Argentina, South America’s second-largest economy, is an addict.
And right now, it’s checking itself into rehab… yet again.
Argentina isn’t addicted to opioids, Netflix, alcohol, or ChapStick… It’s hooked on something far worse, the financial equivalent of crack cocaine: Debt.
How did Argentina get here? I told you part of the story last month. It has a legacy of uniquely toxic populist politics, an electorate that wants everything for free, and a history of irresponsible politicians followed by grown-ups who try to clean up the mess.
But Argentina didn’t get there alone. As Dr. Phil might tell you, an enabler is someone who – intentionally or not – prods an addict deeper into the hole of dependency. Deliberately or not, enablers can make an addict’s bad situation much worse.
Meet the Enabler
Argentina’s enabler is the Washington, D.C.-based multinational lender International Monetary Fund (“IMF”). With money from 189 member countries, the IMF is a cross between a payday lender and a free candy dispensary that’s next to an elementary school… only the candy is toxic, and the money definitely isn’t free.
According to its website, the IMF’s primary purpose is to “ensure the stability of the international monetary system.” As part of that mandate, it’s been enabling Argentina’s debt habit since 1958.
And the IMF has been a great lender – at least from the deadbeat borrower’s perspective. Argentina has defaulted on some of the 22 lending arrangements it’s had with the IMF. But “most of [them have] ended with bitterness on both sides,” says the Financial Times. And the IMF, the ever-faithful enabler, keeps dealing – most recently with the biggest loan in its history, a $57 billion one to Argentina.
It’s high-finance dependency. And the jobs, savings, and livelihoods of millions of Argentines are on the line.
What’s the IMF’s Problem?
When the IMF isn’t dealing to Argentina, it tries to do good (-sounding) things like “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” The people who work at the IMF are some of the sharpest knives in the drawer, with fancy degrees with lots of letters from the world’s top universities.
Despite that, the IMF has made a lot of questionable decisions – particularly about Argentina, the economic itch the IMF can’t stop trying to scratch. One more loan, one more bailout, and Argentina will get back on track, for good this time… really. The enabler acts – and lends money – as if it believes the addict will change.
One more loan, one more bailout, and Argentina will get back on track, for good this time… really. The enabler acts – and lends money – as if it believes the addict will change.
Which brings us to June 2018, when the IMF decided that it was a good idea to make its biggest loan ever… and to none other than Argentina.
A $57 Billion Bad Idea
For a few years, Argentina’s rehab seemed to be working. The “adult in the room,” President Mauricio Macri, had been doing a credible job of fixing the mess made by the previous government [link to previous piece]. The future looked bright enough that in June 2017, Argentina was able to sell a 100-year bond. “Six defaults in the past century do not deter a bet on 2117,” wrote the Economist magazine at the time.
But fixing an economy is like building a house: If one seemingly little thing is wrong, the whole place might collapse, or flood, or burn down… all at once.
Macri had been dealt a terrible hand, and by some measures he moved too slowly to tackle Argentina’s problems, in an effort to appease the country’s famously entitled population. Then in early 2018, a hurricane blew the roof off, as rising global bond yields triggered a global market rush out of risky emerging markets.
Some of Argentina’s biggest challenges were spiraling inflation, and wide fiscal- and current-account deficits. In the playground of international finance, Argentina was the fat kid wearing taped-up glasses who’s practically begging to be beaten up – or sold off immediately and brutally, no questions asked. So when investors fled for safety, Argentina was bullied hard. The peso plummeted in the spring of 2018, and a 13 percentage-point increase in interest rates (to a nosebleed 40%) didn’t help.
Running out of options, Macri called his dealer… The May 2018 negotiation (if you can call it that) with the IMF for a $50 billion loan was straightforward. It was all much easier thanks to the support of U.S. President Donald Trump, who fondly remembered Macri’s dad – who’d sold Trump a building in 1984. (The U.S. is by far the biggest contributor to the IMF’s war chest.)
Time Runs Out for Argentina
But the perfume of the IMF’s cash couldn’t cover up the stench of Argentina’s rot for long. With the peso continuing to come under pressure, the Argentine government went back to the IMF a few months later for a $7 billion top-off. Argentina’s central bank head resigned, maybe because he saw what was coming.
A country’s currency is a perpetual referendum by investors on the prospects of the economy… And the decline of the peso in the graph below shows the story.
Argentina was facing withdrawal, to borrow Ernest Hemingway’s immortal line about bankruptcy, “gradually, then suddenly.” The dealer, though, didn’t want it to end…
In May 2019, the head of the IMF, Christine Lagarde, crowed that the Argentine government’s policies – implemented as a precondition for the IMF’s bailout – were “bearing fruit.” “IMF’s reputation [is] on the line in Argentina,” warned a Financial Times headline in May 2019.
Compared with other countries, Argentina’s debt burden – at around a forecast 100% of GDP now – isn’t so bad on the surface. But unlike the U.S. (debt-to-GDP ratio of 118%) or Japan (the world record holder, at 238%), Argentina can’t just print money (or sell bonds) to pay off its enablers. It needs hard currency, which is a lot more difficult to come by.
As Argentina’s economy continued to stumble, so did Macri’s re-election prospects. With inflation at 55%, and one-third of the population in poverty, prospects were dimming. That Macri called in the IMF – an institution about as hated in Argentina as Congress, the DMV, and the TSA put together in the U.S. – made it all the worse.
Macri lost a preliminary election in August, which makes it almost certain he’ll be kicked out of the Casa Rosada, Argentina’s White (pink, actually) House, in a late October election. He’s likely going to be replaced by a team that includes vice president Cristina Fernández de Kirchner – who, as president from 2007 to 2015, created the mess that Macri was trying to fix. The IMF, and bondholders, will have to negotiate in part with her to get its money back.
That will be difficult. In late August, the Argentine government announced a “re-profiling” of its debt… which is default by another name. Argentina’s bonds are trading at close to the same levels as 2001 – after Argentina defaulted in what at the time was the biggest sovereign debt blowup in history.
Postscript: Blame, Anyone?
In 2012, a credit derivatives trader at JPMorgan, one of the world’s biggest banks, lost $6.3 billion. People exercised bad judgment, laws were broken, the bank lost a lot of money, and there were consequences for the “London Whale” trader… JPMorgan paid a fine of $1 billion for violating securities laws, CEO Jamie Dimon had his 2012 pay cut in half, a U.S. Senate subcommittee accused the bank of misleading investors and dodging regulators, and some traders faced criminal charges.
Needless to say – we’re talking about government work here, after all – the repercussions of an IMF loan nearly 10 times bigger going south in less than two years haven’t been quite as severe.
In fact, the person ultimately responsible for the loan, IMF head Lagarde, isn’t even suffering the blowback… because now she’s the head of the European Central Bank. That’s right: The top manager who oversaw a catastrophically bad loan upon which the credibility of the IMF supposedly depended… is now head of an institution many times bigger, more important, and more powerful than the IMF.
That’s a little bit like Jamie Dimon personally making the disastrous London Whale trades himself, and losing nearly 10 times as much… And for his trouble, then being promoted to be the Grand Poobah, the King and Master of All Banks of America.
Meanwhile, Argentina, and its 44 million residents, are going through withdrawal…
Kim Iskyan is an editor at large for Stansberry Research, and has written about investing in a wide range of frontier and emerging markets. Until recently, he was the publisher of Stansberry Research’s Asian affiliate, and he lives in Singapore.