher interest rates, and borrow in international markets. (That would certainly be easier if Argentina could finalize an agreement with the so-called “vulture funds,” the holdout bondholders that did not agree to the rescheduling of debt after the last default.) And, if anything, Macri’s (unnecessary) promise to give in to all the vulture funds’ demands and rapprochement with the United States and International Monetary Fund (IMF) would resolve any short-run problems in financing the current account deficit.

The question, then, is why the Macri government would promote a huge depreciation of the currency with no clear external crisis on the horizon. The notion that the depreciation would solve the current account deficits is fraught with problems. Not only is the external situation not dire—so depreciation would be a “solution” to a non-existent problem—but there is also no evidence that exports will boom after a depreciation. Exports respond more to the growth of the global economy than to a change in relative prices. So for example, China will not demand significantly more soybeans from Argentina, as a result of lower prices, if the Chinese economy is not growing faster.

Actually, the only significant way in which the depreciation will reduce the external problems of Argentina is by causing a recession. Depreciations tend to reduce real wages, since the increase in the price of imported goods leads to inflation, which is not fully recovered by workers. As a result, consumption declines, with a negative impact on economic growth. Macri and his economic team have been very explicit about the need for a huge devaluation and the closing of the gap between the official and the black-market (or “blue,” as it is known in Argentina) exchange rate. This has already triggered an inflationary surge, as noted by the outgoing Economics Minister Axel Kiciloff.

The reason for the devaluation is precisely to cause inflation and a recession, both of which would weaken working-class bargaining power and, as a result, lead to lower real wages. And that is the ultimate goal of the new Macri administration. He has explicitly said so, in one of the videos that his campaign tried to suppress. The video shows him suggesting that the way out of the problems of the 1990s—when devaluation was not an option due to the Convertibility Plan—was to reduce real wages to increase external competitiveness. The maxi-devaluation of the peso will most likely be accompanied by a “fiscal adjustment plan” or, simply put, austerity. This would push the economy further into recession, reducing the bargaining power of workers even more.

Some skeptics suggest that Macri cannot pursue the classic IMF economic package of devaluation and fiscal adjustment, since that would bring about both inflation and recession, a politically explosive combination. However, the administration will deflect political problems caused by the economic crisis that these policies will trigger by suggesting that both inflation and the recession are the results of the negative legacy of twelve years of “populism” under the previous two administrations. In fact, Macri is already doing this, with intensive media support, suggesting that the inflation since the announcement of the depreciation is just a correction to its true level. One can easily see how higher unemployment would be justified in the same fashion, as an adjustment to the true and sustainable level.

In other words, the Macri government will cause a crisis that does not exist right now—though the economic situation may be difficult and growth in the last three years has not been not high—but blame the effects of its neoliberal policies on the previous government. The idea would most likely be to weather a political storm over the next couple of years and then—after resolving the issues with the vulture funds and normalizing relations with IMF—start borrowing abroad again. That would help promote growth again in time for a re-election campaign in 2019. Growth would be also facilitated by the fact that the economy would be coming out of a crisis, with real wages considerably lower and the working class well-disciplined.

Also, Macri will reduce or eliminate export taxes on grain and soybeans (known as retenciones, or “retentions”), strengthening the position of the ruling elites. The reorientation of the economy toward primary-goods (agricultural and mineral) production, along with a larger role for finance, has been the strategy of the Argentine elites since the last military dictatorship. That is why there is such continuity between the economic plans of José Martínez de Hoz under the military dictatorship of the late 1970s and the early 1980s, Domingo Cavallo under Menem in the 1990s, and (one should expect) Adolfo Prat-Gay under Macri in the coming years.

The initial recession and cuts in retenciones would significantly reduce government revenue and most likely lead to larger fiscal deficits. Hence, austerity will actually worsen the fiscal balance, contrary to what the Macri and his advisors suggest. The key is to remember that austerity policies are not designed to reduce fiscal deficits, even if that is offered up as a rationalization; they are a political instrument for disciplining labor. [And if it is any consolation, at least the adjustment will be done by a right-wing party, in contrast to Brazil, where the same program, essentially, is being pushed by the Workers' Party; and yet the right-wing forces are also trying to bring the left of center government of Dilma Rousseff down; more on that on another post].

