The country is once again in deep crisis mode, with decades high inflation, a crumbling currency and no foreign currency reserves. It is shackled to the IMF but now faces the possibility of being able to tap alternative sources of finance.
What a difference a day can make. On Wednesday afternoon, it seemed that Argentina would not be admitted to the BRICS grouping following months of speculation that it was a virtual shove in. Mercopress even reported that Argentina’s President Alberto Fernández had called off his scheduled trip to Johannesburg to attend the summit after learning that his country would not be joining the BRICS during this round of admissions.
By Wednesday evening, news outlets around the world were reporting that Argentina was no longer on the list. One of the key participants of the Argentine government’s visit to the IMF’s HQ in Washington this week said “the Fund and the BRICS are two very different families,” suggesting a clash of interests between one group and the other. Even as late as Wednesday night, Reuters was reporting that divisions persisted among BRICS members on how much to expand the bloc’s membership and how quickly:
An agreement had been meant to be adopted following a plenary session earlier on Wednesday, but the source said it had been delayed after Indian Prime Minister Narendra Modi introduced new admission criteria.
Asked about the delay, an Indian official aware of the details of the talks told Reuters late on Wednesday that the discussion were continuing.
“Yesterday … India pushed for consensus on criteria as well as the issue of (candidate) names. There was a broad understanding,” he said.
By Thursday morning, that “broad understanding” had given way to full, unanimous agreement. For the first time since late 2010, the BRICS’ doors was open to new members, those members being Saudi Arabia, the United Arab Emirates, Iran, Egypt, Ethiopia and Argentina. Four countries from the Middle East, a region that until now the US and Western Europe have collectively dominated for over a century and another from Africa (though Egypt is also, of course, an African country). Look at a map and you will see what the Rev Kev noted in comments yesterday:
[T]he Persian Gulf is now flanked on both sides by BRICS members as is the Suez Canal. And Ethiopia seems to be in a pretty strategic place too for that matter.
Half a World Away
The other new member, Argentina, is half a world away. And for the umpteenth time, it is in the grip of a very serious financial crisis.
Though much anticipated, the enlargement of the BRICS will have myriad potentially game-changing ramifications. The fact that three of the six countries (Saudi Arabia, Iran and the United Arab Emirates) are among the world’s eight biggest oil producers while another, Argentina, could (and should) become a major natural gas exporter in the coming years is a sobering reminder of the enduring importance of fossil fuels.
The BRICS alliance now includes two of the world’s three preeminent oil producers, Saudi Arabia (#2) and Russia (#3), which will probably further erode the influence of the US (#1) over global energy markets in the future. Also hugely significant as well as welcome is the fact that Iran and Saudi Arabia, two countries whose bitter rivalry has played an important part in destabilising the Middle East in recent decades, appear to have put their differences aside to join the BRICS. Lest we forget, it was Beijing that brokered the initial reconciliation between the two regional powers.
There are many other wide ranging ramifications of the BRICS enlargement (some of which were discussed in this cross-posted piece by Andrew Korybko), but for the sake of this article, I am only interested in exploring one: the possibility that Argentina, once again in deep crisis mode, could soon become the first recipient of a full-scale BRICS bailout.
The country is grappling with inflation of over 100% as well as an acute dollar shortage after a historic drought caused total agricultural losses of €17.6 billion, or 3% of Argentine GDP. In fact, it would have probably already defaulted on its $44 billion IMF bailout if it hadn’t been for the $18.2 billion currency swap arrangement Argentina’s government signed with Beijing back in April, which enabled it to continue servicing the debt.
In recent weeks, Argentina, a country wearily accustomed to upheaval, has been rocked by multiple political and economic shocks. First came the news that Javier Milei, a fake libertarian populist with close ties to Koch-sponsored think tanks as well as one of Argentina’s richest monopolists, had come out on top of the recent primary elections, largely on the back of widespread disaffection with the two mainstream parties. Milei is promising to “burn down” the central bank, put the Argentine peso out of its misery and fully replace it with the US dollar, privatise all assets still in the public domain, endorse sanctions on Russia and realign Argentina’s foreign and economic policies with the US and Israel.
