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Argentina .. The collapse of the largest rescue plan sponsored by the “Fund”

The decision to obtain what has become the largest rescue plan in the history of the International Monetary Fund took just a few minutes, to Argentina’s advantage.
However, the loss of confidence in Argentina’s reform program was most evident due to a strong two-week selloff in the peso in the spring of last year.
President Mauricio Macri has few options left, a long-proposed contingency plan that has gone into effect.
“When it came, we had discussed it a lot,” says a senior government official, recalling the events of last May. “For Macri, it was not a problem. The decision took five minutes … At the time, Macri was fine and he was very happy.” With the agreement … after all, we managed to get 50 billion dollars. “
After 15 months, the massive bailout has become a heavy burden for Macri. Voters angry at the ongoing recession drew a scathing rebuke on August 11th, with a big victory for his Peronist rival, Alberto Fernandez, in the primary vote.
These elections are considered a reliable yardstick for the elections that will be held last October, and their results scared investors because they caused a disaster for Macri’s chances of winning.
After days of market chaos following the vote, the Macri government bowed to the inevitable last week, asking creditors for more time to pay off Argentina’s $ 101 billion foreign debt, including the International Monetary Fund, as Buenos Aires struggles to avoid a ninth deficit. Pay off the country’s sovereign debt and the third this century.

Imposing controls on the currency
Currency controls were finally imposed on companies after they lost nearly $ 3 billion in reserves in just two days, last week.
As the record bailout veers off course, questions are being raised about why the International Monetary Fund, which oversaw 21 bailouts for Argentina, including one that ended with a historic default, lent so much money to support a program that collapses after little more than a year.
“It’s another blow to the IMF in Argentina,” says Benjamin Gaidan, who leads the Argentine project at the Wilson Center in Washington. “They fell into the same euphoria as investors … they thought the second largest economy in South America is adopting the Washington consensus.”
Having so far disbursed $ 44 billion from the Buenos Aires bailout, the fund now faces a difficult choice: whether to stick to the program, hand over another $ 5.4 billion later this month to the Macri government or cut its losses and wait to deal with the president. next one.
In a statement issued after officials visited Argentina last week, the International Monetary Fund said it was assessing the impact of the proposed debt measures, but “will continue to stand with Argentina during difficult times.”
His decision on the future of the bailout will be made without the person who was instrumental in obtaining approval for the bailout: Christine Lagarde, who has stepped down from the top position in the International Monetary Fund to take over the leadership of the European Central Bank.
Lagarde is unrepentant about her pioneering role in lending to Argentina, as she told the Financial Times in July: “We were the only one out there. No one else at the time wanted to invest in the recovery process that the government had decided to participate in. Given the scale of the challenge, we had to participate strongly. “
The last 70 years of Argentina’s history were punctuated by regular economic crises, and Macri’s inauguration in December 2015 was no different.
His Peronist predecessor, Cristina Fernández de Kirchner, emptied government coffers by signing decrees to increase spending by an additional $ 27 billion in her final days in power.
Inflation was around 25 percent, foreign currency reserves are dangerously low, and generous subsidies to public utility and transportation companies drain the budget.
The new president seemed well equipped to meet this challenge as a millionaire and the scion of an Italian immigrant who made his fortune through lucrative government contracts, providing an image of remarkable competence, business prowess and sober realism, which was a relief to investors after Mrs. Fernandez’s chaotic populism.
“I really think we’ve finally learned from our mistakes,” Macri told the Financial Times in September 2016, when asked about his economic program. “No other country in the world is as bullish as Argentina.”
What Macri has been keen to avoid as much as possible is having to seek help from the International Monetary Fund, a constant source of concern for Argentina’s leaders.

Ex President Escape
Buenos Aires’ troubled history with the fund goes back six decades. Most famously on the negative side was the economic meltdown of 2001 that ended with what was then the largest default in history, with clients scrambling to withdraw their balances from banks, widespread civil unrest, and President Carlos Menem’s escape by helicopter from the roof of the presidential palace.
After about a generation has passed, the bitterness remains. A poll conducted by the Wilson Center last year found that 56 percent of Argentines do not like the International Monetary Fund, the worst rating of any international organization surveyed.
The Center compares the International Monetary Fund with Superman’s archenemy, Jidan says: “In Argentina the IMF is like Lex Luther, historically when the IMF enters Argentina, it leaves brutal budget cuts and economic chaos in its wake.”
Macri chose to take a gradual approach to fixing the economic mess that Mrs. Fernandez left him, hoping to avoid another round of IMF austerity and political crisis.
A source close to the administration says, “Macri’s political team told him they could start their term with a major austerity plan. This would be an exemplary right-wing government that might end up leaving the presidential palace in a helicopter when it fails.”
Macri, who was impotent by his lack of a majority in Congress, avoided big cuts in public spending, and had hoped that steady growth and restoration of international borrowing would take the economy out of its troubles.
For two years the plan seemed to be a success, but large deficits required a steady stream of foreign funds to finance them. High interest rates pushed up the value of the peso, which means more dollars must be borrowed to finance the deficit.
When a loss of confidence in the markets triggered a strong sell-off of the peso last year, Macri was forced to turn to the International Monetary Fund.
Claudio Loser, who ran the International Monetary Fund’s Western Hemisphere division at the time of the Argentina crisis in 2001, says that the main problem was excessive borrowing: “They were overly confident that they could keep borrowing large sums while at the same time adjusting the economy slowly. This is the error. “

