Argentina and the IMF: A Toxic Bond

By Roberto Patiño

“Y aunque no quise el regreso

Siempre se vuelve

Al primer amor”

Back in 1934, the Argentinian songwriter Alfredo Le Pera inadvertently but perfectly characterised the intricate relationship of his national government and the yet-to-be-created International Monetary Fund. By that time, Argentina was slowly recovering from the negative effects of the Great Depression moving in the dark to an uncertain economic (and political) future.

Figureheads like Perón, Menem, and de la Rúa had to take the command of the economic ruddle in the second half of the twentieth century and the beginning of the millennium. Some of them are hated nowadays. Others are rather loved. However, some are now both loved and hated; they are sources of inspiration and prayers, but also of protests and unrest. The exact same statement can be said of the IMF.

The organisation has been an unexpected (and many times unwanted) partner of the porteño country in their development as a nation since 1956. After 64 years, 21 arrangements, and over 30 presidents, Argentina has reluctantly come back to its first love.

Figure 1: Ratio of Argentina’s GDP per capita to developed countries’ GDP per capita, 1885-2003 (Campos, 2014)

In the economic history literature, Argentina is often cited as a counterexample to the claim that countries with high GDP per capita in the past will remain as such in the future. At the beginning of the nineteenth century, Argentina was richer than many Western European countries and almost as rich as the United States. As a comparison, the United States in 1910 would have the same relative GDP per capita to Argentina as the modern-day United States currently has with the likes of Canada, France or the United Kingdom. Right now, however, the United States is more than 3 times richer than Argentina. How did a relatively prosperous nation turn into a country crippled with debt and plagued with recessions? Academics have proposed different answers to this question, but the most robust one has been that of political and institutional stability.

In the 1930s, a series of coup d’etats and episodes of electoral fraud led to the so-called Infamous Decade, which saw hindered growth. Clearly, this drop in growth was also directly affected by a drop in the prices of commodities, a key source of income for the nation, due to the Great War and the Great Depression. This period of turbulence set the grounds for the appearance of probably the most influential politician in the history of the country: Juan Domingo Perón.

Perón: the hero and villain of Argentina

Coming from military origins, Perón introduced populist economic policies like the nationalisation of the Central Bank, the railways, and other sectors. As a consequence, inflation and public spending arrived in Argentina to stay. He focused more in achieving redistribution than in achieving growth. Spending tripled during the time of Perón and inflation went from 20% in 1946 to 40% in 1952.

Figure 2: Argentina Inflation and Real GDP, 1944-1975 (Heymann, 2015).

After 9 years in power, Perón was deposed by a new military coup, and under the new leadership, inflation reached 115%, the highest recorded level by that time. This came as a natural consequence of the populist measures taken by Perón, including trade protectionism, increased government spending, and nationalisation of industries. This is something the new military governments were not able to overturn. The damage had been done; Argentina had left its course of stability and progress, something it hasn’t been able to reverse since. That is when the story of the IMF and Argentina truly began.

Figure 3: Lending arrangement between Argentina and the IMF since 1958 (BBC and the IMF, 2018).

Argentina joined the IMF in 1956, under the presidency (or dictatorship) of Pedro Eugenio Aramburu. On December 19, 1958, considering the grim economic situation, president Arturo Frondozi decided to ask the IMF to request the country’s first loan with that institution. However, as many IMF agreements, this pact came with conditions. The government was forced to take austerity measures which were strongly opposed by the public. After many attempted coups, the military took over the government in 1962.

Jorge Videla: a shift to the right

Following a period of relative stability in the 60s and the early 70s, a new military junta led by Jorge Videla was established in 1976 as a consequence of the economic conditions during the presidency of Isabel Perón, who succeeded her husband in 1974. After the so-called Rodrigazo, when the currency was devalued by 150%, the political power of the Perón had crumbled and Jorge Videla became the new president through a coup d’etat. Inflation was at 500% at the time. Under the direction of the Minister of Economy Martínez de Hoz, the new leadership removed price controls, subsidies, trade barriers and the exchange regime, with the aim of opening up to foreign investment and reducing inflation. Initially, this outcome was somewhat achieved dropping inflation to 125%, but after the 1980 recession and the 1982 horrendous defeat in the Malvinas, the economy was again in trouble. Once again, it was necessary to turn to the IMF.

The amount of the 1984 IMF loan was greater than all prior loans combined. The Austral Plan, as it became known, was the plan set up by the Argentine (now democratic) government and the IMF to tackle the devastating economic situation. However, it was largely unsuccessful, just like the following efforts in 1986 and 1988, mainly driven by low commodities prices and low exports, and the Wall Street Crash of 1987.

