The Washington Post, Argentina’s “Renaissance” and the Milei Mirage

A recent Washington Post editorial, “Argentina’s renaissance continues,” offers a nearly perfect example of the Milei success story now circulating in the financial press. According to this view, inflation has fallen mostly as the result of the fiscal adjustment, exports are rising, as a result of market confidence, and Moody’s, Fitch and S&P have upgraded Argentina’s debt. The latter in and of itself shows that markets approve, and what else would you need, really? From this, the editorial concludes that Milei’s free-market reforms are working, that life is improving for Argentines, and that the country offers a model for other stagnant economies.

The problem is not that these developments are invented, but that the editorial provides the wrong explanation for them. Inflation fell primarily because the government slowed the rate of currency depreciation after Milei’s initial maxi-devaluation had pushed monthly inflation to roughly 25 percent and caused a collapse in real wages. Fiscal austerity contributed by producing a deep recession, weakening employment and reducing wage demands, but balancing the budget was not the central anti-inflationary mechanism. Exchange-rate stabilization reduced inflation, and austerity produced the contraction.

The same confusion appears in the discussion of the fiscal surplus. Argentina’s fundamental constraint is not the government’s ability to balance a budget denominated in pesos, but its capacity to obtain the foreign currency needed to pay external debts and finance essential imports. Milei inherited a heavily indebted economy with few reserves and has remained dependent on support from the IMF, China (the swap in 2024) and the United States (last year). A fiscal surplus may reassure creditors, but it does not create dollars, expand productive capacity or resolve the external constraint. Indeed, cuts in public investment may weaken precisely the productive capabilities Argentina needs in the longer run.

Nor did Milei create the export recovery, which is entirely related to foreign markets. Agricultural exports benefited from the end of the drought, while increased energy production reflects investments in Vaca Muerta and related infrastructure made before he came to office. Recession also reduced imports, mechanically improving the trade balance. The Post therefore credits free-market reform with the effects of favorable weather, previous investment, state-supported energy development and depressed domestic demand.

Credit-rating upgrades indicate that bondholders now believe they face a lower perceived risk of default.  That might or not be true (hint, probably not, and markets often make mistakes). They do not demonstrate that Argentine workers are better off or that a sustainable development model has emerged. The real questions concern wages, employment, poverty, public services, investment and the capacity to earn foreign exchange without repeated dependence on external borrowing. Milei may have achieved a politically important stabilization, but it remains fragile and externally dependent. What the Post calls a renaissance looks much more like another familiar Argentine cycle of austerity, financial enthusiasm and growing foreign obligations.

Óscar Ugarteche (1949-2026)

 

At the Institute of Economics in México in 2018

I was traveling attending a conference in Rio, and didn't have time to write a post on the passing of my good friend Óscar Ugarteche. IDEAS published an obit here. I met Óscar at UNAM many years ago (way before that photo, btw). Later, when I worked at the Central Bank of Argentina, I invited him to speak there. His work was an important influence on my own understanding of sovereign debt and the international financial architecture.

Óscar's central insight was that sovereign-debt crises should not be understood simply as the result of irresponsible borrowing or excessive government spending. They form part of recurrent international credit cycles. Periods of abundant liquidity and low interest rates encourage lenders to expand credit aggressively. When interest rates rise, commodity prices fall, or capital flows reverse, countries that appeared solvent suddenly face an external constraint and may be forced into default. The debt cycle is therefore produced by creditors and the international monetary system as well as by debtors.

Debt restructuring is necessary when the original payment schedule has become economically impossible, but the existing system is fragmented and biased. Bondholders, commercial banks, official creditors, multilateral institutions, and suppliers are treated through different forums, while multilateral institutions generally refuse to restructure their own claims. Collective-action clauses can limit holdouts within a particular bond issue, but they cannot coordinate all classes of creditors. Óscar therefore favored a comprehensive, multilateral sovereign-debt restructuring and arbitration mechanism capable of imposing comparable treatment and preventing vulture funds or individual creditors from benefiting from concessions made by everyone else.