Intervention from Rogov
Kenneth Rogoff, a former chief economist at the International Monetary Fund and a professor of economics at Harvard University, now agrees.
“Argentina made many mistakes. The general principle that their program violated is that when markets crossed their borders, politics had to go beyond their borders, but they did not do so, on the contrary, they tried a gradual policy,” he says. Despite the early missteps, Macri secured a large loan from the International Monetary Fund relatively quickly, which helped clear the way.His intimate personal relationship with Donald Trump, the president of the country with the largest share of votes on the IMF’s board of directors.
Trump told reporters when he visited Argentina in 2018: “I’ve been friends with Morcio for a long time, for several years … We know each other very well. I’ve actually done business with his family.”
Trump was referring to his purchase of a luxury New York property for $ 95 million in 1984 from Macri’s father: Franco.
He made Trump think he needed help and began lobbying through the US Treasury before going into the fund, says Hector Torres, a former senior IMF official who now works at the Center for International Innovation for Governance, a Canadian think tank. International criticism. “
“We definitely spoke with the Treasury Department,” says the former senior Argentine official. “The situation was so delicate that it required a quick response, and the fund was so bureaucratic that it couldn’t act quickly enough.”
The fund’s initial rescue plan for Argentina that it announced in June 2018 pledged $ 50 billion, much more than expected. The funds, Lagarde said, “will boost market confidence”.
Just two months later, the markets have lost confidence in the peso and Argentina is back in the fund.

The insistence of the “fund” to float
The main flaw in the first deal, according to former Macri government officials and economists, was the International Monetary Fund’s insistence on freely floating the peso, which led to a new wave of selling at a time when markets were testing the currency.
“It was a chain of expected death,” says the former senior Argentine official. “The first agreement with the Fund was inflationary, and thus it should have led to a recession. The devaluation of the currency forces you to raise interest rates and this calms the economy.”
After weeks of negotiations, Lagarde announced last September that the International Monetary Fund would increase an additional $ 7 billion, making the Argentine bailout reach a record $ 57 billion, and allowing funds to be spent faster. It was confident that the revised plan would be “decisive” in restoring market confidence.
This time, the International Monetary Fund allowed the Argentine authorities limited scope to intervene and defend the peso.
The restrictions on when and how much to intervene were too great for Luis Caputo, the central bank chief who resigned. “The fund got incredibly wrong both the first and the second times,” says a second former Macri administration official, referring to the exchange rate decision. As for the government. The government rushed and took what was offered to it. This was a huge mistake. “
The International Monetary Fund has declined to comment on Argentina beyond its published statements, as it has said it is reviewing the program.
Understandably, officials believe the bailout was mostly according to plan, with the exception of the inflation component.
Buenos Aires’ inflation targeting failed, sources close to the fund say, because it was not coordinated with a broader government strategy to keep prices under control, and because the inflationary effects of the devaluation were worse than expected. Macri’s incremental approach to curbing spending has been a major problem.

Calming the market without reviving the economy
Although the revised September bailout calmed down markets, it did not revive the economy.
With the election date approaching this year, interest rates above 70 per cent were stifling businesses, the unemployment rate was rising, and inflation reached 54.3 per cent in July, according to Argentina’s Indyk statistics agency, and it remained stubbornly high.
The bleak economic picture was an easy target for the opposition Peronists as the presidential election campaign began in Argentina. They portray the market-friendly Macri as a candidate for a privileged few who have imposed misery on the masses.
Opinion polls predicted before the August 11th primaries that Macri was close to his rival, Fernandez, turned out to be catastrophically wrong. In fact, Fernandez defeated the president by 15 points.
The next day, the stock market in Buenos Aires fell 37 percent, and the peso hit record lows as investors woke up to the prospect of Peroni’s candidate returning to power.
Panic weakened Macri even more than before by reviving the instability he promised to remove.
This helped trigger the announcement last week of a “reclassification” of debt by Hernan Laconza, the finance minister under which foreign investors will be asked to voluntarily agree to a delay in payments.
Standard & Poor’s described the move as a “selective default”, a rating it pulled off hours later. Capital Economics said before the announcement: “Argentina’s sovereign debt deficit is now more likely.”
It predicted that bondholders would likely lose about half of their money in the restructuring process.
Fernandez, the next possible president, sent contradictory signals about his intentions towards the bailout plan, saying that he would pay off the IMF loan, but he criticized the fund strongly: “Those who caused this crisis are the government and the International Monetary Fund, and they are responsible for putting an end to the social catastrophe that an increasing part is suffering From Argentine society and its opposite. “
Daniel Marks, a former finance minister, saw political motivation in the remarks.
He said, “Fernandez is preparing the stage for future negotiations.”

Investors’ aspirations … to meet the two opponents

Investors and business people would like to see Fernandez and Macri work together to calm markets, stabilize the economy, and reduce confusion factors to the lowest during the long transition period, until the next president is installed in December.
There is little sign of any of the presidential candidates willing to do so.
Ironically, experts argue that if Macri had had IMF help from the start, he would have been better off now.
“If Macri had gone into the box from the start, it might have worked,” says Victor Bulmer Thomas, an associate fellow at Chatham House in London. The problem is, the history is so bad that governments are delaying going to the fund, until it is too late. As a result, the fund is facing an impossible situation. Then he describes the usual treatments that do not work.

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