The Economist January 8th 2022 Finance & economics 67Blood on the dance floor
I
nflation in argentinahad intensified, the imflamented. The
cost of living had increased by some 50% over the course of the
year. “The most important source of inflation”, the fund ex
plained, “was governmentdeficit spending, financed by borrow
ing from the central bank.” The deficit, in turn, reflected excessive
wage demands and the failure of the country’s utilities to raise
prices in line with costs. The year was 1958. At the end of it, Argen
tina turned to the fund for its first “standby arrangement”, a line of
credit accompanied by a plan to stabilise the economy.
Sixty years later, in June 2018, Argentina was back for its 21st ar
rangement: a $50bn loan, later increased to $57bn, backed by the
government’s promises to cut the budget deficit and strengthen
the central bank in the hope of quelling inflation and stabilising
the peso. The loan was the largest in the imf’s history. It has left Ar
gentina so in hock to the fund that the country will need a new
longerterm loan to help it repay its existing one. Despite its size,
the rescue failed to save Argentina from default and despair. It has
also left the fund heavily exposed to a single country when many
other emerging economies may soon need its help.
The imf’s dance with Argentina over the decades has attracted
plenty of criticism. The institution has been variously described
as too indulgent and too punitive, too kind and too cruel. Conser
vative critics think the fund has been seduced by its dance partner,
wasting public money in a futile battle with market forces. The
left, on the other hand, thinks the fund is both neocolonial (ie, too
bossy) and neoliberal (ie, too enamoured of free markets).
The fund’s latest critic is the fund itself. Shortly before Christ
mas it published a lengthy evaluation of its 2018 arrangement with
Argentina, led by staff who had not been involved with it. It con
cludes that the rescue was not “robust” enough to withstand the
foreseeable risks it faced. Argentina’s economy, the report points
out, suffers from some longstanding structural weaknesses. Its
public finances are notoriously fragile (only 15% of the workforce
pay income tax, according to the oecd, and energy is heavily sub
sidised). Its financial system is shallow, which tempts the govern
ment to borrow fromfickle foreigners instead. Its range of exports
is narrow. Inflation is stubbornly high and responds only fitfully
to tighter monetary policy. Argentines like to hold their depositsin dollars. And they often price things with reference to it. That
means that inflation rises quickly when the peso drops.
The government of Mauricio Macri, which requested the imf
loan, also faced tight political constraints. His centreright party
did not hold a majority in the legislature, and he had to stand for
reelection in 2019, before any painful economic reforms would
have time to bear fruit. Given these difficulties, the fund knew the
loan was risky. Yet it did not insist on adequate contingency plans
upfront, the evaluation points out. At the outset, the fund hoped
that a big loan would restore the confidence of foreign investors,
stabilising the peso and allowing the government to roll over its
dollar debt on reasonable terms. The government’s liabilities
would then prove easier to bear and the confidence of its creditors
would be selffulfilling. Moreover, Argentina might not need to
draw down its imfcredit line entirely, leaving the fund less ex
posed to the country than the headline amount suggested.
This gamble soon failed. Foreign capital kept retreating, the pe
so kept falling and inflation kept rising. The evaluation speculates
that the size of the imf’s loan may even have been “selfdefeating”,
eroding confidence rather than inspiring it, since foreign inves
tors knew the fund would be repaid before them.
In October 2018, once it became clear that Argentina would
need all the money it could get, the imfagreed to enlarge the loan
and disburse it more quickly. The new plan called for an even
smaller deficit and even tighter monetary policy. At times, the re
vised plan seemed to be working. But a jump in inflation in early
2019 caught everyone by surprise. And any remaining hopes of
success were dashed when it became clear Mr Macri would lose
that year’s election. In its last months, his government had to im
pose capital controls to stem capital flight. The leftist government
that succeeded his defaulted on the country’s foreign debt.
What kind of contingency plans should the fund have insisted
on? The evaluation singles out an “early” debt restructuring (in
which the government would have asked its creditors to accept a
delay or decrease in repayments) coupled with capital controls to
prevent money fleeing the country. That would have eased Argen
tina’s debt burden. And it might have left more imfmoney for lat
er, helping bolster the country’s foreignexchange reserves and re
build confidence in the aftermath of the debt writedown. Own goal
But if such aplan had become public, it would have rocked market
confidence, precipitating the damage it was designed to limit. And
it might also have violated the government’s “red lines”, which
ruled out such measures because it regarded them as a hallmark of
Argentina’s uncreditworthy past. The evaluation concedes that
stabilisation plans do not work if governments do not feel they
“own” them. But “ownership”, it says, “should not be understood
as a willingness to defer to [a government’s] preference for subop
timal policy choices.” The imf should not, in other words, let gov
ernments make their own mistakes with the fund’s money.
The evaluation alludes indirectly to another implicit goal of
theimfin Argentina: to rescue its own dismal reputation in the
country. Had it insisted on an early debt restructuring coupled
with capital controls, it might have distanced itself further from
its reputation for freemarket fundamentalism. But to have
pressed such a plan on Argentina, against the wishes of its demo
cratically elected government, would haveentrenched its reputa
tion for bossiness. In the case of Argentina,a less neoliberal ap
proach would have been more neocolonial.nFree exchange
Was the imfcruelly kind to Argentina?