 

His view of the IMF was correspondingly critical. He wrote a brief history of the IMF that is worth reading, but I think is only in Spanish. After the end of Bretton Woods, the Fund ceased to be principally an institution of international monetary stabilization and became, in his phrase, a kind of "policeman for the banks." It supplied finance and imposed adjustment so that private creditors could be repaid. Responsibility was placed almost entirely on debtor governments, while neither creditors nor the international financial conditions that produced the lending boom were held accountable. Conditionality imposed the costs on wages, public services, growth, and state capacity, while the United States remained largely exempt from the disciplines imposed on the Global South. His preferred alternative was to reduce the IMF's power, transfer stabilization functions to regional monetary funds, and create an independent international debt-arbitration framework.

 

He wrote the entry on "Sovereign Default" for the New Palgrave Dictionary of Economics. An interesting point that he discusses is the forgotten history of the Confederate external debt. While cases of defaulters that do not pay their debts are almost nonexistent, contrary to common belief about deadbeat countries, Óscar discussed in his entry the only  historical exception, which involved the unresolved debts of several former Confederate and Southern states, with Mississippi providing Óscar's principal example of outright and permanent debt repudiation.

 

In Óscar's account, the decisive role of the US government during the 1930s was to construct the legal and diplomatic conditions under which confederate debt could remain unpaid and eventually disappear. The federal government denied any responsibility for contracts entered into by individual states and claimed that it lacked the constitutional power to compel Mississippi and the other states to pay. The Eleventh Amendment also protected states from suits brought by foreign citizens. At the international level, the southern bloc in the Senate had repeatedly inserted reservations into arbitration treaties precisely because arbitration might reopen the repudiated Southern debts. Ugarteche says that in 1930 the United States prevented the creation of an international arbitration tribunal in Geneva for fear that the bonds would be brought before it. This left British bondholders without either access to the debtor states through diplomacy or a neutral international court.

 

Óscar's hypothesis is that after World War II, the United States effectively forgave Britain’s inter-Allied war debt, and British bondholders may in return have abandoned their claims against the American states. In other words, the power of the US made the enforcement of debt contracts impossible and then helped shape the postwar settlement in which the claims disappeared.

Make Argentina Crash Again

 

My article for The American Prospect on the Argentina situation was just published online. Argentina is far from being out of the woods. The expectation that the country will stabilize prices, float its currency, and build up reserves, and restart economic growth is a chimera. Despite market support for Milei’s program, the crisis remains unresolved. In my article, I explain why the challenges persist, an why this will end like the previous three neoliberal experiments, with a crash. While an immediate crash may not be on the horizon, it is somewhat inevitable. It's a matter of when, not if. And it may very well be with the next president, if the U.S. continues to financially prop Milei's government.

Note that contrary to the IMF, or Barry Eichengreen, who actually provided the IMF justification for floating rates more generally (as he explains there), I don't think to abandon the dirty float (band in this case) would be a good idea.* On that I think Milei's administration is correct. I even think that some degree, even more I think, of a reintroduction of exchange rate controls (the government reintroduced some controls on individuals, I must add) is necessary. Something that supposedly the IMF also favors. Capital controls as a macro-prudential measure in times of crises.

I also want to make clear that this is mostly about the current macroeconomic circumstances. The point is not to return to a world of Bretton Woods, with fixed exchange rates, and capital controls. It is clear that Brazil, for example, did much better than Argentina, with a dirty float and no capital controls. But, as noted by Fabian Amico, in a talk at Universidad Nacional de Moreno, recently, Brazil accumulated reserves in a different macroeconomic scenario.

Brazil accumulated foreign reserves (see graph), maintaining a positive interest rate differential (the domestic interest rate minus the foreign reference rate, the U.S. one, the expected depreciation, and a measure of country risk). We discussed that with Amico and Serrano a few years back (in Spanish). Note that as capital inflows allowed Brazil's central bank to accumulate dollars, the real appreciated in nominal terms. In Argentina where both left and right of center governments have 'appreciation fear' (and their fear is about the real rate, let alone the nominal one), that would be politically difficult.