In fact, the coming larger fiscal deficits will most likely be used to try to cut social welfare expenditures, which increased significantly during the administration of the outgoing president Cristina Fernández and her predecessor (and husband) Néstor Kirchner. It would not be surprising if Macri tries to privatize social security once again, something that Menem accomplished in the 1990s, and which had to be reversed in the 2000s as a result of the private system’s complete failure to provide a decent retirement for seniors.

But if the Macri administration is a throwback to the neoliberal era of Menem, it is important to remember that the current historical context is very different. Back in the 1990s, the fall of the Berlin Wall and the collapse of the Soviet Union gave the neoliberal policies of the infamous Washington Consensus a status of unquestionable truth. Supposedly, ideology had vanished and history had come to an end. No alternative was politically possible. Since then, the 2008 global Great Recession has shown the world the perils of unfettered capitalism, and even if the “Keynesian moment” was brief and austerity policies have reasserted themselves, at least it is widely understood that the “free market” is no solution for the problems of development in a globalized economy.

The socioeconomic situation in Argentina is also very different. Back then, the economy was coming out of two bouts of hyperinflation, a whole decade of very low growth with very high unemployment levels and very low real wages, two decades of social conflict with a considerably weakening of the trade unions, several military coups, and an unresolved human-rights crisis from the last dictatorship. Now, the economy has grown at a healthy pace over the last decade, though with slower growth over the last three years. Unemployment remains at relatively low levels, and though inflation is relatively high, real wages have still grown significantly over the decade, with a considerable reduction of inequality.

Further, not only has the reorganization of the economy strengthened the working class, but civil society has managed to bring violators of human rights to justice, and finally come to terms with the nefarious legacy of the dictatorship, something unique in the region. The new government does not control congress, and the election was close, signaling a divided country. In short, society is more organized and better prepared to face the onslaught of neoliberal policies this time around.

* Forthcoming in the January/February issue of Dollars & Sense (subscribe; the other contributors are actually good). A version of my talk at the Universidad Nacional de San Martín (UNSAM) last month.

More on Argentina and the Vulture Funds and the sanctity of contracts

So the Argentine government decided to negotiate with the Vulture Funds to avoid a default, which is eminent if no agreement is reached, well, basically today. This is not necessarily bad news, given the potential consequences of a default. It is also one of the frustrating results of the decision of the very Conservative (and pro-bussiness) Roberts Supreme Court. To preside over the negotiations Judge Griesa chose a Wall Street lawyer (who boasts in his CV to have sued Elliot Spitzer for exceeding his authority in investigating Wall Street fraudsters). Argentina is trying to pay today to the ones that renegotiated, but whether that will happen is still not clear (apparently without success).

Note that the consequences of the default could be dire indeed. It would put more pressure on the exchange rate, lead to further depreciation that would be both inflationary, and contractionary, since it would basically reduce real wages. The economy would be forced to continue to grow at very low levels, as it has done since 2011, to avoid a current account crisis. In part, the problem exists even if Argentina does NOT default. Meaning the current account is already close to its limit and the reserves are not sufficiently high (around US$ 28 billions or so), and that's the reason the government has tried to finish negotiations with creditors that did not enter the previous debt reschedulings, including the Paris Club.

The notion is, arguably, that in a world with significant amounts of liquidity, and the chance that low rates of interest in international markets will continue for a while, access to international financial markets would be a reasonable solution for the Argentinean current account constraint. In fact, Brazil has financed a larger current account deficit with little or no problem (maybe the rate of interest is too high, and could be lower, but that's another discussion).

