Argentina 20 Years On: Has the IMF Really Changed Its Ways?

By Gino Brunswijck, Maria Jose Romero and Bodo Ellmers of The European Network on Debt and Development (Eurodad). Originally published at TripleCrisis

Argentinians are experiencing deja-vu this month as the government announces massive layoffs and a hiring freeze as part of an adjustment package attached to a loan from the International Monetary Fund (IMF). Thousands of public servants are being forced yet again to swallow the bitter pill of austerity, which the IMF programme– published last Friday – aims to patch up through increased targeted social assistance.

For many Argentinians the financial crisis gripping the country, and the return to the Fund, brings back bad memories of 2001. Then, IMF-induced policies triggered the worst economic meltdown in Argentinian history.  A cocktail of austerity measures contributed to the contraction of economic activity with a loss of 20 % of GDP between 1998 and 2002. They also compromised the government’s ability to provide essential services; unemployment soared above 20 % while real wages dropped by 18%; and poverty affected more than half of all Argentinians. Children were most affected, with seven out of 10 falling below the poverty line.

To appease popular discontent, the government and IMF officials have emphasised that this time the Fund has changed its ways. However, a comparison between previous and current agreements points to business as usual, focusing on traditional austerity with a few cosmetic tweaks.

Current Financial Outlook

Argentina’s financial outlook looks gloomy as global financial conditions change. Tightened monetary policies in advanced economies, just as foreign investors discard Argentinian assets, are putting downward pressure on the peso. The Argentinian Central Bank attempted to stabilise the peso by raising interest rates to a whopping 40% and by spending massive amounts of its foreign reserves – up to 7.7 billion over the course of a few months. To bolster reserves, the government is also negotiating an extension to the current currency swap with China. Nevertheless inflation remains high, while the peso continues to depreciate.

Argentina’s Debt Crisis

The seeds for the current debt build-up were sown in the aftermath of the 2001 crisis. A majority of the country’s creditors agreed to a haircut on their Argentinian debt, restoring the country’s solvency. However, a group of vulture funds held out their Argentinian debt. Eventually, a US court ruled in favour of the vulture funds, which meant that the Argentinian government had to pay out. In the absence of a global sovereign debt workout mechanism, these vulture funds were able to pocket astronomical profits.

Argentina’s new government ploughed ahead and raised the money they needed by issuing new debts. This was just the beginning of a new borrowing boom. Private creditors enabled this boom by generously investing in Argentina’s high-yield bonds. While Argentina’s public and external debts had been low and stable for almost a decade, they increased rapidly from 2015 as debt servicing costs rose. This debt build-up is the underlying cause of the USD 50bn IMF bailout loan.

A New IMF Bailout for Irresponsible Lenders

The borrowing boom culminated in Argentina’s June 2017 issuance of a ‘century bond’. The Financial Times commented: “what sane individual lends money for 100 years to a serial-defaulter?” The conditions were highly attractive through, high yields of 7.125% annually and an initial offering at a steep discount of 90 cents to the dollar. Argentina found sufficient greedy investors to pick up the bonds. Perhaps these also speculated that someone might step in to bail them out when Argentina loses the ability to pay. They were right, because this is exactly what the IMF just did with its $50 billion loan, barely a year later.

“The IMF Changed Its Ways” – True or False?

The $50 billion three year Stand-By Agreement (SBA) – the largest in IMF history –  is a hefty loan compared to an outstanding debt stock of roughly US$ 221 billion as of 2016, and it is likely to be primarily allocated to debt service payments and the replenishment of international reserves.  Stand-by agreements are typically used to assist countries with balance of payments problems in the short-term. While the IMF claims that conditionality has been streamlined as part of this facility, in fact, the number of loan conditions rose compared to the 2000 loan programme.

Who Bears the Burden of This New Adjustment?

The IMF is advancing similar policy prescriptions to those doled out 20 years ago, with a focus on austerity measures. The main difference between the SBAs of 2000 and 2018 lies in the fact that the former promoted austerity through both increased taxation and spending cuts, while the latter focuses on spending cuts only. This is by no means a change of course of the IMF     as both types of austerity are still operated across other country programs (based on examined data from MONA-database).

The type of spending cuts advocated strongly resemble the 2000 SBA. In 2018 the program calls for the following cuts:

  • Budgets cuts at federal and provincial levels
  • Reduction of the wage bill through hiring freezes and layoffs
  • Pension reform
  • Subsidy elimination for sensitive products such as gas and electricity
  • Cuts for public works
  • Reduced transfers public enterprises

Worryingly, local analysts expect ripple effects from squeezed budgets at the provincial level leading to supplementary cuts in education, health care and utilities (transport, energy and water).