Exchange rate depreciation at this point would lead to accelerated inflation, and to contractionary pressures. Of course, there might be a situation (they had more than a few over the years) in which, with low country risk, and high interest rates at home, leading to a higher differential that allows for the profitability of holding peso denominated assets to be higher than holding dollars, we might finally get on the road to stability. That would be orderly macroeconomic policy, and not draconian fiscal adjustment. At any rate, that doesn't seem to be the case right now.

Over the long-term, it is very clear that all the previous experiments with this kind of policy (fiscal austerity, financial deregulation, and trade liberalization) ended up in a crash. There is also little reason to believe that this time it will be different. 

* It goes without saying that I would also be against dollarization, something that Milei promised in his campaign in 2023, and that has been recently floated by Laurence Kotlikoff in the Financial Times. This suggests that the old bipolar consensus has not been completely abandoned in more mainstream circles.

Election in Argentina boosted investor confidence, but is it sustainable?

My interview with Deutsche Welle on the Argentine election and the economy. I also had the opportunity of talking with Newsweek on Trump's strategy for Latin America.

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. 

Ken Rogoff on Milei and the IMF

 

Another Excel... ent work*

This is from a few weeks ago, but only now I had some time to post about it. Ken Rogoff has been doing the rounds of podcasts, after the publication of his most recent book, Our Dollar, Your Problem. He was on Ezra Klein, where he claimed basically that Bernie is as bad as Trump on trade (essentially saying that Biden, that had moved in the direction of Bernie is as bad too; good for Klein that he pushed back on that point). More on that in another post.

He was also on Tyler Cowen's podcast were he discussed, very briefly, the Argentina case. Here a short clip.

Here is the transcript of that bit of the conversation.

COWEN: Is Milei going to make it succeed in Argentina? What does it depend upon?

ROGOFF: I hope so. I think he’s the best chance that Argentina’s had in a long time, which is, fair to say, a very low bar. The thing that he’s done that I have not seen before is balancing the budget. If you’re a big borrower and you keep defaulting, a starting point is figuring out how not to have to borrow money, and he’s managed to do that. I don’t know that all his libertarian visions necessarily will come to pass, but he’s provided some stability, bringing inflation down.

It’s so sad. Argentina, as you know, was one of the richest countries in the world by any measure at the turn of the 20th century in 1900. Now they’re a lower middle-income country. Their per capita income is below Brazil, which is hard to get your head wrapped around. I think there are many reasons, but certainly Peronism, socialism has not done well by Argentina.

COWEN: But has he balanced the budget? I know he announced a balanced budget, but this is April 2025, and they just borrowed $20 million from the IMF. It doesn’t sound like a very balanced budget.

ROGOFF: It’s counting the interest payments on the IMF, and yes, he inherited this big debt. They’re paying the interest. It’s very low interest on the big debt, and I don’t know how that’s ultimately going to get resolved. They have a lot of problems ahead, but there’s a lot of strength in Argentina if they can grow again. I don’t want to sound Panglossian about Argentina, but goodness, they had inflation of 200 percent when he took over. The economy was in free fall. Look, there’s no magic wand you can wave over the last 80, 90 years of Argentina and make everything right.

A few things, that I think are important to contextualize, in particular given the relevance of Rogoff, who was the chief economist at the IMF, and whose textbook, co-authored with Maurice Obstefeld, another ex-chief economist at the IMF, is one of the main graduate texts for international macroeconomics.

First, the notion here is that the problem was fiscal in nature, and the debt in domestic currency is what matters. Of course that is NOT a problem. Inflation was not caused by monetary emissions, and neither was Milei's stabilization. In fact, the IMF first, by forcing a devaluation while Massa was still the minister, and candidate, and then Milei in December of 2023 accelerated inflation. He only managed to stabilize prices so far, because he has held the exchange rate under control, and that has led to many complaints that the real exchange rate is overvalued (that's a topic for another discussion). The fiscal adjustment caused the recession in 2024. That is on Milei, as well as the initial collapse of real wages.

