Argentina bailout by IMF — why it’s making people nervous

Protesters
hold signs with a message that reads in Spanish: “Get out IMF,”
during a demonstration against the International Monetary Fund
near the G20 Finance Ministers and Central Bank Governors
meeting, in Buenos Aires, Argentina, Saturday, July 21,
2018.
AP Photo/Gustavo
Garello

• The IMF boosted its credit line to Argentina this week,
  to $57.1 billion, the largest in its history.
• A larger credit line will be delivered at a faster
  pace, so long as the central bank follows new
  requirements. 
• Some economists worry the bailout plan could cause
  stagnation and political risks.

In an effort to stem a crisis has roiled Latin America’s
third-largest economy, the International Monetary
Fund this week said it would
increase Argentina’s credit line to $57.1
billion. But boosting what was already the largest
bailout in its history doesn’t come without risks, experts
say. 

“While the IMF’s decision to make more credit available to the
country over the next three years has reduced sovereign default
risks over this period, things could still turn sour beyond
that,” Edward Glossop, a Latin America economist at Capital
Economics, said. “Argentina has had 22 IMF deals since 1958, and
none have restored macroeconomic stability on a sustained
basis.” 

What are the changes?

• A $7.1 billion credit-line increase
• Payments will be delivered at a faster pace
• A zero-deficit target for 2019 
• Restrictions on when the central bank can intervene
• Disbursements are no longer precautionary (Argentina will
  receive funding so long as it meets the conditionality of the
  agreement)

Stagnation risks

New monetary-policy stipulations would minimize volatility,
analysts said, but could pose risks to economic activity. Under
the new agreement, Argentina’s central bank would only be allowed
to intervene under extreme circumstances. A “non-intervention
zone” would be set between 34 and 44 pesos per dollar beginning
in October. 

“We think the main risk of this policy is to generate additional
stagnation in economic activity, particularly well into 2019,
when we expect some recovery signs to start showing,” analysts at
HSBC said. That could be especially true if
inflation, which is expected to surpass 40% this year,
remains well above target.

Meanwhile, economists are predicting the country will fall
into a recession by the end of 2018 as the government scrambles
to reduce its debt.
Gross domestic product fell sharply
 between
April and June, marking the first economic contraction in more
than a year, and is expected to continue to slide in coming
quarters amid
 steep spending cuts and export
tax increases.

A complicated past

Argentina has had a complicated relationship with the
IMF, which has been blamed for worsening the
country’s economic crisis in 2001. Three years after
intervention, which was followed by the largest sovereign
default in history, an independent evaluation office within the
IMF authored a 193-page report pointing
to where it may have gone wrong.

But this plan falls short of requiring a fixed exchange rate, a
factor the IMF said played “the central
role” in turning Argentina into a crisis
country. Trading one-to-one with the dollar, it provided
stability for awhile but left policymakers powerless once
investor confidence faltered.

Alberto Fernandez, who served as cabinet chief to former
President Néstor Kirchner, criticized current
President Mauricio Macri on Twitter in May when the IMF
announced plans to aid Argentina again. “The only idea that came
to Macri is to resort to the lender of last resort,” he wrote. “That
is the IMF. What a way to smash an economy.”

‘It’s about the politics’

Fiona Mackie, regional director for Latin America at The
Economist Intelligence Unit, said the new deal offers a better
plan to address inflation and normalize the economy. But she said
political uncertainty could cause turmoil in the country. 

“The government should be better able to steer policy through a
difficult few months and succeed in its adjustment package,” she
said. “All that said, risks abound, and at this point it’s about
the politics, and the political capacity to keep the moderate
opposition, and voters at large, on side.” 

Sticking to IMF targets may prove difficult for Macri, a
conservative whose campaign focused on free-market reforms, as
the October 2019 presidential election approaches. With an
approval rating that his dipped below 40% this year, he could
risk losing re-election.