Making matters worse, the IMF did not require an upfront restructuring of Argentina’s current debt stock to private creditors as a pre-condition to disburse the loans. The IMF loans ensure that private creditors will be paid in full, at least for the time being, as the share of the budget that is debt service costs remains protected by the IMF. This implies that the full burden of adjustment is put squarely on the Argentine people who will be affected by job losses, reduced pension entitlements, tariff hikes and lower public service provision.

The Argentinian Foundation for the Environment and Natural Resources (FARN) is worried that austerity will fall on the shoulders of ordinary citizens: “The IMF asks for a reduction of the primary deficit of 3.1% of GDP. According to our estimates this is equivalent to the amount of fossil fuel subsidies to large companies. However, the government has applied austerity measures that are a burden to citizens.”

Paving the Way for the Private Sector?

Argentina increasingly pushes for privatisation, in particular since the adoption of a PPP law in 2016 Argentina has been scaling upPublic-Private Partnerships (PPPs) in infrastructure. In the meantime, the country has developed a major pipeline of PPP projects, including in health and education, for instance the construction of six hospitals. Furthermore, Argentina aims to further develop infrastructure as an asset class as part of its G20 agenda.

Austerity cuts for public works are being implemented in parallel with an increased push for Public-Private Partnerships (PPPs) in infrastructure. Confronted with shrinking fiscal space a government might well turn to PPPs, because – using this model – infrastructure projects can be kept off-balance sheet, hiding the true cost of the project. Civil society organisations in Argentina such as FARN have expressed widely held concerns about PPPs,as shrinking public spending reinforces ‘existing bias’ in the government towards private investment and PPPs in particular.  “We are concerned that the pressure of shrinking public spending ends up reinforcing the already existing bias of this government towards private investment, and the new regime of PPPs,” said FARN.

Social window dressing

While the IMF programme recognises that there will be social repercussions associated with austerity, it does so through a narrow fiscal lens. Targeted social programmes are supposed to protect the vulnerable from the effects of adjustment. However, in practice, targeted programmes have often failed to  reach people in need.

What is more, Argentinean CSOs and trade unions have labelled the level of social safeguards in the IMF- programme “a joke” for those that stand to lose their jobs, salaries and pension entitlements. They calculated that the level of social spending under the programme for the remaining six months of 2018 would amount to $6 per person for the 13 million poor in Argentina. In an environment of generalised spikes in food prices and increasing numbers suffering economic hardship, these safeguards are unlikely to attenuate the consequences of austerity.

How To Deal with Argentina?

Over the years the IMF’s macro-economic prescriptions attached to loans remained broadly the same: the magic potion for economic crisis remains austerity based on the promise of restoring “market confidence”. This threatens to further dampen economic activity and constrains the government’s ability to provide essential services. What is more, the current IMF programme fails to tackle the crucial underlying issue, namely the desperate need to restructure Argentina’s debt in sustainable and transparent way.

Instead of locking countries into a perpetual cycle of austerity programmes – an austerity trap- the focus should be on establishing an international debt workout mechanism. The IMF, on the other hand, should stick to its mandate and assist countries’ short-term balance of payment problems. This should not require long-term structural reforms and should leave fiscal and monetary decisions in the hands of democratic decision-makers.

Without these changes, the same prescriptions will continue to be doled out time and time again to treat the exact same problem.

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  1. JTMcPhee

    “Thanks for the memories…” Will there be a Colour Revolution to nail down the global gains in the Big A? Maybe not needed, but then the bits of the ruling forces in the Empire that bring these things about, just keep doing the same thing over and over, because they can and because it’s what they know how to do and have the “programs” for. Plus, good paying middle class jobs, a steady career path, and a Golden Handshake or great pension at the end of one’s years of ‘service!” What’s not to love?

    At least their “interventions” don’t meet the Einsteinian test of insanity, because they do not expect and do not want a different outcome from the repetitions…

  2. Synoia

    The diagnosis is incorrect.

    The consequence of not managing local manufacture, foreign trade and capital flows is the Argentinian Problem.

    On the planed Government Deficit + Private sector surplus = 0. Under these circumstances a Country’s Government either has to manage:

    Imports – Through local manufacture and Import Substitution
    Exports – What does the country have to export?


    Become a Vassal state by joining a large block of states.

    Countries which run large surpluses, or control a reserve currency, are predatory colonial powers.

    The concept of “Free Trade” and “Free Capital Flows” is nonsense when performed inside a system with no mechanism to recycle large trade surpluses.

    The issue of reserve currencies is resolved by multi currency settlement system, but that would not suit the issuing reserve country’s desire for global control.

    1. Alex morfesis

      Argentina needs to slap on the bernaze sauce thicker… The “globaloney” neo-feudal system does not work well for countries with long travel lead times and costs due to finding themselves on the edge of the world… Greece, Ireland, Portugal… All on the edge of the Eurozone…

      Argentina needs a shipping company industry… It is a groundhog day economy that should have blown past a trillion dollars in GDP long ago but seems to have a Chicago/second city we are not good enough wall it seems to constantly hit…

      200 billion in debts for a nation of 40 million people…how exactly is that a problem?