Second, Argentina was never a developed country. It did have a high level of income per capita, but that is true of Saudi Arabia now. Petro-States and Beef-States are not necessarily developed, even if some people might be very wealthy. Peronism (which cannot really be considered socialism) did not cause a decline, not only because there was no glorious past in which the country was developed, but also because it was not in power all the time. There were periods of industrialization with conservative-authoritarian regimes, like Ongania in the 1960s, that did not align with the liberalism that Rogoff seems to prefer.

In fact, Prebisch, the father of the intellectual defense of state-led, import substitution industrialization, was a well-known anti-Peronist, and supported the 1955 coup.

Finally, it is true that Milei inherited a large external debt in dollars, and no significant reserves in the central bank. But that debt was accumulated during the Macri administration, an ally of sorts of Milei, under the same economic team (both Caputo and Sturzenegger were in both governments). This was not caused by the excesses of Peronism (read the Kirchners), but by the excesses of neoliberalism.

I have my issues with the implied notion that laissez faire, both in the US, and even more so in the periphery, is a rational strategy for development. On this Rogoff seems out of sink with the times, that have rediscovered industrial policy, and state-led growth. And I also think that Milei can, in particular with the help of the IMF, hold exchange rates for a while (even longer if external markets help him) and ride a reelection as Menem did in the 1990s. But then things will eventually crash.

* On the Reinhart and Rogoff affair read the piece by Cassidy in the New Yorker.

Milei's Psycho Shock Therapy

My short piece for Dollars & Sense on Milei's economic program is out now, here. An early version is available here. Btw, this is the 50th anniversary issue. By coincidence, 20 years ago, a piece of mine on Brazil (and the Lula government back then) was also published on Dissent on their 50th anniversary issue.

The Milei piece was written in June and revised around September. Now it seems more clear that they might receive some fresh money from the IMF, which will allow them to continue to pushing the adjustment well into next year, and, perhaps beyond. Note that this is exactly what the same team during the Macri administration. Try to cut spending in domestic currency (now more drastically) and, hence, debt in pesos, and increasing indebtedness in dollars. The money will probably come in, and as the interest rate differential remains negative, it will probably not lead to the accumulation of reserves. To be seen.

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.

The IMF’s 2018 Stand-By Arrangement with Argentina: An Ultra Vires Act?

A good paper by Karina Patricio and Chris Marsh that deserves a wider readership, in particular if you are interested on the International Monetary Fund (IMF) and it's policies. The paper argues that the IMF agreement is legally void, and might lend support (the authors do not say so) to a more radical view, suggesting that Argentina should not pay. From the abstract:

The 36-month exceptional access Stand-By Arrangement (SBA) with the Republic of Argentina approved by the International Monetary Fund (IMF) in June 2018, later augmented in October 2018, represents the largest programme in the history of the Fund. The programme, however, has failed in all its core objectives. While the programme has been subject to macroeconomic critiques, this is the first study that integrates such analyses into a comprehensive legal evaluation, with resort to general Public International Law, the law of the IMF and, where international law is uncertain, relevant analogies with English private law.We introduce the hypothesis that the SBA violated the core purposes of the IMF as per its Articles of Agreement and, therefore, constitutes an ultra vires act. To explain why, we proceed as follows. Section 1 provides the legal foundations of our analysis. First, it explains the ultra vires doctrine in international law and outlines key considerations drawn from case law of the International Court of Justice for the recognition of ultra vires acts. Second, it draws on core provisions of the Articles of Agreement to discuss relevant purposes of the IMF, as well as a set of authorisations and limitations to its powers established in the treaty to achieve such purposes. Section 2 draws on macroeconomics to discuss how those substantive rules were violated in the SBA in a way that is too manifest to be open to reasonable doubt, thereby raising suspicion that the SBA’s approval was ultra vires. In particular, the programme was characterized by egregious assumptions and accounting inconsistencies that meant the objectives were impossible to attain. Section 3 considers the impact of the IMF’s recently published Ex-Post Evaluation of Exceptional Access Under the SBA on our legal analysis. Section 4 draws on the premise that the SBA’s approval constituted an ultra vires act to discuss the potential legal implications of its invalidity. Section 5 concludes this piece by summarising its key findings and reflecting upon the need for clarification on the legal validity of the SBA, as well as further scholarly research on ultra vires lending by the IMF.