Shortly after the elections, the outgoing Alberto Fernández government devalued the Argentine peso by 18% and raised the benchmark interest rate by 21 percentage points to 118%, which will inevitable push Argentina’s three-digit inflation rate (113 % at last count) even closer to hyper inflationary levels. Reuters described the government’s two measures as “politically costly moves amid a presidential campaign.” This is especially true given that the man who executed them, Economy Minister Sergio Massa, is the governing Peronist coalition’s candidate in the presidential election.
Eerie Echoes of 2001
So it has transpired. The spectre of even faster rising prices, especially of food and other essentials, has allegedly triggered a wave of looting in cities such as Mendoza, Cordoba and Nequen that bear eerie echoes of the chaos that gripped Argentina during the economic crisis of 2001-02. I use the word “allegedly” because some government figures deny that the looting is happening, insisting that the images are fake and are being generated by opposition forces intent on further destabilising the country. From El País on Wednesday:
The governor of the province of Buenos Aires, the Peronist Axel Kicillof, has pointed to “an organised campaign” that began at the weekend spreading “false denunciations” and “fake images”… The presidential spokesperson, Gabriela Cerruti, went a step further. “This is an operation carried out by the people of Javier Milei, whose objective is to destabilise, generate uncertainty and undermine democracy,” she said in a live broadcast on Tuesday night.
Argentina’s latest devaluation of its currency and hike in interest rates is seen as positive by the IMF and Wall Street. As Mexico’s El Financiero reported, Bank of America strategists called the devaluation “broadly positive” given the currency was “highly overvalued”, and said it was good that the current government was bearing the burden of some of the necessary macroeconomic adjustment. “It should be favourable to the IMF deal pending IMF Board approval for a $7.5 billion loan disbursement,” they wrote.
And so it proved to be. On Wednesday, the Fund approved the disbursement of $7.5 billion for Argentina after completing the fifth and sixth reviews of their $44 billion program, which is essentially a 2020 restructuring of the $57 billion bailout requested by Macri in 2018.
That Massa was in Washington negotiating another instalment in Argentina’s IMF loan at the same time that the five original BRICS members were debating whether to admit Argentina as a new member speaks volumes about Argentina’s current place in the world. It is shackled to the IMF, an institution with which it has a long, painful relationship and to whom it still owes $46 billion, making it the IMF’s largest debtor. But it also faces the possibility, for now undefined, of being able to tap a new source of funding, from the BRICS’ New Development Bank.
Brazil Already on Board
In June, Massa and Central Bank Governor Miguel Pesce visited Beijing, where they signed a cooperation plan to jointly promote the construction of the Belt and Road Initiative. Massa was also told by New Development Bank President Dilma Rousseff, a key ally to current Brazilian President Luiz Inácio Lula da Silva, that the road was clear for Argentina to join the entity and thus be able to obtain financial backing in the near future.
Clearly, Brazil’s government is already on board with such a plan. President Lula appears to have played an instrumental role in securing Argentina’s BRICS membership. In a speech on Wednesday he emphasised both the importance of Argentina’s membership as well as the dark role played by the IMF in subjugating many of the world’s struggling economies:
When the financial crisis hit in 2008, the IMF was nowhere to be seen. It even seemed that it did not exist. Now, when there’s a crisis in any small country, whether in Africa or Latin America, the IMF makes forecasts, it talks, it meddles, when in reality it should help but it doesn’t. The money it puts up is like a strait jacket. The country is shackled and cannot extricate itself.
Look at the situation in Argentina, how difficult it is due to a loan that was awarded on the basis of the IMF’s own political interests — the €44 billion lent to Macri during the 2018 elections. There are those who say in Argentina that the money was lent so that Macri would win the elections. He didn’t win, Alberto Fernández did, and Alberto ended up with the debt that he now has to pay off.
And now we know Argentina’s predicament. It had a very severe drought resulting in the loss of 25% of its agriculture. And I, for one, support our Argentine brothers and sisters’ application to join the BRICS. We are going to see what comes out of the meeting. And I support it, whether it’s in a month, or two months’ time. And I support it. It is very important that Argentina is in the BRICS. Brazil cannot carry out an industrial development policy without counting on Argentina, which is a country that must grow together with Brazil.