      Debts of 5 grand per person and the world flips the bird at the financially irresponsible Argentina ?

      Running fast today and having dated an Argentinian woman way back when for a while might be fogging up my synapses…

      Hopefully someone can correct my math here and can point out my eyes keep missing one or two zeros…

  3. ChrisAtRU

    The year is 2018. The fact that the (so called) leaders of the global economic order are still advocating that it is necessary, even beneficial, for any country to go into foreign debt in order to acquire the resources it needs for life and growth is beyond ridiculous and criminal. Here’s my prediction: it will never end; unless you consider a nation having to sell its natural resources and other assets to private interests a sign of “progress” and a worthwhile “solution”.


    1. JTMcPhee

      “It” will very definitely end, of course, maybe with a nuclear bang but pretty certainly with a mostly-dead-biosphere whimper.

      And all the bad actors that have brought and are bringing us mopes to that point will escape, either to bunkers or into “Apres moi le deluge” comfortable deaths, consequence-free…

  4. Sound of the Suburbs

    The IMF predicted Greek GDP would have recovered by 2015 with austerity.
    By 2015 it was down 27% and still falling.

    The money supply ≈ public debt + private debt

    The “private debt” component was going down with deleveraging from a debt fuelled boom. The Troika then wrecked the Greek economy by cutting the “public debt” component and pushed the economy into debt deflation.

    Richard Koo had to explain it to the IMF.

    They actually now understand the economics of why austerity doesn’t work, but they still keep doing it.

    What is their real agenda?

  5. Scott1

    I read in an article about a week ago here of who was getting all the money and stashing it outside of the country. Criminal or con or free rider? The IMF wants you to get rich and run whatever country you have power in into the ground.
    Privatization is enabled by Aggressive Economic Warfare.
    When starvation is about to set in and famine a real threat, well give ’em a box of bread crumbs.
    Dancing with the Rats. Rat Captain at the Bridge. Head straight at that iceberg there.
    Fire up the chopper.

  6. john c. halasz

    Not only did Macri pay off the hedge fund pirates, but among his brilliant ideas, he removed the requirement that Argentinian exporters convert their FX earnings back into domestic currency, thus automatically reducing FX reserves. When you read in the financial press that “foreign investors” are fleeing, you should be aware that many of those “foreign investors” are really domestic oligarchs, who will smuggle their wealth and earnings abroad into U.S.$ when the currency is relatively strong and “flee” when the inevitable CA/currency crisis hits, which has been a regularity in Argentinian history, only to return when they can buy up local assets on the cheap, and thereby consolidate their control over the domestic economy. And of course, the IMF serves to bail-out “foreign” investors scot-free, while imposing “structural adjustment” programs that further reduce wages and privatize public assets and programs. It’s an old and nasty game in Argentina and elsewhere; it’s called “capitalism”. Policy choices are always also political choices and don’t result from any entirely neutral economic “logic”.

  7. RBHoughton

    The creation of this enormous ‘loan’ is intended to ensnare Argentinians in the USD for as long as that currency can endure. There are still staff in the central bank with no concern for Argentina’s best interests. The loan will partly off-set the loss of contributors to USD in Asia. The likely effect elsewhere on the planet will be to stimulate barter like the Sri Lankan deal of tea for oil imo.

    There is an answer to financial problems but its not the IMF or the Central Banking system of control – Richard Werner has commended community banks as the way ahead. They will serve each major metropolis, issuing their own paper for local exchange and development. Financial predation will end and happiness will increase.

  8. Mickey Hickey

    Cristina Kirchner understood Argentina.She understood that Argentina which has everything that any country would need was particularly prone to bingeing on credit. When Macri made a deal with the US vulture funds it opened up the gates to a flood of loans from organizations that were deterred by Kirchner’s resolve not to compensate irresponsible lenders. Macri’s message was crystal clear, Argentinian production will henceforth be at the disposal of irresponsible lenders. The IMF was and is the aider and abettor clearly on the side of the lenders with no haircut clauses on the lenders. An abrupt change of Gov’t resulting from millions banging pans in the streets is now the only solution.

  9. Rates

    The IMF was founded in 1944. Argentina starting in 1930s already took a turn for the worse in terms of everything. Blaming things on the IMF is not productive.

    1. Yves Smith Post author

      Straw-manning is a violation of our written site Policies. In addition, you failed to refute what the article actually said. Normally I’d bother explaining how but your drive-by comment isn’t worth the effort.

      Better trolls, please.

      1. Synoia

        True. In 1939/1940 my Father build the new buildings for the Bank of England somewhere in Wales, for its war time offices. He hired people who had not worked in 10 to 15 years.

        The UK economy was badly deflated by the UK re-instituting the Gold Standard after WW !, and there were no roaring twenties in the UK.

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