The pandemic has had an enormous impact on political and economic trends throughout the world. Increased great power competition, a reversal in globalisation, and skyrocketing public debt are only some of the common features that have come about from the crisis. As elaborated by our article Argentina and the IMF: a Toxic Bond, Argentina, as well as Latin America more broadly, is a region where soaring debt and economic recession have a sense of recurring normality. Despite the pandemic having amplified these struggles, the country’s new left-leaning government has sought opportunities to restructure debt with the International Monetary Fund (IMF). The Alberto Fernandez administration took office in December 2019; this defied political trends in Latin American politics, as most countries (Chile, Colombia, Brazil) elected right-wing governments in recent years, a shift dubbed the conservative wave, or ola conservadora in Spanish. The government was elected to restructure IMF debt arrangements after the Fund’s biggest ever bailout of up to 57 billion USD failed under the right-leaning Macri administration in 2018. With the increased strain brought by the pandemic and political polarization defining Latin America, what position is the Fernandez government in, and will it successfully pave a way for a recovery free of more austerity and defaults?
When and how the deal and debt repayments are organized depends on government figureheads, IMF relations, and economic optimism. Inflation was as high as 53.6% in 2019 and the pandemic-rocked economy faces its third consecutive year of recession, making the IMF work to settle a debt deal of 44 billion USD planned for March this year. In the current situation, the country’s net liquid forex reserves are close to 0, risking further devaluation of the peso. Additionally, with a recent currency crash in 2018 under Macri and its ninth sovereign default in May last year, investor scepticism and domestic attitudes towards debt deals are making the government look for alternatives. The pandemic has worsened Argentina’s economic crisis as the economy faced a contraction of 10.9% in 2020, its biggest on record. The Fernandez administration has sought to postpone the deal until after the October midterm elections, as well as large debt repayments until 2022-2023, as they are politically incentivised to fulfil their anti-austerity promises and boost market confidence.
The government’s IMF relations are handled by three main players: President Fernandez, Vice President Cristina Fernandez de Kirchner, and Finance Minister Martin Guzman. Vice President Fernandez de Kirchner is seen as the government’s most radical figure due to her pronounced anti-IMF rhetoric, recently claiming that the Macri IMF deal was illegal. The country’s growth forecast for 2021 went up from 3.6% in October to 4.1% in December of last year but the IMF believes this growth depends on vaccine rollout and US investor optimism. A recent second wave of Covid-19 has been devastating for much of the Southern Cone and Brazil, making many sceptical. As seen in Figure 1, Argentina’s economic recovery in December 2020 was the lowest since the start of the pandemic at 0.9%, with hospitality and transport being the most affected sectors. Fernandez has sought to grow exports to avoid the loss of foreign currency and consequent peso depreciation, since the government ambitiously aims for an inflation figure of 29% this year, which many private economists claim will likely be around 50%. In contrast, Chile has successfully implemented fiscal and monetary policy to stabilize metal prices when they were less demanded. Along with Chile’s swift vaccination campaign, Latin America could face uneven growth as other nations such as Argentina and Brazil face further price volatility, a sluggish vaccination drive, and a sceptical IMF.
Argentina falling behind in economic recovery, vaccinations, and price stability combined with the government’s tensions with the IMF would normally indicate that the country has limited choices under the prospect of further bailouts and debt pressure. However, the pandemic has also meant that creditors worldwide have had a kinder approach to restructuring debt deals and rescheduling debt payments. As seen in Figure 2, Argentina needs to find alternatives to avoid both austerity measures and another sovereign default, as it faces an obligation payment of 1.87 billion USD in September. The Fernandez administration has been considering the use of IMF reserve assets allocated to all Fund members known as Special Drawing Rights (SDRs). The assets would provide 1.9 billion USD to pay for and avoid defaulting on outstanding debt by September. The government already used 305 million USD of SDRs for a debt repayment this month and believes further use would make delaying debt restructuring easier for the economy.
Although the pandemic has brought many economic struggles to a country already overwhelmed by economic malaise, it has opened a window of opportunity for the anti-austerity government as creditor relations could play in the administration’s favour. The country currently holds 1.36 billion USD in SDRs but due to the pandemic, the G20 has discussed taking IMF reserves to 500 billion USD of SDRs, 3.35 billion USD of which would be allocated to Argentina, the biggest G20 proponent of this increase. In addition to SDR allocation, the Fernandez government has been in talks to restructure Macri’s “illegal” deal. The current administration has been reluctant on reimbursements since it took office in 2019 and Guzman is to travel to Washington to renegotiate the Macri loan in the coming weeks. While the IMF seeks to complete negotiations by May, the government wants to avoid any austerity and spending controls until October, since they will be defending their slim majority in congress then. Quoting President Fernandez’s anti-austerity message “we have to find a deal … that doesn’t cost the Argentines more than what they have tolerated already”.
The current IMF attitude towards debt renegotiation goes beyond its relations with Argentina, instead, it represents a global shift from neoliberalism. Argentina’s government plans to refuse spending cuts and engage in an unprecedented round of negotiations as it seeks a deficit spending as high as 4.5%. Although this figure is ambitious, the pandemic’s effect on IMF creditors’ attitudes has played into the government’s anti-austerity narrative. The case of Argentina has shown that Macri-like contractionary monetary policy has been rejected by the electorate as it failed to stabilise prices or pay for debt, still sending the country into a deeper recession. The emerging policy consensus over austerity on the left and the right within developed countries as well as international institutions has increasingly followed this pattern. In the US under Trump, the EU, the IMF, and the World Bank, there has been overwhelming support for industry bailouts, deficit spending, and expansionary monetary policy despite political differences. Scottish-US political scientist Mark Blyth has mentioned that anti-austerity policy consensus across the political spectrum is prevalent among developed countries has not been seen in the Southern Hemisphere.
Perhaps, the case of Argentina and its ambitious debt restructuring is a turning point for the region and is paving the way for the introduction recovery-focused alternatives to austerity. Its rejection of neoliberalism is in tune with the IMF’s subdued attitude towards debt repayments worldwide, as international organizations, high-income countries, and developing markets have all become aware of the shortcomings of austerity politics during the pandemic. In Latin America as a whole, political polarization and its history with neoliberalism have made the Fernandez government an outlier. With failures to deal with the pandemic, far-right rule, and constitutional reform, protests manifesting the political divide have broken out in Brazil, Chile, Ecuador, and Bolivia. Perhaps, the conservative wave in Latin America has peaked during a period of world crisis, while Argentina finds itself ahead of the game in defining policy consensus. With the conditions of international trends playing in its favour and the IMF continuing to have a supportive approach towards debt and SDRs, the Fernandez government might be able to successfully deliver an economic recovery free of austerity and defaults for the country and change institutional approaches to debt repayments.
This article was written by: Alessandro Casino, currently a student at the London School of Economics, pursuing MSc Theory and History of International Relations
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