Less than two decades ago, Argentina crashed out of an IMF programme, defaulted on debt and plunged into depression. As Fund officials arrived in Buenos Aires over the weekend to assess the country’s current $56bn bailout - and decide whether to keep doling out cash - some of the same warning signals were flashing.
President Mauricio Macri just got trounced by the populist opposition in a nationwide primary vote, after his IMF-backed programme - based around budget austerity and the world’s highest interest rates - failed to pull the economy out of recession.
His defeat brought about a market rout that was spectacular even by Argentina’s standards of volatility. The peso slumped 20% in a week, and yields on government bonds surged - pushing the implied risk of default above 80%.
The IMF now faces a tricky choice with unwelcome echoes from two decades ago: Risk making the turmoil even worse by withholding a $5.3bn instalment due next month; or cough it up, even though the programme’s future looks highly uncertain.
They’ll also have to figure out the economic plans of opposition chief Alberto Fernandez - who’s likely to head a less market-friendly government. While elections are still two months away, Macri’s 15-point primary defeat has led analysts to write him off.
Fitch Ratings and S&P Global have downgraded the country’s credit rating deeper into junk territory citing the possibility of a sovereign debt default.
Since the ballot reverse, Macri’s government has begun to loosen policy. It froze fuel prices and boosted subsidies, in an effort to shield the poorest Argentines as the peso’s latest slide threatens to push inflation even higher.
Fitch Ratings now predicts a primary deficit of 1%, though the government still says it will meet IMF budget targets. The central bank could also breach IMF targets, as it burns through cash to defend the peso.
Late in 2001, after a series of missed budget targets and re-upped IMF loans, the government announced it was preparing to restructure debt. Argentines rushed to the banks to pull their money out - and found their deposits had been frozen by authorities, an event known as the “corralito.”
The IMF has reportedly already opened channels to the opposition leader Fernandez, who cites his experience working with the IMF as cabinet chief in the years after the 2001 crisis. “There’s no possibility that Argentina will fall into default if I’m president,” he said last week.
Most analysts say things aren’t that bad today. But the implied chance that Argentina will miss a debt payment, as measured by credit default swaps, soared last week.
The Merval stock index lost 45% in dollar terms in the five days through Friday, bond prices tumbled about 30% and the peso weakened 18%.
The country’s, unemployment stands at 10%, inflation at 55% and the poverty rate between 27% and 35%.
With a $56bn loan in danger, the IMF is, indeed, in a serious crisis in the face of the Argentine mess.