IMF Evaluation of its Argentina Program

Shortly before Christmas, and certainly with an intention to not give it too much publicity, the IMF has released its very interesting evaluation of its Argentina program of 2018. I have summarised and commented the document in the Please find an English google translation below. 
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Jürgen Kaiser
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Jürgen Kaiser,
3. January 2022

On 12/22, the IMF published the evaluation report on its program with Argentina approved in 2018 and canceled in 2019. The report highlights many important weaknesses of the failed program, but avoids all questions about consequences with regard to the structures of the fund itself. The opinion of the Argentine government attached to the report raises a few points in this regard.

The program of 2018

In June 2018, the then Argentine government under President Macri agreed with the IMF on a stand-by agreement, which became the largest credit program in IMF history after its extension in October of the same year: 41 billion special drawing rights (SDRs), which corresponds to 57 billion US dollars, it should include. This corresponds to 1277% of the Argentine quota in the IMF. Normally, the maximum borrowing for a country is 185%. Already in August 2019, the program requirements were no longer met after only four out of the planned twelve reviews of the program had taken place. They all came to a positive conclusion - until the termination of the program. The new Peronist government elected in 2019 under President Fernandes terminated the agreement in July 2020, after of the total amount 32 billion SDRs (45 billion billions US$) and today make up the largest line item among Argentina's total debt.

Immediately before Christmas 2021, the IMF published its evaluation report, which sets out the weaknesses of the program and the reasons for its failure from the point of view of the IMF. Together with the IMF report (hereinafter cited as page numbers S or sections pt), an opinion from the current Argentine government (pages listed in Annex IV as GoA) was also published. The two documents - that of the IMF focuses more on the technical, the Argentine rather on the political weaknesses of the program - agree in many ways, but also have differences. The possible and necessary consequences that should arise with regard to (a) the design of future IMF programs and (b) the handling of Argentina's debt to the IMF resulting from the failed program are exciting.

Why was the program not successful?

Centrally, both sides assumed that Argentina had no solvency problem in 2018, but only a liquidity problem. Accordingly, the IMF's funds were originally only intended as "precautionary" that the government did not have to access at all during the course of the program. They should only signal to external investors that Argentina would definitely remain solvent (p.17). However, the emergency occurred very quickly, as the hard currency reserves financed mainly the flight from the national currency Peso under inflationary pressure in the absence of capital restrictions without being able to attract capital inflows from abroad in the hoped-for way. Thus, the character of the program has been changed in fully disbursing (p. 47).

IMF error

From an IMF's point of view (p.15), the fund has been too cautious with formulating conditions in view of the difficult history between the institution and Argentina. Out of consideration for the parliamentary leeway considered to be small by President Macri in the run-up to the 2019 elections and his interest in re-election, too many actually necessary ( austerity) measures have not been integrated into the program. The hope was that after Macri's election victory, these two restrictions could be eliminated and the necessary measures could be taken from 2020.

Admittedly, existing risks were clearly identified in the program itself and in the four reviews. Nevertheless, there were no plans in the event that Argentina's performance deteriorates sustainably. Rather, it was assumed in an almost spooky way that the risks identified in each case would not occur.

The IMF admits that when the failure to achieve goals became more and more visible, it should either have expanded the volume of the program or tied its further commitment to debt restructuring. At no time, despite its enormous size, the program was so extensive that Argentina was not additionally dependent on the funds from the capital market. The evaluation claims that such insistence would have "unplugged the program" (p.19) - without justifying why a rescheduling of liabilities to other creditors would have stopped the program. Instead, the success of the program remained dependent on triggering capital inflows and corresponding growth progress (p.32). These did not occur.

In addition to the false expectations of the positive consequences of the program, the IMF also admits (p.25) that its information on the amount and maturity of Argentine liabilities was not complete, so it was considered too optimistic.

The categorical exclusion of debt restructuring of any kind (reprofiling or restructuring including real decrees, as implemented by Fernandes government in 2020) led to increasingly absurd targets having to be set with regard to fiscal consolidation - up to a total volume of 13.1% for the target debt ratio of 53% and 26.1% for the original debt ratio of 40% of GDP. Such consolidations were never achieved (p.35). However, the hope maintained for its achievement led to the assessment that debt restructuring would be unnecessary, so that Argentina once again experienced that the necessary debt restructuring was postponed and thus more expensive and painful for all parties involved than if it had been tackled in good time (p.35); a problem that had also been pointed out by the IMF earlier (2014 and 2020) (pt.66).