This does not necessarily mean that the Kirchner government has backtracked on previous policies, at least not completely. Reducing foreign indebtedness, after the default and the renegotiation, was the rational choice, and the commodity boom basically provided the policy space for it and for the accumulation of reserves. But borrowing in international markets, when the current account and reserves do not allow for continuous growth, might be fine too if borrowing is done on a sustainable basis. In other words, if the Argentinean government manages exports and imports (import substitution here plays a role as much as export promotion) to allow for the service of debt.

Also, renegotiation of debts (and default might be just a phase in a renegotiation process) are common, and do not show that (as some angry and, quite frankly, not very informed readers suggest in comments on posts on the default, not just in this blog) Argentina is a "deadbeat country and nobody should ever lend to them again." Note that defaults are actually quite common in history.

For example, Cipolla (1982) describes the bankruptcy of the banking houses of a developed country associated to the default of a developing and 'deadbeat' country. What countries are these, you ask. England and Italy, and of course England is the deadbeat one. According to Cipolla (1982: pp. 7-8):

“The large companies of the dominant economy (Florence), which operate in the underdeveloped country (England), have a vital interest in securing the local raw material (wool) for the home market. By logic of events they are led to grant increasingly larger credits to the local rulers, on whose benevolence the licenses for the export of raw material ultimately depend. The rulers of the underdeveloped country, however, instead of using the credit to finance productive investment, squander the funds in war expense and are soon forced to declare bankruptcy.”

So in the mid-fourtenth century the banking houses of Bardi and Peruzzi were brought down by the sovereign default in England and, hence, Florence, more accurately than Italy, was hit by the default. And there are several other countries that would now be considered developed (e.g. Germany) that defaulted before, without being excluded forever from financial markets.

Most countries that default do pay eventually, just at a new rate with extended periods. Renegotiations are normal, and the basis for them is the ability to repay, since it would be better for creditors to receive something. Note also, that creditors (as a whole, not an individual creditor per se) seldom make losses, and that is why all countries after a shorter or longer spell come back to international financial markets. The reason is not difficult to understand, since developing countries pay risk premiums well above the safe assets (Treasury bonds), the advantage of holding developing country debt even for a short while is sufficient for compensating default risks. And besides most savvy investors try to get out before the default (or in the case of Vultures, enter afterwards, to buy debt at the bottom, and make a kill in the courts; it is a good business model, if nothing else).

Changing the terms of contracts, which is basically what a default and renegotiation does, is not new and not the privilege of debtors. In fact, when the credit card company sends a "change of terms notice" to their cardholders, increasing fees or directly the interest rate, it is basically renegotiating unilaterally your contracts. So that is a normal market practice, and Argentina is not violating the sanctity of contracts, and is at least trying to honor its debts, as it has done for the last two hundred years.

Finally, beyond Argentina the consequences of the Robert's Court for international financial markets have been well summarized by UNCTAD, namely:

• First, by removing financial incentives for creditors to participate in orderly debt workouts, the rulings will make future debt restructuring even more difficult, in particular for outstanding bonds without a Collective Action Clause, the actual amount of which is unknown but is likely to be large.
• Second, obligating third-party financial institutions to provide information about assets of sovereign borrowers will have a significant impact on the international financial system as it forces financial service institutions to provide confidential information on the sovereign borrower's global financial transactions to facilitate the enforcement of debt contracts for the creditors.
• Third, the ruling will erode sovereign immunity.

In other words, reduces the chances of debt renegotiations, and of sovereign governments to manage its international reserves, reducing policy space. The question here is not if or whether Argentina should pay, which it was already doing, but at what cost, and who would benefit. The Robert's Court went with Wall Street, and that's no surprise. Interestingly this might hurt even Wall Street. Oh well.

Reference:
Cipolla, C. (1982), The Monetary Policy of Fourteenth-Century Florence. Berkeley: University of California Press.

Don’t Cry for Argentina--Not Yet!

In the new issue of Dollars & Sense my short article on the Argentine crisis. Subscription required. Previous post on the same topic here, here and here.