Harsh interrogation of a former IMF in Argentina: he asked for pressure on the revisions and said that the government reached the agreement “shouting”

Martin Muehleisen
Martin Muehleisen

A prominent former International Monetary Fund (IMF) executive said the organization’s deal with Argentina would set a bad precedent with other countries and called on the Group of Seven to pressure the government for further reforms in program reviews. .

the German economist Martin Muehleisen, former director of the Department of Strategy, policy and reviewbetween 2017 and 2020, argued that the government of Alberto Fernández has obtained the program “on the shout” and without accepting any policy that improves the conditions of the country.

In an article published in The Atlantic Council, Mühleisen (who also seriously questioned the previous agreement with the country while in the Fund), said that “In the end, there was never any serious doubt that the IMF board of directors would approve another loan to Argentina to help its troubled economy.”

“Even without the turmoil caused by the Russian invasion of Ukraine, the odds were skewed in favor of a deal to succeed the ill-fated 2018 program, which left the South American country close to $ 45 billion in debt to the world’s largest lender. multilateral.

He later stated it “The IMF’s decision this time puts geopolitical considerations ahead of its own economic principles, setting a dangerous precedent that the Fund may regret.”

The IMF’s decision this time puts geopolitical considerations ahead of its own economic principles, creating a dangerous precedent that the Fund could regret (Martin Mühleisen)

“The 2018 loan was negotiated when I headed the IMF’s department responsible for general strategy and policies. Since then, the Fund’s staff have produced a compelling assessment of the factors that contributed to the loan failure, ”he recalled.

“Faced with Argentina unable to meet its debt service obligations this year, the council had to decide between providing the country with new funds or accepting its largest borrower default.”

“The reasons why the council chose the former were many. First, the insolvency of the IMF loan would have meant suffering for ordinary citizens if the access to the market of Argentine borrowers had been severely limited ”.

Stock Photo - IMF CEO Kristalina Georgieva and Argentine Economy Minister Martin Guzman attend a conference organized by the Vatican.  The South American country has started talks with the agency to renegotiate its debt.  February 5, 2020. REUTERS / Remo Casilli
Stock Photo – IMF CEO Kristalina Georgieva and Argentine Economy Minister Martin Guzman attend a conference organized by the Vatican. The South American country has started talks with the agency to renegotiate its debt. February 5, 2020. REUTERS / Remo Casilli

“Secondly, it would have prevented Argentina from borrowing from the Fund again until its arrears were repaid with transitional loans from friendly countries.”

Third, “it could have fueled the already strong anti-IMF sentiment in the country, undermining the chances of resuming negotiations at a later stage.”

And fourth, “it would have affected the IMF’s financial reputation, even though its balance sheet could absorb an arrears settlement process within a few years.”

“With the world economy having suffered a multitude of shocks since 2020, the geopolitical motive for helping Argentina overcome its steep earnings curve has become even stronger.”

more tension

“Financial exposure to Argentina has been reduced in recent years, but global debt markets are tense and more vulnerable than usual. A potential Russian debt default remains in the air and rising interest rates threaten borrowers , with global credit at an all-time high.

“Inflation and commodity price shocks are likely to spill over into global markets when lenders fail to collect. Against this backdrop, deteriorating economic sentiment in Latin America – a relatively stable region in recent years – could create another front that nervous investors will look forward to.

Moreover, “The world should not focus on a crisis in Argentina when all efforts should be focused on helping poorer countries withstand an impending food crisis caused by the expected decline in Ukraine’s grain exports.”

“Buenos Aires has also played its geopolitical cards wisely in recent weeks. While finalizing a staff-level deal with the IMF, President Alberto Fernández joined China’s Belt and Road Initiative during his visit to Beijing (with a stopover in Moscow), sending a strong signal to Washington and its western allies.

