Last week, the International Monetary Fund’s executive board convened “an informal meeting” in anticipation of what Managing Director Christine Lagarde called “the Argentine authorities’ intention to request an exceptional Stand-By Arrangement.” The May 18 gathering to discuss significant financial assistance for the South American country’s economic reforms and to restore market confidence was an unusual step for the Fund, which has gone through its share of complicated rescues.
This atypical meeting didn’t come about because of today’s Argentine case. Instead, it was the result of the country’s historical relations with the IMF.
There are four important reasons why, on paper and without a deeper historical perspective, Argentina’s approach to the IMF wouldn’t seem particularly complicated, even though it is:
First, Lagarde reiterated the widely held view that Argentina’s government, led by President, Mauricio Macri, is “engaged in fundamental and welcome transformation of its economy” and is “conscious of the need to build and maintain social consensus in the pace of calibrating the pace” of reform.
Second, Argentina’s efforts have been complicated by exogenous shocks, including a drought that undermined agricultural output, and tighter global financial conditions caused in part by rising U.S. interest rates, an appreciating dollar and higher oil prices.
Third, as detailed here, the recent bout of “significant financial volatility” demonstrated by a sharp drop in the value of the peso and higher sovereign-risk spreads has been amplified by economic-policy mismanagement steps. The slips include a badly timed increase in the central bank’s inflation target and currency intervention that suggested an insufficient understanding of international market dynamics. These have exposed vulnerabilities due to relatively high debt and twin deficits (government budget and the current account of the balance of payments).
Fourth, corrective steps have already started, including an increase of policy rates to an eye-popping 40 percent and the pursuit of greater fiscal adjustment.
Yet it seems that both Argentina and the IMF don’t regard these conditions as sufficiently compelling to pursue the more traditional route to a financing agreement. Instead, both sides are taking extra care (and steps) to keep key constituencies informed and, hopefully, on board. And for good reasons.
An already complicated historical relationship was taken to its limits before and after Argentina’s sovereign default in December 2001. This highly visible and costly debacle highlighted how the two sides had fallen into an unhealthy interdependency over the years. The relationship ultimately proved irreconcilable, and its demise was followed by a nasty blame game.
Despite repeated warning signs, the IMF continued to support an unsustainable financial configuration in Argentina, including through repeated lending even though its basic conditions of “financial assurances” were not being met.