September 16, 2019 BARRON’S 21
THE ECONOMY n By Matthew C. Klein
Blame Argentina’s Crisis on Repeated Mistakes
Neither the government nor the IMF learned the lessons of past economic troubles
ARGENTINA IS IN CRISIS.
Domestic spending fell
3.4% in 2018 and is cur-
rently forecast to drop
6.8% this year. The peso
is down 70% against the
U.S. dollar since the be-
ginningof2018.ThedropintheArgentine
currencyhaspushedyearlyinflationabove
50% and exploded the government’s
foreign-debt burden relative to national
income.Thegovernmenthasrespondedby
imposing capital controls and delaying
debt payments.
This is precisely what President Mau-
ricio Macri wanted to avoid when he went
to the International Monetary Fund in
the spring of 2018. The entire point of the
$57billion loan—the largest ever made by
the IMF—was to restore investor confi-
dence in the country and attract enough
new financing from the private sector to
sustain spending on imports. That pro-
gram failed, and now Argentine voters
are looking to replace the center-right
Macri with a leftist alternative later this
year.
Macri came into office at the end of
2015 under difficult circumstances that
have their roots in Argentina’s long his-
toryoffinancialinstability.Afteryearsof
stagnationandhyperinflationinthe1970s
and1980s,Argentina’sapparentembrace
ofeconomicorthodoxyintheearly1990s
made it a darling of international inves-
tors.Fromthebeginningof1993through
theendof1999,dollar-denominateddebt
issuedbytheArgentinegovernmentand
the Argentine private sector each grew
morethan80%.By2003,theprivatesec-
tor’sdebtshadbeenabsorbedbythegov-
ernment, the banking system had been
liquidated, the peso had depreciated by
70% against the dollar, and the govern-
ment had been forced to default on most
of its foreign obligations.
Rising prices for Argentina’s agricul-
tural exports helped the country boom
throughout the rest of the 2000s without
theneedforforeignfinancing—whichwas
fortunate,sinceafewdoggedhedgefunds
that had bought the country’s defaulted
debt at a discount yet demanded full
repayment,withinterest,limitedthegov-
ernment’sabilitytotapinternationalcapi-
tal markets. Argentina steadily ran cur-
rent account surpluses and accumulated
reserves of hard currency until 2010.
After that, however, falling commodity
prices and rising capital flight pushed the
administration of Cristina Kirchner to im-
pose capital controls and, crucially, to pay
for imports by raiding the central bank,
known by the acronym BCRA. As the
peso depreciated from 3.8 per dollar in
the beginning of 2010 to 9.5 per dollar by
the end of 2015, it generated substantial
paper gains on the BCRA’s portfolio of
foreign assets relative to its peso-denomi-
nated liabilities. The government mone-
tized those unrealized profits by having
the BCRA print pesos and transfer the
difference to the federal budget. After
Macri took over, the BCRA maintained
the same basic practice, except that it
issued peso-denominated securities in-
stead of cash.
Macri started his termby lifting the
capitalcontrolsandsettlingwiththehold-
out creditors. At the same time, he
wantedtocapitalizeonachangeinsenti-
mentbyborrowingasmuchaspossibleat
relatively low interest rates to boost the
economyandhelphischancesforre-elec-
tion at the end of October.
From December 2015 to March 2018,
Argentine savers moved more than
$41billionoutofthecountry,andforeign
investors bought roughly $90 billion in
newArgentinebonds.Debtsowedtofor-
eigners rose by more than 80% in just
over two years, funding an import boom.
Borrowingthatmuchindollarswasinher-
ently risky, but the situation was com-
pounded by the mismatch between the
BCRA’sneedforcontinuedpesodeprecia-
tionandthegovernment’sinabilitytoser-
viceitsdebtswithoutcontinuedinflowsof
dollars and a stable exchange rate.
Bythemiddleof2018,domesticcapital
flighthadacceleratedandforeigninflows
hadswitchedtooutflows,hencethecallto
the IMF. Instead of demanding that
Argentinarestructureitsunpayabledebts
at the expense of private creditors, limit
financial outflows, and fix the dysfunc-
tional relationship between the govern-
mentandtheBCRA,theIMFdecidedto
blame Argentina’s troubles on a lack of
confidence and a drought.
As it did in Greece back in 2010, the
IMFignoreditsownstatedguidanceand
lentgoodmoneyafterbad.TheIMF’sini-
tialexpectationwasthatforeigninvestors
wouldkeeplendingmoreandmoretothe
Argentine government so that the coun-
try’s external indebtedness would con-
tinuetorise.TheIMF’smostrecentfore-
cast does not bother to estimate foreign
demandforgovernmentdebtandinstead
assumes that external liabilities will be
roughly flat in dollar terms until 2024.
So far, the influx of official loans has
mostlyoffsetthecollapseinbondfinanc-
ing.Butnothingelsehasgoneaccording
to plan.
For one thing, Argentine savers have
moved more money
out of the country
than the IMF has
movedin.TheBCRA
has had to use most
of the loan proceeds
simplytomaintainits
portfolio of foreign
reserves. That is far
worsethanwhatwas
initiallyanticipatedin
the IMF’s “adverse
scenario.”
Second, the col-
lapseofChina’sswine
herd due to disease has depressed soy-
relatedexportearnings.Whentheloanwas
agreed to last summer, the IMF’s staff
economistshadexpectedArgentineexports
to rise by 23% from 2017 to 2019 in dollar
terms.Sofarthisyear,exportearningsare
essentially unchanged.
More preposterously,theIMFhadex-
pected Argentinian export revenues to
eventually rise more than 50% by 2023.
Thiswasnecessarytomakethecountry’s
massive external debt load “sustainable”
andjustifycontinuedforeigndemandfor
Argentine assets. Tellingly, this was also
the same mistake made in Greece: The
IMFexpectedGreekexportsofgoodsand
services to rise by more than 40% from
2010to2015.Whiletourismrevenuesdid
grow in line with the forecast, nothing
else did.
Argentina’s current troubles can be
blamed on the twin mistakes of the gov-
ernment and the IMF. At this point, the
best thing the IMF could do is help Ar-
gentinareduceitsmassivedebtloadwhile
providingtemporaryfinancingtosmooth
the inevitable cuts in imports. Unfortu-
natelyformillionsofArgentines,neither
the government nor the IMF seems to
have learned from recent experience.
email: [email protected]
Bye,Bonds
Argentina has replaced bond financing with loans from the International Monetary Fund
Sources: International Monetary Fund; Barron's calculations
Financialinflowsbytype,rolling4Qsums
Bond
Issuance
IMF
Loans
2004 ’06 ’08 ’10 ’12 ’14 ’16 ’
0
20
40
As it did in
Greece in 2010,
the International
Monetary Fund
ignored its own
stated guidance
and lent good
money after
bad—and then
compounded
the misstep with
overly optimistic
assumptions.