Brazil’s government has been sounding the alarm about the risk of another Argentine debt crisis for some months now. In late May, the finance minister Fernando Haddad attended a meeting of the New Development Bank to lobby for alternative sources of funding for Argentina. According to Bloomberg, an anonymous official described Argentina as “a regional partner that’s too big to collapse, but not relevant enough on the global stage to convince the IMF or even China to mobilise the additional resources the country urgently needs.”
One option proposed by Haddad involved one of the five BRICS member nations making a capital contribution to the NDB, allowing part of these funds to be used for specific development projects for countries outside the bloc. This would go some way to alleviating the financial pressure on the reserves of the Central Bank of Argentina. For the moment, the outcome of Haddad’s lobbying is not clear. Crucially, Brazil is just one of five — and from Jan 1 next year, 11 (or perhaps 10) — BRICS members, and any disbursement of funds would require their full approval.
The latest disbursement of IMF funds buys Argentina a little extra time. But much of the money is being used to pay back the Fund for the original 2018 bailout program. Part of it will also be used to pay back some of the latest $1.7 billion swap payment from China, which enabled Argentina to continue servicing its IMF debt in the first place. Before the latest disbursement from the IMF, Argentina’s government had managed to secure a $775 million loan with Qatar as well as a $1 billion bridge loan from regional development bank CAF.
It is unlikely to receive any financial assistance from the BRICS’ multilateral lenders for some time to come, assuming it ever does, for two reasons: first, the new BRICS members do not officially join the club until Jan 1, 2024; and second: two of the three candidates in Argentina’s upcoming presidential election, on Oct 22, Javier Milei and Particia Bullrich, have both rejected the Fernández government’s decision to join the BRICS in the first place. Milei, the front-runner, said his government would only have relations with nations that respect liberty, peace, democracy and free trade while Bullrich said she would pull out of the alliance altogether.
If the first round of elections does not produce an outright winner, which is quite likely given this is a closely contested three-horse race, a second round will take place some time in mid to late November. In other words, Argentina’s BRICS membership may not be assured for another three months. And if Milei or Bullrich win, it may never happen at all. Even if Massa wins, he will
But since the announcement of Argentina’s BRICS membership, the Sergio Massa campaign potentially has an ace up its sleeves: it can say that if Massa wins, his government may become the first recipient of a BRICS bailout. In such an event, Argentina could significantly reduce or, in the case of a bailout covering the full value of the IMF loan, even eliminate its dependence on the IMF, just as happened in 2006.
It is probably safe to assume that the strings attached to a prospective BRICS loan would not be as onerous as those attached to the IMF loan. For China, Russia and the other BRICS members, issuing such a loan would be a relatively low-risk way of further eroding US influence over the global economy. After all, the IMF and World Bank are two of the fundamental pillars of the neoliberal world order that has prevailed since the 1970s, enabling the US and its allies in Western Europe to continue plundering the resources of the former colonised countries of Africa, Latin America and Asia without having to use standing armies. They have also hugely enriched the financiers of Wall Street and the City of London.
Bailing out Argentina would be a relatively low-risk gambit for the BRICS members. While Argentina may have a long, storied history of defaulting on its debts, it also has two hugely valuable assets that it can put up as collateral: its huge natural gas reserves in Vaca Muerta, which are only just coming on line, and its vast, unexploited lithium deposits in the north, both of which are already of keen interest to Beijing. Plus, Argentina is of vital strategic interest to the BRICS given it is the second largest economy in South America, a resource-rich region that is already trading more with China than anywhere else, but which is in the cross-hairs of the US Southern Command for precisely that reason.
Such a move would also send a clear message to many of the world’s struggling economies that there is a new lender in town — and what’s more, with the combined financial backing of not just China, Russia, India, Brazil and South Africa but also all the new members, including the financial powerhouse that is Saudi Arabia. Right now, the number of struggling economies continues to rise due to the dual impact of spiralling inflation and the soaring debt servicing costs. According to a recent UN report, developing countries are shouldering a staggering 30% of the $92 trillion global public debt burden. As many as 52 countries — 40% of the developing world — are on the brink of serious debt trouble.
The prospect of the BRICS moving into the multilateral lending arena in a big way has not gone unnoticed by some in the West, according to Reuters. Werner Hoyer, the outgoing head of the European Investment Bank, warned Western governments on Wednesday that they were in danger of losing the confidence of the “Global South”, unless they urgently intensified their own support efforts for poorer countries.