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Argentina: 20 years on, has the IMF really changed its ways?

This article has also been published by Triple Crisis. 

Argentinians are experiencing deja-vu this month as the government announces massive layoffs and a hiring freeze as part of an adjustment package attached to a loan from the International Monetary Fund (IMF). Thousands of public servants are being forced yet again to swallow the bitter pill of austerity, which the IMF programme - published last Friday - aims to patch up through increased targeted social assistance.

For many Argentinians the financial crisis gripping the country, and the return to the Fund, brings back bad memories of 2001. Then, IMF-induced policies triggered the worst economic meltdown in Argentinian history. A cocktail of austerity measures contributed to the contraction of economic activity with a loss of 20 % of GDP between 1998 and 2002. They also compromised the government’s ability to provide essential services; unemployment soared above 20 % while real wages dropped by 18%; and poverty affected more than half of all Argentinians. Children were most affected, with seven out of 10 falling below the poverty line.

To appease popular discontent, the government and IMF officials have emphasised that this time the Fund has changed its ways. However, a comparison between previous and current agreements points to business as usual, focusing on traditional austerity with a few cosmetic tweaks.

Current Financial Outlook

Argentina’s financial outlook looks gloomy as global financial conditions change. Tightened monetary policies in advanced economies, just as foreign investors discard Argentinian assets, are putting downward pressure on the peso. The Argentinian Central Bank attempted to stabilise the peso by raising interest rates to a whopping 40% and by spending massive amounts of its foreign reserves - up to 7.7 billion over the course of a few months. To bolster reserves, the government is also negotiating an extension to the current currency swap with China. Nevertheless inflation remains high, while the peso continues to depreciate.

Argentina’s Debt Crisis

The seeds for the current debt build-up were sown in the aftermath of the 2001 crisis. A majority of the country’s creditors agreed to a haircut on their Argentinian debt, restoring the country’s solvency. However, a group of vulture funds held out their Argentinian debt. Eventually, a US court ruled in favour of the vulture funds, which meant that the Argentinian government had to pay out. In the absence of a global sovereign debt workout mechanism, these vulture funds were able to pocket astronomical profits.

Argentina’s new government ploughed ahead and raised the money they needed by issuing new debts. This was just the beginning of a new borrowing boom. Private creditors enabled this boom by generously investing in Argentina’s high-yield bonds. While Argentina’s public and external debts had been low and stable for almost a decade, they increased rapidly from 2015 as debt servicing costs rose. This debt build-up is the underlying cause of the USD 50bn IMF bailout loan.

A new IMF bailout for irresponsible lenders

The borrowing boom culminated in Argentina’s June 2017 issuance of a ‘century bond’. The Financial Times commented: “what sane individual lends money for 100 years to a serial-defaulter?” The conditions were highly attractive through, high yields of 7.125% annually and an initial offering at a steep discount of 90 cents to the dollar. Argentina found sufficient greedy investors to pick up the bonds. Perhaps these also speculated that someone might step in to bail them out when Argentina loses the ability to pay. They were right, because this is exactly what the IMF just did with its $50 billion loan, barely a year later.    

“The IMF changed its ways” – true or false?

The $50 billion three year Stand-By Agreement (SBA) - the largest in IMF history - is a hefty loan compared to an outstanding debt stock of roughly US$ 221 billion as of 2016, and it is likely to be primarily allocated to debt service payments and the replenishment of international reserves. Stand-by agreements are typically used to assist countries with balance of payments problems in the short-term. While the IMF claims that conditionality has been streamlined as part of this facility, in fact, the number of loan conditions rose compared to the 2000 loan programme.

Who bears the burden of this new adjustment?

The IMF is advancing similar policy prescriptions to those doled out 20 years ago, with a focus on austerity measures. The main difference between the SBAs of 2000 and 2018 lies in the fact that the former promoted austerity through both increased taxation and spending cuts, while the latter focuses on spending cuts only. This is by no means a change of course of the IMF as both types of austerity are still operated across other country programs[1].

