The government spent much of the week downplaying the significance of its negotiations with the International Monetary Fund (IMF) and dismissing fears among the population about a return to the dire days of the early 2000s.
The last resort of going to the IMF came after drastic policies announced at the end of the previous week failed to halt a surging dollar and capital flight. Treasury Minister Dujovne said that this year’s fiscal reduction target would be accelerated from 3.2 to 2.7 percent of gross domestic product while Central Bank Governor Federico Sturzenegger jacked up interest rates to 40 percent. These measures restored a very temporary calm to the exchange rates and markets which did not last beyond Monday.
After that failed to work, Macri’s abrupt switch to the IMF surprised the global monetary authority as much as anybody else. A little over a fortnight ago many of Macri’s economic team had attended the IMF’s spring meeting in Washington with no hint of this bold initiative.
From Washington, Treasurer Nicolás Dujovne, who last week described the Fund as “very different the one we knew 20 years ago”, sought to justify the move by saying that IMF loans carried the lowest interest.
Economists expressed surprise at the degree of improvisation by the economic team in all these decisions, with interest rates of 40 percent not only complicating the productive sector (especially small and medium-sized companies) but domestic financial operations as a whole, said former Treasury secretary Guillermo Nielsen. Nielsen commented that the crisis of the last fortnight was the inevitable result of the government’s slow progress in cutting public spending although he agreed with the government’s strategic premise that it was dangerous to allow the dollar to advance beyond 22 pesos.
Nielsen pointed out that it was unprecedented for a country with Argentina’s level of foreign currency reserves (still well over US$ 50 billion despite the Central Bank selling billions in the last fortnight) and with a country risk of around 450 points (which could only rise due to this rash move) to take the extreme step of going to the IMF, normally the last resort of countries on the brink of default. This abrupt decision with no advance warning or consultation smacked of a lack of professionalism in his opinion.
Most of the comment from economists was negative or sceptical.
Not surprisingly, the harshest verdict came from Kirchnerism. Kirchnerite economist Agustin D’Attellis defined the decision as “really bad ... a desperate move at the last moment with all that resorting to the IMF implies.” Using dollar futures would have been a better option, he said. As a result of mismanagement of the crisis, there was an exodus of funds from shares, bonds, Lebacs and everything else to take refuge in the dollar.
Yet D’Attelis also said that he was not surprised since it was the “only alternative facing the government to try and control an already impossible situation.” He also described interest rates of 40 percent as counterproductive because such elevated levels only made people ask why they were so high.
Economist Manuel Adorni claimed that the government already realised on the day that its May 4 announcements of a more ambitious fiscal reduction target and 40 percent interest rates were not enough and were already thinking of the IMF back then. He also claimed access to leaks that the credit would be to the tune of US$ 50 billion (well above other forecasts, which average around US$ 20 billion) and that it would be a stand-by rather than for immediate use, a scenario which was proven true on Thursday evening.
Adorni said that the root of the problem was the fiscal deficit (an analysis shared by the vast majority of economists) and that regaining confidence via an IMF loan was a poor substitute for cutting spending. An uncontrolled deficit could only end in hyperinflation as in 1989 or in a debt crisis as in 2001, he concluded.
Federico Furiase, director of EcoGo consultancy, took a more positive view of the IMF credit line as a support. He said that the loan would need to total at least US$ 30 billion in order to reassure markets, stop the run on the currency and compensate for the loss of political support. Much would depend on the conditions demanded by the IMF, which would probably include more austerity and boosting Central Bank independence, as well as backing its inflation-targetting strategy. Furiase also deplored the fiscal cost of the Congress bill to control utility pricing.
The negotiations with the IMF, which Dujovne began with Lagarde on Thursday, are expected to last six weeks.