Editorial: Into More Fires

International Monetary Fund (IMF) Managing Director Christine Lagarde has proved herself a true disciple of Theodore Roosevelt’s famous maxim: “Speak softly and carry a big stick” – although it should be added that the carrot is pretty big too at US$50 billion out of a total multilateral credit of US$56.5 billion. During the weeks of surprisingly smooth and rapid negotiations she had seemed quite comfortable with a mildly accelerated gradualism or anything to help Mauricio Macri’s alternative to populism out of its hole, in keeping with the kinder, gentler image projected by the IMF in the last decade (even turning a blind eye on quantitative easing).

Yet while image is one thing, hard figures are quite another and the conditions as unveiled on Thursday evening were severe. Just taking the bottom line of the fiscal deficit, the 2018 target of 3.2 percent of gross domestic product from the start of the year (already downsized) must be more than halved to 1.3 percent in the electoral year of 2019. But not only the deficit is to be subjected to drastic shrinkage – the 3.5 percent growth forecast of the 2018 budget descends to 1.4 percent in the IMF agreement (although even this could be optimistic amid a backdrop of 40-percent interest rates and a bad harvest). The only area where the IMF is at least nominally laxer than the government is inflation, permitting 17 percent in 2019 (leaving this year up in the air) as against the hopelessly unrealistic official targets of 15 percent this year with faint hopes of single digits thereafter. The IMF’s recommendations will improve the balance of payments – here Lagarde’s team knows what it is doing – but at the price of condemning the economy to stagflation. The IMF is thus always the same with the vision of the accountant, not the economist – and hence open to the argument that economies cannot pay their debts if not allowed to grow.

And what does Argentina gain from this agreement? Our editorial ‘In Monetary Flux’ of four weeks ago asked why Argentina was resorting to the extreme step of going to the IMF in the first place (almost without precedent for a country far from default and with ample reserves). That question could be repeated now, with further doubts as to why so much more money was needed than the US$20-30 billion initially forecast. The size of the assistance is obviously the main attraction – equivalent to 10 percent of the economy, it adds huge solidity to Argentine finances by more than doubling Central Bank reserves, even without reference to the currency swap apparently being sought with China.

Yet even support on this scale can be deceptive – at the start of the century Argentina began that fateful year of 2001 with the famous blindaje package of US$38.6 billion from the IMF (probably worth more in real terms than the current stand-by) when Argentina seemed covered for a year or two at least, only to collapse into total meltdown the following spring. Memories of that disaster (when the IMF had too much respect for Paul O’Neill’s “plumbers and carpenters” of the United States investing in Argentine bonds and the need to teach the irresponsibly insolvent a lesson) might well have influenced the IMF’s generosity now, but such multi-billion packages can be false friends if they sustain bad financial habits beyond the point of no return – Lebacs could be a case in point here. And even help on this scale could be swimming against the tide of devaluation in the region. But this agreement is neither salvation nor the chronicle of a death foretold – we will just have to see how it goes.