ON MAY 8th, as the peso continued to tumble, Mauricio Macri, Argentina’s president, addressed his nation on television. His government had opened negotiations with the IMF for a credit line in order to “avoid a crisis like those we have faced before in our history”. That steadied the peso. But it also brought back painful memories for Argentines, highlighted doubts about Mr Macri’s approach to mending Argentina’s economy and cast a shadow over the reformist president’s future.
Argentines have bitter memories of the last time their government sought the IMF’s help. Many blame the fund for imposing austerity in return for loans and then pulling the plug in 2001, tipping their country into a devastating $82bn sovereign default. It was followed by widespread unemployment, a sharp rise in poverty and the corralito, in which the government froze bank accounts for a year to halt a run. Argentina’s economy had been battered by the lunatic policies of a succession of populist governments. But most Argentines still hold the IMF responsible for their own Depression. To turn to it for help was, therefore, politically risky, but Mr Macri was running out of alternatives.
Argentina’s peso has fallen by a fifth against the dollar since the beginning of the year (see chart). The central bank’s frantic efforts to halt the slide failed. Between April 23rd and May 4th it sold $5bn of currency reserves and raised interest rates in stages by 12.75 percentage points. As part of the effort to reassure investors, Nicolás Dujovne, the treasury minister, cut the target for this year’s primary budget deficit from 3.2% to 2.7%. It had reached 3.9% in 2017. But each new step brought only brief respite before the peso started to fall again.
Like other emerging markets, Argentina is suffering from the strengthening dollar and higher American interest rates. On April 24th the yield on ten-year Treasury bonds rose above 3% for the first time since January 2014. That fuelled a sell-off, which gained fresh impetus on May 8th when Jerome Powell, chairman of the Federal Reserve, spooked investors by saying, in effect, that interest-rate policy would be set without taking much notice of the impact on emerging markets. The Turkish lira, Mexican peso and Polish zloty all fell.
But Argentina is unusually vulnerable. Inflation expectations for this year have risen to 22%, well above the central bank’s target of 15%. Investors are worried by foreign-currency debt that has risen to 40% of GDP, up from 26% in 2015, and by large fiscal and current-account deficits. High interest rates and underdeveloped capital markets mean Argentina has been unable to find the financing it needs locally and in its own currency, as some developing countries have done.
Squabbles over the speed of deficit reduction have created fractures in Mr Macri’s coalition. An emboldened opposition is seeking to derail his economic reforms. “Investors are questioning whether the government is willing to assume the political costs required to sustain its long-term economic strategy,” says Dante Sica of Abeceb, an economic consultancy.
Mr Macri has taken a cautious approach to cleaning up the mess he inherited from his predecessor, Cristina Fernández de Kirchner. When he took office in December 2015, the economy was in complete disarray. The national statistics institute produced fictitious inflation figures to disguise annual price rises of more than 40%. The central bank printed money to finance the deficit, which swelled to 5.4% of GDP in 2015. Currency controls artificially inflated the peso. Export taxes encouraged farmers to hoard grain. A dispute with bondholders meant that Argentina was locked out of international credit markets.
Mr Macri quickly lifted currency controls, cut export taxes and settled with holders of Argentina’s defaulted debt. But lacking a majority in congress, and hoping not to stifle economic growth, he decided to reduce the deficit slowly. Subsidies on transport and utilities were withdrawn only gradually in order to avoid a spike in inflation. Low international borrowing costs allowed the government to plug the fiscal deficit cheaply. Foreign investors appeared to endorse the strategy. In June 2017 they snapped up Argentina’s first 100-year bond, with an annual yield of 7.9%.
But then Mr Macri seemed to take his eye off the ball. Doubts first flared up in December, when the central bank loosened its inflation target for 2018 from 12% to 15%. It did so at the behest of the government, which was worried about the impact of high interest rates on economic growth. The bank then cut rates by 0.75 percentage points, causing inflation expectations to rise. Investors began to fret about its independence and its commitment to reducing inflation. In April, when the government introduced a capital-gains tax on Argentine bonds, the nerviness intensified.
With credit now prohibitively expensive, Argentina has little alternative but to turn to the IMF. It would no doubt have preferred an unconditional “flexible credit line”. But the IMF offers such loans only to countries with “strong economic fundamentals and policy track records”. Despite the progress made under Mr Macri, Argentina lacks both. On May 10th it confirmed that it was seeking a “stand-by” arrangement, which guarantees that credit will be available in exchange for whatever reforms the IMF deems necessary.
Things could be worse for Mr Macri. Argentines were not queuing to withdraw their deposits from banks, as they did in 2001. He does not face re-election until October 2019 and has until now enjoyed relatively good approval ratings. But he seems likely to pay a high political price for the crisis. A recent poll found that three-quarters of Argentines were opposed to approaching the IMF. Next year’s election looks likely to be more competitive than expected, reckons Sergio Berensztein, a political scientist. Holders of Argentina’s 100-year bonds have a nervous few months ahead of them.