The president of Argentina, Alberto Fernández, talks with his Russian counterpart, Vladimir Putin, in the Kremlin in Moscow.  February 3, 2022. / Pool via REUTERS.  Attention editors: this image was provided by a third party.
The president of Argentina, Alberto Fernández, talks with his Russian counterpart, Vladimir Putin, in the Kremlin in Moscow. February 3, 2022. / Pool via REUTERS. Attention editors: this image was provided by a third party.

However, “the terms of the new loan could create the impression that IMF money is now freely available to cure the financial problems of any country that requests it with sufficient force.”

“Unlike countries that received emergency funding at the start of the COVID-19 crisis, Argentina’s problems are largely internal. Although it is a member of the G20, its economy has been poorly managed for several decades. “

Unlike countries that received emergency funding at the start of the COVID-19 crisis, Argentina’s problems are largely internal, the economist said.

“Previous administrations were unwilling or did not have bipartisan support to undertake critical reforms that would put the country on a path of sustainable growth.”

“With the loan that has just been approved, Argentina has lost an opportunity to show that they are willing to deviate from the past.”

Compared to an average IMF program, the Argentine loan has come almost without conditionality, including a slow fiscal adjustment path that will surely be ruled out by politicians once the campaign for the next election starts in a few months.

Although IMF directors stressed the need to “gradually remove economic distortions and provide a more predictable regulatory framework,” the government declined to consider reforms aimed at improving productivity over the 30-month lending period, favoring a model of greater participation and protection of the state “, according to the report of the staff of the IMF.

Optimistic projections

“As is often the case with IMF programs, growth and inflation projections appear to be overly optimistic.”

However, “IMF staff admit that the debt sustainability test is not met with a high probability, as would be required in cases where normal lending limits are exceeded.”

“The program can go on on a quibble, as there is enough private sector debt for Argentina to have a chance to embark on a more permanent debt restructuring,” according to IMF policy, if cancellation risks jeopardize. their ability to repay the IMF after the program ends.

However, “under these circumstances and after two major cuts for private bondholders over the past 20 years, getting market financing at reasonable interest rates will continue to be an uphill battle over the next few years.”

Indeed, “The program appears to be little more than a refinancing of the previous IMF loan that the Fernández government has been clamoring for, but which has long been a taboo for the Fund’s shareholders.”

“It is not unusual for succession agreements to follow IMF plans. However, these have traditionally served to complement unfinished reforms, not perpetuate the Fund’s exposures.

“With its focus on Argentina, the IMF has compromised its ability to deal with future crises. The Fund’s influence in persuading hesitant governments to undertake the necessary reforms will be reduced by this program. “

With its focus on Argentina, the IMF has compromised its ability to deal with future crises. The Fund’s leverage in convincing hesitant governments to undertake necessary reforms will be diminished, he warned.

“Private sector creditors will find it even more difficult to accept debt forgiveness if the largest multilateral lender remains without increasing the borrower’s ability to meet their obligations to other lenders.”

“The privileged creditor status of the IMF may be subject to scrutiny, and consequently, the solution of the growing problem of excessive sovereign debt in the world will become more complex ”.

“The decision is partly the responsibility of IMF leaders, who appear to have bowed to heavy pressure, believing that the outcome of the program will be different this time around.”

“However, political appropriation, even of this minimalist program, is very absent in Buenos Aires. The ratification bill also faced opposition within the ruling coalition, with lawmakers weakening Argentina’s commitments to secure its passage to the lower house.

“It would have taken strong support from major IMF shareholders to persuade the Argentine political leadership to take a different approach.”

“It is still not too late for the IMF board to take the initiative again. During upcoming reviews, a particular Group of Seven (G7) could push for minimal reforms to improve the program’s chances of success. “

“It’s not just about Argentina, it’s about not setting a bad precedent before the world faces a new economic downturn that will require the IMF to give its best.”

“The Fund’s major shareholders would do well to exercise their geopolitical unity to tighten the backbone of the global lender of last resort.”

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