Read full paper here. This is in accordance with recent critiques on the IMF role by Joe Stiglitz and Kevin Gallagher. Note that the IMF itself has done a mea culpa of sorts on the lending to Argentina (see here).

The New IMF and the Covid Crisis

 

Video of the roundtable sponsored by the Review of Keynesian Economics on the changes (or lack of) at the IMF with Ilene Grabel, Marc Lavoie, Esteban Pérez Caldentey and Florencia Sember.

Debt default or negotiated solution?

An Argentinean default is neither new, nor a surprise, perhaps, even for a casual observer of the ups and downs of international bond markets. One may want to follow Oscar Wilde’s Victorian governess advice and omit the chapter on the fall of the peso as being ‘too sensational.’ But an Argentinean default now, after the Great Shutdown provoked by the coronavirus pandemic, would be the harbinger of a generalized sovereign debt crisis for emerging markets that would engulf the global economy, and make the recovery slower and more painful, including in the United States and other advanced economies. It may also undermine the US position in the global economy.

The Argentinean government’s debt restructuring proposal to the private creditors expired Friday, May 8th, with a limited number of adherents. In particular, large institutional investors did not accept the terms offered by Martín Guzmán, the finance minister, which would have implied a cut of about sixty percent of the principal, and a moratorium on payments for three years. This proposal, one might add, was for the most part designed before the coronavirus crisis, and the collapse of the global economy. The main preoccupation of the proposal was to put the external debt of the country on a sustainable basis, meaning in line with its ability to pay, which depends on its exports, the only secure source of dollars.

Black Rock, Fidelity, PIMCO and other investment funds that hold enough of Argentinean debt to preclude any rescheduling, want a cut of around forty percent, and have enough influence to hold out for a better deal (this guy here says Black Rock is the fourth branch of government). Since Argentina did not make a payment of interest of approximately US$ 500 million in April 22nd, today the country could be officially in default (grace period expires today, even if government extended negotiations). In the absence of a negotiated solution with the main bondholders the default is inevitable. The impasse is established, and the question is how can the stalemate be broken. Only the U.S. government holds the key for a negotiated solution.

The International Monetary Fund (IMF), the United States government, and other international creditor groups like the Club of Paris have been unusually supportive of Argentina. The IMF that had lent US$44 billion to Argentina between 2018 and 2019, has openly argued that the Argentinean debt is unsustainable, providing support for the rescheduling proposal. The U.S. government that has been a harsh critic of center left governments in the region, has had good rapport with the new government of Alberto Fernández, and his vice-president, the ex-president Cristina Fernández de Kirchner, with whom relations were considerably less friendly in the past.

As Jagdish Bhagwati famously implied with the notion of a Treasury-IMF-Wall-Street complex, the connections between the financial sector, the United States government and the multilateral organizations run deep. The current Treasury Secretary, Steve Mnuchin, as it is well-known, worked at Goldman Sachs, and he is the last of a long list of Wall Street connected government officials. Only the United States would have the clout to influence bondholders to come to the table with a reasonable counter offer. This would be of interest not only to Argentina, and its creditors, since a default would lead to years of litigious disputes that would only be sorted out by the courts, but for the United States and its global standing in the midst of the pandemic.

The collapse of international trade and of the price of commodities, the disappearance of remittances and revenues from tourism, coupled with the normal flight to safety will put other developing economies, that were not on the verge of collapse like Argentina, on unsustainable paths too. Most of these debts are denominated in dollars. The exorbitant privilege associated to the international position of the dollar comes with some requirements, as Charles Kindleberger famously noted. It requires acting as a global lender of last resort, providing counter-cyclical demand in times of distress. The U.S. is already doing some of these, with the Fed offering swap lines for central banks of a few countries, but it has blocked other initiatives like the expansion of the IMF’s Special Drawing Rights. Certainly not enough, and debatable whether it is enough even for domestic purposes (let alone other problems noted here, like the notion that the federal government would allow subnational units to go bankrupt)

Even more important in the context of the pandemic, particularly for the U.S. global standing, would be to allow countries that are indebted in dollars to default. These countries need the international reserve currency for the importation of essential medical equipment and pharmaceutical goods. The crisis has, if anything strengthened the position of the dollar in the short run, but there are dangers.