1990s and 2000s: the Argentine Great Depression

In the early 90s, under the presidency of Carlos Menem, characterised by significant borrowing and privatisations of public industries, was marked by a 12,000% inflation rate. After receiving additional funds from the IMF, the government decided to peg the austral (the national currency) to the dollar, introduce monetary reform, and encourage free trade.

1998 marked the start of the worst period of economic depression in Argentina, that would last until 2002. In 1999, Fernando de la Rúa was elected president, following the policies that Menem introduced previously. Accumulated debt, financial instability in foreign markets, low prices of commodities, and the unsuitability of the peg system, led to a run of the peso and a subsequent drop of 28% in GDP over three years, pushing 50% of the country’s population to living in poverty.

Figure 4: Peso-Dollar official exchange rate (Rabobank and the World Bank, 2013).

Figure 5: Percentage of the population under poverty line in Buenos Aires, 1974-2006 (Aguirre, 2015).

In 2000 and 2001, the IMF agreed to provide 20 billion SDR to help the recovery of Argentina. It was the largest amount ever given by the fund to Argentina (in SDRs). However, in December 2001, the IMF decided to stop supporting the government with lines of credit since it would not abide by the conditions imposed by them. This was a major blow for the government and the Argentine population, who still resent the Fund for the lack of support during the crisis and the worsening of the government debt. According to a posteriori analysis, the IMF over-estimated the growth prospects and the ability of Argentina to recover. 

Figure 6: History of Lending Commitments (with Argentina)  as of August 31, 2019 (IMF, 2019).

Argentina was able to repay all of its commitments after the crisis elapsed after a period of relative stability during the presidencies of Néstor Kirchner and his wife, Cristina Fernández. However, after new nationalisations (including the social pension system), increased in public spending, and credit controls, the fears of a new recession and a new default began to increase. Inflation reached 26% and public spending reached the figure of 40% as a percentage of the GDP, which encouraged the election of a potential reformer, Mauricio Macri. After a long and troublesome record of economic failures and misdeeds, the Argentine public was looking for something different to the typical Peronista government that they had been used to.

Figure 7: Argentina Public spending as a percentage of the GDP, 1993-2018 (OECD and Ministerio de Hacienda, 2018).

Macri and the Fernández(s): What is happening and what is to come?

When Mauricio Macri, a businessman, was elected to the presidency, the hopes of recovery were certainly high. “President-elect Macri promises to reboot the Argentine economy” was the headline of Reuters back in 2015. Like Menem in the 1990s, and with the risk of rising inflation and increasing monetary pressure, Macri decided to remove capital controls and trade restrictions introduced during the Kirchners governments. However, this was not enough to combat inflation, which was the second in the region after Venezuela. In 2018, the United States Federal Reserve raised interest rates, attracting investors to the US, hitting fiercely developing markets such as Argentina. The peso devalued again and once again, Argentina had to come to terms with its old friend, the IMF. After negotiations with the then-Managing Director Christine Lagard, the Fund decided to give its largest loan in its history: a 57 billion rescue package. However, the market had already lost its faith to the peso and the dreams of change with Macri. Inflation had gone to 53% and unemployment was rising, and politics did not forgive.

Figure 8: Fiscal space and exchange rates in Latin America during Covid-19 (OECD Ecoscope, 2020).

Alberto Fernández and his running mate, the former president Fernández de Krichner, aligned with the Peronist tradition, were elected in 2019, forcing another devaluation of the peso. In 2020, the Covid pandemic hit Argentina harshly: GDP dropped by more than 10%, the currency devalued 15% from January to June, and public debt moved to 90% of GDP. It isn’t all bad news, however, since the new government struck a deal with private creditors in August with aims to restructure its sovereign debt. Now it’s time to settle the payments to the IMF (or even asking for a new loan). The socialist government has suggested so far that they don’t want to ask for a new loan and they don’t want to introduce austerity measures either. Nonetheless, this would represent a difficult decision to make, since the economic situation still looks grim for the country, in light of the current pandemic. The nation looks set for a 22nd settlement with the IMF and Argentina again has to turn to its first love, with a wildered forehead and grey hair. Will the same story play itself out this time? Will the IMF come to the rescue of the Argentine economy, but without taking them out of its vicious cycle? Or will it be different this time?

“Vivir

Con el alma aferrada

A un dulce recuerdo

Que lloro otra vez”

This article was written by: Roberto Patiño, currently a student at the London School of Economics, pursuing BSc Mathematics and Economics