The IMF has learned nothing from the Greek crisis
The IMF has just published a new review of the Argentine economy. It’s a dark read. Argentina is in trouble: Economic conditions have deteriorated significantly since the IMF’s last review in June 2018. But the review also reveals that the IMF could be in even more trouble. He is repeating the same mistakes he made during the Greek crisis, but with a much larger amount of money at stake.
Argentina have been struggling all year. A drought has severely reduced agricultural production, widening the current account deficit and triggering a mild recession. Simultaneously, rising Fed interest rates and a booming US economy have pushed the US dollar higher, making it increasingly costly for Argentina to secure the dollars needed to pay interest on its massive debt. denominated in dollars. The central bank printed money to finance the growing government deficit, but it helped fuel inflation that is now over 40%.
In June, the IMF agreed to a stand-by credit agreement of $ 50 billion with Argentina, the largest in the history of the Fund. $ 15 billion would be drawn immediately and the remainder would be made available as needed over the next three years. Half of the $ 15 billion would go to government budget support.
But it soon became clear that, however huge this funding deal was, it would be far from enough. In September, as the peso collapsed and Argentina faced a default, the IMF hastily agreed speed up the credit agreement, so that the Argentine government can immediately draw an additional $ 13.4 billion (a total of $ 28.4 billion). An additional $ 22.8 billion would be taken in 2019 and $ 5.9 billion in 2020-2021.
It is no longer a “fallback” arrangement. This is a full funding agreement. Argentina has now become dependent on IMF funding – and the IMF has pledged to lend by far the largest amount of money in its history.
The newly published review is the first assessment of progress made under the Standby Agreement. And it shows that Argentina’s economy – and its finances – are now far worse than the IMF’s most pessimistic forecast at the time the deal was struck:
The last time we saw such a deterioration immediately after the launch of an IMF program was in Greece in 2012. Of course, everyone knew that the fiscal measures Greece had accepted could only make matters worse. Everyone, that is to say except the IMF, which continued to predict that growth would return overnight even as the Greek economy slipped into the deepest and longest depression in peacetime from any advanced country since the 1930s. In 2013, IMF economists admitted that the Fund had gone wrong in Greece. And now the IMF is say loud that debt relief is needed in Greece, much to the chagrin of EU creditors.
But is Argentina’s unexpected deterioration really due to the IMF’s program, or is it due to other factors? IMF directors should pray that the program is not the cause of the deepening recession in Argentina. The reputation of the IMF in Argentina is toxic. In 2001, an overly harsh IMF adjustment program failed ignominiously, leading to a disorderly default and a three-year depression in which the Argentine economy contracted by 28%. Argentines have not forgotten the difficulties of that time: the IMF remains extremely unpopular and President Macri took a considerable political risk by approaching the IMF.
To its credit, the IMF has tried to avoid making some of the mistakes it made in 2001: the fiscal consolidation program includes measures to protect the poor, and there are even improvements in social benefits, in particular childcare allowances to increase women’s participation in the labor market. But it is still a fiscal consolidation program aimed at closing the primary deficit (currently 2.7% of GDP) by 2019 and generating annual primary surpluses of around 1% of GDP at from 2020. There are budget cuts and tax increases at all levels. In an economy that is already in a considerably deeper recession than the IMF predicted four months ago, this is sure to have contractionary effects unless it is offset by monetary expansion.
So, is there going to be monetary expansion? After all, Argentina is not like Greece. It issues its own currency, so it can just print more.
Not far from here. To lower inflation, the IMF specifies that the monetary base must be fixed, and interest rates must be maintained at their current level of more than 60%, or even higher if necessary: he blithely cites two examples of programs. who have “successfully” used fixed money base plans with interest rates above 100%. The consequences of this for businesses, households and the economy as a whole are not worth considering.
The exchange rate will be allowed to float, which in a less indebted country might provide some relief from the depreciation of the currency, but in Argentina default is even more likely. The central bank may intervene in foreign exchange markets to cushion large fluctuations in exchange rates, but if it sells US dollar reserves to support the exchange rate, the pesos it purchases must be permanently withdrawn from circulation. This is all on top of a severe monetary contraction, not an expansion.