A financial crisis in the middle of a pandemic could have enormous human consequences, and it could also create the conditions for an eventual reduced role for the dollar. The pandemic has exacerbated the dispute between the United States and China, and the latter has already expanded its global lending in renminbi for years. It is also trying to provide medical support for affected countries in the region, to reduce criticism about its role in the pandemic, and now has stepped in to provide medical support. Argentina too has received medical equipment from China. If the U.S. is perceived as unresponsive, it is not inconceivable that China, if it follows a more generous credit policy, could be favored by the crisis.

The best possible outcome would be a negotiated solution, which would probably fall somewhere in between the Argentinean government offer and what would make the big institutional investors not loose money in the short term. Somewhere between a forty and a sixty percent haircut. That would allow the Argentinean government to deal with what really matters, the pandemic, and perhaps expand its spending without fear of external consequences. The U.S. Treasury and the IMF should back more vocally such a solution. Time is running out.

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.

Bernie Sanders in 1998 on the Global Crisis and the IMF role in it

Old clip from C-SPAN. It's still worth watching. Strong critique of the failures of the IMF and neoliberal policies in leading to the crisis. We know now that the subsequent bubble pushed the major crisis for another 10 years.

The IMF's Second Chance in Argentina

Kevin Gallagher and Matías Vernengo

Alberto Fernández and his running mate, former president Cristina Fernández de Kirchner, have won the election in Argentina amid a real danger that the country’s economy will collapse. Outgoing president Mauricio Macri and the transitioning Mr Fernández should work closely with the IMF to put the fragile economy back on a path to stability and sustainable growth.

Read rest here.

Argentina and the IMF: What to Expect with the Likely Return of Kirchnerism

Simple Math, Macri + IMF = Poverty

The Argentine economy is on the verge of another default less than two decades after the last one, in 2002. The forthcoming elections, in October 27, will most likely bring back the Kirchnerist opposition back to power, and they will have to negotiate with the International Monetary Fund (IMF), that has the power to prevent a crisis.

Argentina has a long and turbulent history with the IMF that dates back to the country’s entry in the organization in 1956 and to the first loan that was received the following year, after the military coup that brought down the Peronist government in 1955. Since then, the country has been an adept user of IMF resources, ranking among the countries that signed the most agreements. The loan of approximately $57 billion, reached in 2018, is the largest in the IMF’s history, and is a Stand-By arrangement, since it comes with the imposition of economic policies designed by the IMF. This contrasts with the period in which Néstor Kirchner and his wife Cristina Fernández de Kirchner were in power.

Read rest here.

Some brief thoughts on Argentina's ongoing crisis and the IMF's role in it

Argentina's peso depreciated significantly after the primary elections last month, with the clear victory of the opposition. The crisis has come full circle now with the re-imposition of capital controls, and with the default on domestic bonds, the latter a puzzling and clearly unnecessary measure, since it was in domestic currency (Standard & Poor's says it's a selective default, whatever that means, and Fitch called it a restricted default). So here a few things that might be useful to understand what is going on.

So how did we get here? As I noticed recently here, the collapse has nothing to do with fiscal problems. They hardly ever do, since the debt that matters is the one in foreign currency. First, let's clarify what were the problems that Macri faced in December of 2015, at the beginning of his term. Yes, inflation was high, but real wages were not low, and in many ways the persistent depreciation of the peso, during Cristina Kirchner last term, and the increases in wages explained that. Note that inflation did not cause the low growth during the last part of the previous administration. So inflation was less of a problem at that point, and one that Macri should have emphasized less (contrary to what most think, as I said even before the government started, Macri had no intention of reducing inflation, at least not initially, since the plan was to let nominal wages adjust by less than it, and reduce real wages).

