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There is no longer any doubt. The International Monetary Fund (IMF) is Peronist. The Government accuses the organization of having given a political loan to the government of Mauricio Macri. He said the loan was “intended to support the electoral chances of the incumbent administration.” But that lifesaver, if it existed, It was a lead lifeline.

The IMF demanded that the Macri administration a fiscal adjustment of almost four points of GDP in the course of a year and a half, and imposed an absurdly contractionary monetary policy. On October 7, 2018, once the second agreement with the IMF was signed, I wrote in THE NATION: “It is very likely that the monetary strategy imposed by the IMF will benefit Peronism in the October 2019 elections.” And I added that “it is likely (…) that the new monetary program will extend the recession for several more months.”

Indeed, the fiscal and monetary contraction had a significant impact on activity. To this was added the impossibility, due to the imposition of the agreement, of intervening in the exchange market, which generated anxiety with a high impact on the popularity of the Macrista government as of March 2019. The rest is history.

The understanding with the IMF announced last Friday reaffirms that the organization is Peronist. It imposes on the Government of Alberto Fernández a fiscal adjustment of only 1.3 percentage points of GDP in the two years that remain. The variable must go from 3.2% of GDP in 2021 to 1.9% in 2023. At the same time, They ask the next government to lower the primary result to 0% of GDP in the first two years of its mandate.

Monetary and exchange requirements are also much more light than those carried out when Cambiemos was in charge. They allow the Central Bank to continue financing the Government –although in a much more limited way than in 2020 and 2021 and in a decreasing way–, and enable it to maintain extensive capital controls, although, on the other hand, they apparently require it to have a rate real positive, which would be a first for a Kirchnerist government.

Nor do they impose on this government no structural reform, such as the labor regime or the retirement system. It is not that Macri has been asked for too many reforms either, but at that time it was a stand-by agreement, while it is now an Extended Fund Facility (EFF). Since EFFs have a longer repayment period, they are usually accompanied by demands for structural reforms.

The EFF that the Government aims to sign, according to Economy Minister Martín Guzmán, has a duration of 10 years, with a grace period of 4 and a half years.

“The hard wing of the Government does not believe that the recovery of confidence and the attraction of capital play a role in growth”

That is to say, the next government will not only have to adjust the primary deficit much faster than the current one, but it will also face heavy maturities with the IMF and with the private sector.

When President Alberto Fernández presented the results of the restructuring of the debt in foreign currency with the private sector, he folded the page that had the chart of maturities. In the part that was not seen on television were maturities for US$21,428 million that the next government will have to face. Adjustment, structural reforms and heavy debt maturities, a very difficult cocktail to manage.

Two questions remain. The first is whether the deal will close. And the second is, if it is signed, what would be its consequences. A clarification is worth. What was announced on Friday is an understanding, not an agreement. IMF staff issued a statement shortly after the Argentine officials’ statements. According to the agency, “IMF staff and Argentine authorities have reached understandings on key policies, as part of their ongoing discussions on an IMF-backed program.”

Logic indicates that the Government should finish closing the agreement with the IMF. The stress experienced in the previous weeks, with an uncertainty that is likely to cause permanent damage, is proof that the alternative to agreement is the abyss. Entering into default would imply, in addition to a huge reputational cost, losing access to credits with international organizations such as the World Bank. Monetary policy would be put under tremendous stress, as the Central Bank would have to finance the Government’s deficit, and even issue more in order to pay off part of the nearly $5 trillion in local currency debt due this year, as the market finds it difficult to wants to renew all maturities if there is a default with the IMF. Inflation, in this context, would accelerate sharply.

This is, however, our logic. Cristina Kirchner has another, and it is important to understand it, because it indicates that an agreement is very likely (since it is very light), but not sure. The episode with holdouts in 2014 serves as an example. The default of July 2014 had high costs for the country, although it was totally avoidable, since the country had the capacity to pay. It brought high reputational costs and left the country and its companies without international credit. It also had a huge economic cost. That is, according to our logic it was “the dumbest default in Argentine history”, as the journalist Martín Kanengiser called it in his book with that title.

“A light agreement is much better than a default, but it is hardly the basis for a sustained recovery of the economy”

According to the logic of Cristina Kirchner, faithfully executed by Axel Kicillof, the battle with the “vulture funds” was a battle for sovereignty. Shortly after Argentina went into default, he said: “We want to exercise our rights as a sovereign country.” Words, by the way, very similar to those used by Guzmán in his presentation to the governors at the beginning of January.

More generically, the logic of populism is based on the construction of enemies like, in the case of Cristina Kirchner, the IMF and its “adjustment policies”. Along the same lines, the hard wing of the Government does not believe that the recovery of confidence and the attraction of capital play a role in growth. They subscribe to the financial version of “living with our own.” Therefore, the only thing the Government was looking for was to postpone payments and avoid implementing a fiscal adjustment, since it sees the public sector as the only driver of the economy.

In addition to epic battles for sovereignty, neighborhood quarrels also pushed the country into default in 2014. There was a negotiation between private banks –led by Jorge Brito– and the holdouts, which advanced a lot and would have allowed the conflict to be unblocked. The negotiation fell apart after Kicillof’s statements in New York. Cristina apparently did not want to anoint Brito, close to Sergio Massa, then at odds with her for having challenged her in the 2013 legislative elections, as the savior of the country. This story fully shows the distance between our logic and Cristina’s.

These characteristics of the logic of Kirchnerism and its objectives in the negotiation collide with the objectives of the IMF, which needs to project that the path of the debt will be sustainable and fears that the monetary financing of the deficit will accelerate inflation. It also wants the agreement to have broad political and social support. If the announcements translate into a deal, it is clear that the IMF will have sacrificed the goal of debt sustainability on the altar of political support. This brings us to the pending question.

An agreement light It is much better than a default. But it is hardly the basis for a sustained recovery of the economy, for several reasons. The first is that a high fiscal deficit will not remove the risk of a high monetary issue, since its financing is not guaranteed in the agreement, and it is difficult for the government to obtain much voluntary financing in the local or international market. In addition, with a Leliq stock that is close to $5 trillion, 140% of the monetary base, migrating to a scheme of positive real interest rates without a strong fiscal adjustment suggests the sustainability of the Leliq dynamics, which They grow like a snowball.

With high issuance risk, the exchange rate gap will not fall too much. With a high gap and without a devaluation of the peso in the official market, it is difficult for exports to grow. Without macro or micro measures to improve competitiveness and with a frozen export sector, it is not clear what the sources of economic growth will be. Without growth, there is no sustainable debt.

Beyond these concerns, the main disadvantage of a program light is that He throws almost all the adjustment to the next government. Thus, the market fears a repetition of the events of 2015-2019. A non-Peronist government comes to try to straighten out the economy, but the task is impossible, and Kirchnerism ends up returning to power in 2027. Thank you for so much, comrade Georgieva.


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