The IMF was not prepared for a situation in which other official lenders would not go along. Multilateral and bilateral financiers remained cautious under the program, so that only borrowing made by the government himself and domestically was available as sources of funding. Actually, access to other sources of finance is one of four conditions under the criteria for accessing credit beyond the normal quotas (EAC-2) of the IMF (p.51). However, under the constant threat that the entire program could not proceed as planned, the IMF interpreted its own rules more generously as appropriate.

The program was also not stopped when the IMF did not receive the usual assurances of all promising candidates before elections to want to continue the program. Rather, the later election winner Alberto Fernandes announced before the election that he wanted to renegotiate individual aspects. Nevertheless, the program was continued. (P.58).

In detail, the IMF has identified further risks, but ignored:

  • Three out of four EACs were only considered fulfilled because the staff took advantage of scope for evaluation (judgement) after the access criteria themselves were not met.
  • The IMF Office of Risk Management, which actually has to be consulted in exceptional access cases, was not involved at all in the review process.
  • The diagnosis of a liquidity crisis may have been correct at first, but became less and less durable during the course of the program (pt.59). The IMF's Internal Evaluation Office (IEO) had already complained about this misdiagnosis regarding the 2000 crisis; nevertheless, the error was repeated in 2018 (fn 55).
  • It was not taken into account at all that the sheer size of the program created such a mountain of new debts with seniority status that private lenders inevitably had to fear that they would no longer be served in the event of a crisis; the program therefore torpedoed the hoped-for private capital inflows itself (p.53).

What mistakes have been made by the Macri government?

Two important mistakes can be clearly attributed to the Argentine side about the above points, which were largely due to the cooperation of the government at the time with the IMF:

It was important for the Macri government to exclude unpopular measures such as capital controls and debt restructuring associated above all with Christina Fernandes' peronist predecessor government. Although there were already voices in the fund at that time that both considered necessary and sensible.

The lack of Plan B is mainly due to the Macri government's refusal to even publicly discuss a possible failure of the program (p.18)

What isn't the report talking about?

In addition to the already very strong criticism of the program in the IMF document, the detailed statement by the Argentine government on the evaluation addresses some points that have to do with (a) the political constellation during the approval of the program and (b) with structural weaknesses in the IMF's decision-making structures. The Fernandes government rightly urges (GoA pt.10) reforms in the structures of the fund on such points.

The misjudgments of the, of course, not operationally blind IMF staff listed above could only be made because the requirement of the program was to keep the Macri administration close to the Trump administration in office at all costs. Existing payment obligations were overlooked, unrealistic growth prospects were accepted and errors complained about earlier by the IEO and others were repeated.

If this report is not to be cited equally regretfully in the evaluation of future failed programs, the reforms demanded by the Argentine government are essential:

  • The program decisions must be depoliticized. The fact that Europeans, with their voting share of more than 30% in the case of Greece, enforced the IMF by amending the lending guidelines, which was immediately collected again inconspicuously, is just as scandalous as the instrumentalization of a multilateral financial institution for the geopolitical and ideological interests of the blocking minority holder USA, which emerged here.
  • The future composition and decision-making power of the IMF's board must play a key role in this. The Argentine Executive Director (who represents not only Argentina, but several Latin American countries) made his position clear in the process. The fact that and on what grounds his predecessor waved through absurd decisions made at the instigation of the USA or Europe is not discussed in this report. This is exactly what would now be urgently needed in view of the clear technical analysis of the IMF staff.

Follow-up remark: Who does his homework now - and who doesn't

On the 11th February 2021, the Argentine parliament passed the "Debtbearing capacity law" (Ley de Fortalecimiento de la Deuda Pública), which will in future bind borrowing by the government to parliamentary approval in individual cases. It is very unusual for a government to put on itself so far non-existent shackles in terms of borrowing. In this respect, it signals a break with the widespread culture of politically motivated backroom deals between a government and institutions such as the IMF, the Chinese government or even private lenders by making a broader social consensus a prerequisite for further debt of the state.

While the Argentine government is trying in this way to do its homework after the painful and scandalous debt history of the country, the same thing on the part of the IMF is not yet in sight despite the devastating verdict on its own program. On the contrary: even the urgently needed sign of restructuring one's own demands from the failed program, as requested by Finance Secretary Guzman, has so far met with a positive response from Washington, apart from personal expressions of sympathy from the IMF director. It would be an important first step towards a more responsible International Monetary Fund to no longer let borrowers pay for the institution's self-recognized hair-recognized hair-raising mistakes.

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