RIO DE JANEIRO, BRAZIL – Argentina’s Economy Minister Martín Guzmán will be in Washington early next week to attend the International Monetary Fund (IMF) annual meeting and the G20 ministers’ summit.
In addition, along with the Argentine representative to the Fund Sergio Chodos, he will meet with the weakened managing director Kristalina Georgieva and with Western Hemisphere Department negotiators Julie Kozack and Luis Cubeddu. A few hours in New York for talks with Wall Street investors is not ruled out.
Yesterday, the Minister publicly supported the Bulgarian official at the XV United Nations Conference on Trade and Development (UNCTAD), assuring that “we took positive steps under her leadership.”
Meanwhile, in the U.S. capital and in Manhattan, caution has been used when referring to the Argentine situation, although quietly there are fears that the worst forecasts will materialize. Words that had long been out of the vocabulary – such as an extremely accelerated inflation and the political risk with respect to Alberto Fernández’s government – were again mentioned in external circles watching the country’s difficult context.
In this respect, yesterday the World Bank’s chief economist for the region William Maloney was forced to pause and choose an elegant rhetorical way out when asked at a press conference if the country may face the risk of hyperinflation.
“Inflation is close to 50%, but the government still has some tools to prevent the crisis from deepening, such as reaching an agreement with the IMF and clarifying expectations; however, we are talking about the short term and once there is more stability, the country must address its medium-term structural problems because it has failed to grow for almost the last decade,” Maloney pointed out.
From New York, Mogador Capital partner Guillermo Mondino said that the “overall scenario is one of uncertainty. No one knows what is going to happen in the coming months and everyone is waiting and watching. No one dares to say that Argentina is falling apart, but no one is ready to say that in two months there will be an agreement with the Fund, that it may have an orderly economic program, that the government is aligned and that society tolerates it. For now, Argentina is pure uncertainty.”
Another executive, who chose to speak anonymously, wondered aloud: “Who is the Minister who will negotiate the program? Which Parliament will vote on the program? Who will sit on the IMF’s side to come up with a program? What real margin is there for an inevitable orderly adjustment after the elections? What happens if an agreement is not reached by next March 31?,” when the grace period granted by the Paris Club expires.
In this respect, former IMF Director for Latin America Claudio Loser said that “Georgieva is very interested in closing the chapter on Argentina because it is the organization’s largest debtor and she would be willing to reach a less strict agreement. But as the investigation into her irregularities at the World Bank has advanced, her ability to influence the G7 directors has been greatly weakened, although I do not know if this means that she will resign.”
From Washington, he cautioned: “Her credibility is being carefully investigated and I think that if doubts remain, they will pressure her to resign.” This does not mean that “there may not be an agreement with Argentina; there may be an agreement, but not longer than the current 10-year term, although they may lower the interest rate for the country.”
According to former director for South America of Barack Obama’s National Security Council and Woodrow Wilson Center’s Latin America program director Benjamin Gedan, “the PASO results were quite encouraging for investors abroad who prefer the opposition’s pro-market policies. Horacio Rodriguez Larreta is seen as a pragmatic and reasonable man who would improve the investment climate. Meanwhile, divisions within the coalition, and in Congress, are making a dramatic shift to more statist policies over the next two years less likely.”
However, he clarified that “a paralyzed government is a concern in a country in such fragile conditions as Argentina; prior to the PASO, it was assumed that there would be progress in the negotiations with the IMF after the November elections. Now, it seems unlikely. The Minister of Finance came out of the PASO very weakened and the president, with his sights set on the 2023 elections, will not be willing to accept the minimum conditions for a new agreement with the IMF.”
And although he considered that “neither the government nor the IMF wants conflict, as there is always the possibility of a new insubstantial program, such an agreement would not create much confidence in the country’s course nor would it reopen access to the capital markets.”
Meanwhile, veteran Wall Street executive Arturo Porzecanski noted that there are three scenarios to consider regarding Guzman’s trip to Washington:
– Scenario One: “Early next year, the government decides to change course and adopts an emergency economic stabilization and structural reform plan that not only passes IMF scrutiny, but also attracts the support of at least some opposition deputies and senators. Equally important, the stabilization plan induces investor confidence and improves the government’s access to voluntary capital markets, allowing it to reduce reliance on central bank financing for any remaining fiscal borrowing needs. This plan strengthens the country’s economic recovery, curbs inflation and supports Argentina’s currency.”
– Second scenario: “Argentina and the Fund remain estranged on the terms and conditions of a long agreement because there is no political backing for the kind of orthodox economic policies that would be seen as a national surrender by key supporters of Peronism. The relationship falls apart and the Fernández government defaults on its payments to the IMF. Undoubtedly, this rupture would be very problematic for both parties. Several countries have defaulted on payments to the IMF in past decades, but especially in the 1980s and 1990s, for short periods and for low amounts. However, a default, let alone a protracted one, by Argentina on the largest Fund loan in history would be a huge embarrassment for the institution.”
“The consequences of a default scenario for Argentina could be dire. News that Argentina has failed to agree on a sensible economic program with the IMF, and is set to default on its most important foreign creditor, could trigger a stampede of bank deposits and a massive run on the Argentine peso, triggering a hyperinflationary spiral, a financial crisis and political instability.”
-Third scenario: “The government offers the IMF only modest fiscal and monetary adjustments and timid structural reforms, backed by a thinly veiled threat to walk away and default if its offer is rejected, and IMF management and its major shareholders decide to go ahead and approve a new loan. This scenario, of a ‘kinder and gentler’ but far less promising IMF stabilization and reform program, has two advantages.”
“First, it keeps Argentina committed to the IMF and honoring its debts to it, establishing a mechanism for frequent consultations and negotiated course corrections as circumstances dictate, so that the program could become more ambitious and successful over time. Second, a low conditionality loan could buy the Fund 2 years until Argentina’s next national elections are held in October 2023, after which a new administration could take office with a more responsible and market-friendly agenda.”
Porzecanski conceded that “we already got a preview of what could happen to the IMF with the Paris Club, whose final payment was postponed until next March; not even Macri paid the Paris Club! It would be a terrible shame if there is no agreement, while Georgieva is also faltering.”
And he pointed out that in 2002 the country was also heavily indebted to the IMF and the organization did not agree with the economic plan, only agreeing to patches, because the country threatened not to pay. “Now there is less freedom in the IMF for these patches, by modifying the rules to make agreements, especially for agreements to refinance sums that are much higher, more than 10 times, than its quota,” said the American University professor.
“If confidence were to drop further, what is left is to find out what spark may ignite inflation. One of them would be to announce a non-payment to the IMF,” he pointed out. In any case, with or without an agreement with the IMF, “there will be a devaluation and more inflation” after the elections.
“This is the price of not having agreed with the IMF last year, as soon as the agreement with the bondholders was closed. At that time, the cost for the government would have been much lower; a frank recovery of Argentina’s financial assets would have been achieved, in a context in which the country’s prices, the dollar and tariffs, were not yet so far behind,” he said with some regret, for what was not and could have been.
Can the experts be wrong about a collision they see as inevitable? In the summer of 2002, when convertibility was already dead, many foreign officials and analysts predicted that Argentina would not be able to dodge another hyperinflation event, but they were wrong because the government implemented a strong fiscal and monetary adjustment that allowed it – along with the subsequent strong commodity cycle – to enjoy a solid rebound in the Néstor Kirchner years.
If that time the right decision was taken after the 2001 crisis for fear of the abyss, now it could be taken earlier and thus prevent a repetition of the consequences of a catastrophe such as the one society suffered 2 decades ago.