Friday, April 10, 2020

OP-ED | 22-02-2020 11:55

Immolating Monetarist Fundamentalism

A birthday gift for Vice-President Cristina Fernández de Kirchner? Well, perhaps not quite – the International Monetary Fund’s concluding statement last Wednesday (the day the ex-president turned 67) might have fully endorsed the insistence of President Alberto Fernández and Economy Minister Martín Guzmán that Argentina’s foreign debt is “unsustainable,” but did not go quite as far as explicit mention of a “haircut” (least of all for the IMF itself, as stridently demanded by the veep from Cuba).

Yet despite taking absolutely no part in last week’s consultations, the birthday girl is a crucial figure towards understanding what would otherwise have every appearance of a total IMF U-turn surprising many – for various reasons. In point of fact the turnaround in the IMF’s Debt Sustainability Analysis from “sustainable” last July to “unsustainable” now is less complete than it seems because back then the former word was accompanied by others: “but not with high probability, given substantial downside risks” – risks which came to pass.

Hard to recollect now but last July was a different ball game – a free dollar well below 50 pesos, inflation even lower than last month’s 2.3 percent, the economy growing (even if only mainly because the vast difference between last year’s harvest and the 2018 drought outweighed continued plunges for manufacturing industry and construction) and virtually every pundit tipping Mauricio Macri to clinch re-election by squeaking through the run-off.

But the latter scenario was shattered by the following month’s PASO primary (with the markets spooked more by the bottom half of the winning presidential ticket than by its top) and the wheels came off – in the ensuing months the peso was devalued by over 40 percent despite the sacrifice of some US$20 billion in Central Bank reserves to defend the currency, there was a four-digit surge in sovereign bond spread (known here as “country risk”) and the contraction of Gross Domestic Product deepened. Macri critics tend to underestimate the importance of the latter factor in making debt unsustainable – it was not so much that he borrowed extraordinarily large sums by international standards (even if that US$57 billion stand-by remains a record IMF outlay) but debt/GDP ratio is a completely different story if its bottom half for a debt of US$310-340 billion is the US$360 billion resulting from devaluation rather than half a trillion dollars (still often the figure given for Argentina’s GDP). Negative growth is the bottom line here – everything else (including the sharp devaluations) is a symptom.

In IMF eyes last year’s elections had only two possible outcomes – either an improbable re-election of Macri and business as usual, or some populist reign of terror. But what did the IMF monitoring team find when it came here this month? A soft-spoken economy minister implementing various IMF recommendations ruled out by an electioneering Macri such as the termination of indexlinking, thus downsizing a couple of million pensions – steering wage bargaining towards lump sums rather than percentages moves in the same direction even if the most vulnerable sectors are being spared. Any permanent utility rate freeze was also denied. With this music in its ears it did not make any sense for the IMF to play hardball with the Alberto Fernández administration, thus driving Argentina into default and triggering that dreaded populist takeover – why not simply tell Fernández, Guzmán & Co. what they wanted to hear? In this sense Fernández owes his success to his vicepresident, the key figure.

But now comes the hard part – with the IMF now on board, it now only remains to reach agreement with private bondholders within the tight self-imposed timeline of five weeks and this is as much harder as easier than before precisely because of last Wednesday’s positive IMF statement. Countering that stamp of approval from such a supreme authority is the suspicion that the Fernández government and the IMF have sealed a deal guaranteeing the latter a preferred creditor status (contrary to the veep’s wishes) at the expense of private bondholders who will now be hit with a more aggressive offer. And while a default is plainly not in the interest of the IMF, many bondholders have less fear of that extreme because litigation can be better business than negotiation. Perhaps celebrations were more in order last Wednesday for Cristina Fernández de Kirchner’s birthday than any solution of Argentina’s debt problems.

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