Thus, the IMF prescribes a concomitant fiscal and monetary contraction, for an economy already in recession and with unemployment above 9% and rising. I am sure that the men and women who will lose their jobs, and those who will not be able to find enough paying jobs to support their families, will be really impressed by the IMF child care allowances. Not.
This brings me sharply to the real problem with the IMF program. It shouldn’t exist.
The fundamental problem that the IMF posed to Greece was the loan to an insolvent country. Severe adjustment programs do not make unsustainable debt sustainable. They are simply creating misery for the people while increasing the debt burden. The IMF should not have lent to Greece at all. He should have faced Greece’s creditors and insisted on orderly debt restructuring from the start.
The IMF’s debt sustainability analysis for Argentina indicates that its dollar-denominated debt is “sustainable, but not with a high probability,” which is a convoluted way of saying that it is not sustainable in the future. a realistic scenario. So the IMF once again lends an insane amount of money to an insolvent country and tries to make its debt sustainable with a harsh pro-cyclical adjustment program. And furthermore, just like it did with Greece, it justifies its decision to lend by producing forecasts based on wildly optimistic assumptions:
Federal government debt is expected to reach 81% in 2018, but start declining from 2019. The peak debt-to-GDP ratio in 2018 is 16 percentage points of GDP higher than forecast when the program was approved, in due to the depreciation higher than expected. and a weaker growth projection. However, under the new staff baseline scenario, which forecasts a rebound in market confidence and faster fiscal consolidation, debt is expected to fall slightly below 60 percent of GDP by 2023.
The “new baseline” for staff is as follows:
Investment will apparently come back in force in 2020, despite ongoing fiscal consolidation and a monetary desert. And the REER will recover a large part of what it lost this year (it has already fallen a little more than what this graph shows). It is never explained why either of these situations should occur, except in vague references to “trust”. We know all about the “trust fairy”, don’t we? She is a myth.
The IMF admits that its baseline scenario is extremely risky:
This trajectory involves significant downside risks, in particular economic and financial conditions which do not improve as expected in the baseline scenario; the structurally high share of debt denominated in foreign currencies; budgetary and external financing needs; and potential contingent liabilities.
The Greek catastrophe has taught us that when it comes to IMF forecasts, risks too often become realities. The risks to the baseline scenario make it very likely that this program will fail.
Paradoxically, one of the factors that makes it susceptible to failure is the floating exchange rate. Currency depreciation helps restore competitiveness – Argentina’s trade balance is already again in surplus – but it makes debt denominated in foreign currencies even less affordable. This program aims above all to make the debt sustainable and is based on a substantial appreciation of the real exchange rate. But it is not in Argentina’s economic interest for the exchange rate to rise so much. It is also not likely if current global trends continue.
In addition, the accompanying fiscal and monetary tightening is likely to deepen and prolong the recession in Argentina, rather than end it by 2020, as the staff benchmark project. It would also cause the peso to depreciate further. The IMF’s debt sustainability analysis warns that debt-to-GDP would increase significantly if the peso were to depreciate further or if growth were to disappoint.
If the program fails, Argentina could be forced to default on some or all of its dollar-denominated debt, potentially including its IMF loans. But Argentina’s extended deal is the most important and risky the IMF has ever agreed to. The Fund cannot afford to default.
The IMF knows better than to get into such a mess. This is what he said on his own blog in February 2017:
In some circumstances, however, the level of government debt is so high that it is “unsustainable”; that is, when the expected debt service exceeds the capacity of the member country to repay it, even taking into account both a strong adjustment program and significant financial support from the IMF. Under these circumstances, it is not possible, neither politically nor economically, for the problem to be solved by a further tightening of the belt. Any assessment of debt sustainability must be underpinned by realistic, rather than heroic, assumptions about future growth prospects, taking into account that economies have often taken longer to recover from crises than initially expected. .
Argentina in June 2018 may not have met those criteria, but it’s hard to see that is not the case today. He needs debt restructuring, not more loans. The IMF must rethink before it is too late.