The type of spending cuts advocated strongly resemble the 2000 SBA. In 2018 the program calls for the following cuts:

  • Budgets cuts at federal and provincial levels
  • Reduction of the wage bill through hiring freezes and layoffs
  • Pension reform
  • Subsidy elimination for sensitive products such as gas and electricity
  • Cuts for public works
  • Reduced transfers public enterprises

Worryingly, local analysts expect ripple effects from squeezed budgets at the provincial level leading to supplementary cuts in education, health care and utilities (transport, energy and water).

Making matters worse, the IMF did not require an upfront restructuring of Argentina’s current debt stock to private creditors as a pre-condition to disburse the loans. The IMF loans ensure that private creditors will be paid in full, at least for the time being, as the share of the budget that is debt service costs remains protected by the IMF. This implies that the full burden of adjustment is put squarely on the Argentine people who will be affected by job losses, reduced pension entitlements, tariff hikes and lower public service provision.

The Argentinian Foundation for the Environment and Natural Resources (FARN) is worried that austerity will fall on the shoulders of ordinary citizens: “The IMF asks for a reduction of the primary deficit of 3.1% of GDP. According to our estimates this is equivalent to the amount of fossil fuel subsidies to large companies. However, the government has applied austerity measures that are a burden to citizens.”

Paving the way for the private sector?

Argentina increasingly pushes for privatisation, in particular since the adoption of a PPP law in 2016 Argentina has been scaling up Public-Private Partnerships (PPPs) in infrastructure. In the meantime, the country has developed a major pipeline of PPP projects, including in health and education, for instance the construction of six hospitals. Furthermore, Argentina aims to further develop infrastructure as an asset class as part of its G20 agenda.

Austerity cuts for public works are being implemented in parallel with an increased push for Public-Private Partnerships (PPPs) in infrastructure. Confronted with shrinking fiscal space a government might well turn to PPPs, because - using this model - infrastructure projects can be kept off-balance sheet, hiding the true cost of the project. Civil society organisations in Argentina such as FARN have expressed widely held concerns about PPPs, as shrinking public spending reinforces ‘existing bias’ in the government towards private investment and PPPs in particular. “We are concerned that the pressure of shrinking public spending ends up reinforcing the already existing bias of this government towards private investment, and the new regime of PPPs,” said FARN.

Social window dressing

While the IMF programme recognises that there will be social repercussions associated with austerity, it does so through a narrow fiscal lens. Targeted social programmes are supposed to protect the vulnerable from the effects of adjustment. However, in practice, targeted programmes have often failed to reach people in need.

What is more, Argentinean CSOs and trade unions have labelled the level of social safeguards in the IMF- programme “a joke” for those that stand to lose their jobs, salaries and pension entitlements. They calculated that the level of social spending under the programme for the remaining six months of 2018 would amount to $6 per person for the 13 million poor in Argentina. In an environment of generalised spikes in food prices and increasing numbers suffering economic hardship, these safeguards are unlikely to attenuate the consequences of austerity.

How to deal with Argentina?

Over the years the IMF’s macro-economic prescriptions attached to loans remained broadly the same: the magic potion for economic crisis remains austerity based on the promise of restoring “market confidence”. This threatens to further dampen economic activity and constrains the government’s ability to provide essential services. What is more, the current IMF programme fails to tackle the crucial underlying issue, namely the desperate need to restructure Argentina’s debt in sustainable and transparent way.

Instead of locking countries into a perpetual cycle of austerity programmes – an austerity trap- the focus should be on establishing an international debt workout mechanism. The IMF, on the other hand, should stick to its mandate and assist countries’ short-term balance of payment problems. This should not require long-term structural reforms and should leave fiscal and monetary decisions in the hands of democratic decision-makers.

Without these changes, the same prescriptions will continue to be doled out time and time again to treat the exact same problem.

 

[1] Based on examined data from MONA-database. https://www.imf.org/external/np/pdr/mona/index.aspx