Argentina Heads for Another Crackup

The resignation of Argentina’s Economy Minister Martín Guzmán on July 2 comes three months after he renegotiated his country’s $45 billion debt with the International Monetary Fund. The fund says the stabilization and growth program it worked out with Mr. Guzmán is still on track. But widespread fears that a sharp depreciation of the peso is on the way, along with higher inflation, suggest otherwise. The country could be heading for another collapse.

March’s IMF debt restructuring wasn’t the first time Mr Guzmán bought the world’s most notorious deadbeat more time to repay what it borrowed. In August 2020, he led a restructuring of approximately $65 billion in government debt held by major bondholders including Fidelity Management & Research Co., Monarch Alternative Capital LP, VR Capital Group, Greylock Capital Management and Pharo Management LLC.

The 39-year-old centre-left economist should have written his own ticket within President Alberto Fernández’s government. Instead, he fought Vice President Cristina Fernández de Kirchner — no relation to the president — who defies even the minor reform promises he has made to the IMF. Mrs. Kirchner won.

President Fernández quickly filled the post created by Mr Guzmán’s departure with Silvina Batakis, an ally of Ms Kirchner and her hard-left faction within the Frente de Todos governing coalition. Ms. Batakis’ resume is not reassuring. She is a former Minister of Commerce for the Province of Buenos Aires (2011-15) who left her successor with empty coffers, forcing him to turn to the federal government for emergency assistance to pay public employees’ salaries.

When Fidel Castro died in November 2016, Mrs. Batakis was tweeted a photo of the late military dictator in revolutionary garb, citing his call for “struggle.” In a 2019 tweetMs Batakis advised that “fighting” poverty “requires a state that plans and intervenes”.

Concern has spread quickly that Ms Batakis will abandon even mild attempts to end the fiscal waste and money printing that have fueled inflation that is now more than 60% a year and accelerating.

On Wednesday, IMF Managing Director Kristalina Georgieva tried to stave off panic. she tweeted that she had a “very good conversation” with Ms. Batakis “to discuss the implementation of Argentina’s program”. Reuters reported that Ms Batakis “had already spoken to the head of the IMF’s Western Hemisphere Department and pledged to support the IMF’s goals [renegotiated] IMF program.”

It is recalled, however, that a March 2022 IMF staff report on the Guzmán program warned that it faced “extraordinarily high risks,” including that it “may fail to inspire confidence and enhance stability.” These risks have now increased. Both the Paris Club and the Inter-American Development Bank say any new lending arrangements will require guarantees of reform commitments to the IMF.

Argentina is by far the Fund’s largest borrower. To put its $45 billion in debt into perspective, Egypt, the second largest borrower, owes the Washington-based multilateral organization just $12 billion. Argentina’s borrowing from the IMF is now at 1,000% of its quota.

When center-right President Mauricio Macri took office in December 2015, expectations were high that he would tackle the age-old Argentine practice of printing pesos to pay government bills. But he failed to properly measure public spending, preferring a phased approach to working with a Congress he did not control.

International funding dried up in May 2018 as markets began to lose confidence in Mr. Macri. When the peso came under attack, the IMF stepped in with a $30 billion contingency package that soon became part of a $57 billion stand-by arrangement. Mr Macri lost his re-election bid in October 2019, but when he left office a few months later, Argentina had drawn $44 billion from that deal.

Argentina had $19 billion in payments due this year and $20 billion in 2023. The “enhanced fund facility” that Mr. Guzmán has secured delays those payments, pushing back their start date to the second half of 2026 and extending the loan’s life to 2034.

But that won’t save Argentines from another hyperinflation fueled by government “experts” who believe in modern monetary theory – which says that printing money to pay bills need not cause inflation if tax rates are high enough are.

The public knows better. Since 2017, the peso has lost 87% of its official market rate, which is now around 130 to the dollar. The currency is now trading at around 265 to the dollar on the black market.

Argentinian economist Aldo Abram told me last week that “inflation expectations are spiraling out of control” because “the central bank is robbing the public of their purchasing power.” As demand for pesos collapses, triple-digit inflation is becoming more likely, he said. Even with a lot of flexibility and leeway on the part of the IMF, it’s hard to see how this shouldn’t end in tears.

Write to O’Grady@wsj.com.

Magazine Editorial Report: Paul Gigot interviews London-based editorial writer Joe Sternberg. Images: Reuters/Bloomberg News Composite: Mark Kelly

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Alley Einstein

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