The real cause of low growth was the Balance of Payments (BoP) problem. More specifically, the current account that was negative, and in the absence of reserves, imposed a constraint on growth. Imports of essential goods, basics like energy, and the service of debt, at a time that Vultures closed access to international markets, were the real problem that he faced. But there were no issues about a possible default. Reserves were low, but sufficient to face short term obligations, and low growth allowed the current account to be under control. There was NO POSSIBILITY OF A DEFAULT. What Macri proceded to do, eventually with the support of the International Monetary Fund, is what caused the current crisis.

Actually, during the governments of Néstor and then his wife Cristina, from 2003 to 2015, total debt in foreign currency fell, and the ratio of foreign denominated debt to exports, which measures the sustainability of debt, since exports provide the dollars needed to service the debt, went down significantly from about 450 to below 100 percent. This was the result of two renegotiations of debt (in 2005 and 2010), and of the recovery of the economy and exports too. But note that even after the end of the commodity boom in 2011, the ratio did not go up again.

So the problem was lack of growth and not default. And all the conventional media coverage about the fears of a return of a Populist government are evidently bogus on the face of that graph. It is clear that the borrowing in foreign currency, the one that Argentina has problems paying, were during the Macri government. He is the irresponsible one, and not because of excessive fiscal expansion for social programs, but simply for borrowing in foreign currency.

The question is then why did the Macri administration borrow huge amounts of dollars. Foreign debt went from around US$ 70 to close to 160 billion, btw. And while one can speculate about motives, the fact is that most of the money went to capital flight, in oder words, the central bank sold the dollars to try to preclude the depreciation of the currency. Mind you, Macri said back in 2016 that lifting capital controls was fine, and that contrary to the Cassandras, nothing bad happened. Yes, not immediately, but the point was exactly this. Now we are on the verge of a default.

The IMF largest package in its history, of about US$ 56 billion, was provided to Argentina in 2018, and it has essentially supported the capital flight strategy of Macri. Again, one can speculate about the IMF's motives, but the fact is that they have provided the money for the policies pursued by this administration, and given the circumstances that the next government will inherit, it will have a great deal of power in allowing the country avoid or not a default. Note that when the loan was provided, the IMF requested austerity, and did not ask about capital controls. So for all the talk about changes at the IMF, this was essentially your grandma's IMF.

Interview for the Argentinian Radio

I was interviewed yesterday about the situation in the country (Cítrica Radio, Siempre Es Hoy). Interview was cut short as a result of a bad connection. The audio of the part of the program I appear is here.

The return of populism or Argentina on the verge of collapse

The Argentinean primary elections, which are very peculiar and take place all at once with all parties, were last Sunday. The primaries made some sense when the Peronist party was all divided and that allowed the main candidate to proceed, but with the move of Cristina Kirchner to the vice-presidential spot next to Alberto Fernández, and the unification of a good part of Peronism (in particular Sergio Massa), the primaries become essentially an anticipated election. And Peronism won resoundingly, with 47 percent of the votes, considerably more than the 32 percent the neoliberal Mauricio Macri obtained.

After the election there was a run on the peso, with a depreciation of almost 30 percent, and no significant intervention from the Central Bank. To add to the problems, Macri, the incumbent president, blamed the run on the voters.  In his view, they basically do not know how to vote, and by bringing back the spectrum of populism, and the implication was default, they scared the markets. It's all about confidence.

There are many problems with his arguments, and the policies he proposed the following they, after he apologized (after all he still needs the votes of those that do not know how to vote in October, when the actual election takes place). First and foremost, the fact that the problems faced by this government are the result of their own decisions to increase significantly the amount of debt in foreign currency. As I noted before here, it doubled in this government, after having being significantly reduced in the previous one (and after the renegotiation of debt with 93 percent of bondholders in 2005 and 2010; I must insist that default was in 2002, before Kirchner, in spite of what the Wall Street Journal said recently).

Yes, it is true that by the time Macri was elected in 2015 the country had an external problem. Meaning that the current account was moderately negative, and there were no inflows of capital in a world awash in capital, and reserves were low. But most countries were able to attract flows with moderately higher rates than the international ones. I expected the depreciation and higher inflation in the beginning of Macri's government to bring down real wages. And fiscal adjustment was to be expected too, in order to increase unemployment and reduce the bargaining power of unions.

But he had space, after that, for borrowing in international markets in domestic currency, at higher interest rates, and in domestic markets, and he could have in the process obtained significant amount of dollars (locals buying high paying bonds in domestic currency) to prop up the reserves. That would have led to growth, possible stabilization of prices (with some appreciation of the currency), and accumulation of reserves, reducing the external vulnerability of the economy. The fact that they borrowed in dollars, allowed the depreciation of the currency, losing control of inflation, increased the obligations in foreign currency to a level that an agreement with the IMF was necessary, and that adjustment forced the recession (besides the contractionary effect of the devaluation) was unexpected, to say the least. It is almost impossible to fathom why he would pursue policies that would make his reelection very difficult.

To things should be said in this context. One is that the agreement with the IMF supposedly was in place to allow to maintain the exchange rate in the forty something level, and with that, perhaps, at least not accelerate inflation and help with reelection. A politicization of the IMF that the international organism should have resisted. Also, many people able to buy dollars at forty something (now that they are at around sixty) won significantly. So those that bet on a depreciation (and promoted capital flight) won. And financial markets certainly did. This government has many friends in the markets. The other is that the agreement with the IMF ties the hands of the next government. And in my view that's no accident.

The measures he announced to counter the crisis (see this FT story), essentially "increases in the minimum wage, loans for small and medium-sized businesses, student grants, subsidies for poor families with children and a floor for income tax, as well as a freeze on petrol prices" (the later freeze was, apparently, now eliminated) will not have an economic, and most likely also not an electoral effect. FT is correct, it's too little too late. Not only the size of the measures is small, but also the inflationary and contractionary effects of this massive depreciation will dwarf any possible benefit of a moderate stimulus.

So Fernández is the virtual new president, and Cristina his vice-president. And the left of center is most likely back in power in Argentina. The notion that the left was done in the region has been exaggerated. As I noted more than three years ago here it was a stretch to think that most people wanted a return of neoliberal policies in the region. I noted that Brazil was divided, and I think still is, with significant resistance to Bolsonaro, and that Macri had only won by a very a narrow margin. Note that the return of the left in Argentina comes with significantly less degrees of freedom than in 2003. Not only there's an IMF agreement that would need to be renegotiated (and they must do it to avoid a default), but also the international scenario is much less favorable. But my take is that the new government will be able to avoid default, and restore some degree of coherence to economic management, allowing for lower inflation, and moderate rates of growth (on the low end, but at least growth) and reduction of unemployment and poverty. More on that in another post the near future.

The IMF Program in Ecuador: A New Report by Mark Weisbrot

Thirty pieces of silver

As they discuss the new candidate for the International Monetary Fund (IMF), and it seems that the lead candidate for Lagarde's position is the former Dutch finance minister Jeroen Dijsselbloem, a pro-austerity member of the Labor Party (which I guess is at least nominally on the left), it is worth reading the new CEPR report on the possible effects of IMF programs in Latin America, more specifically the one in Ecuador, now that the country has been brought back into the fold of well-behaved nations (after expelling Assange from their London embassy, in the post-Correa period).

From the abstract:

This report examines Ecuador's March 2019 agreement with the International Monetary Fund (IMF) and finds that Ecuador is likely to have lower GDP per capita, higher unemployment, and increased macroeconomic instability under the program. Even the program itself, the authors note, projects Ecuador to have a recession this year and increased unemployment for each of the first three years of the program. But these projections are optimistic, the report concludes. [Full report here]

I'll have more on the IMF and Argentina soon. Also, something on Brazil, for those interested in the situation in Latin America.