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Monday, 18 December 2017

Solo success

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Argentina has found a credible scapegoat in the IMF for its self-imposed exile from capital markets.

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An IMF deadline for Argentina to provide accurate inflation data earlier this month may have fuelled dire warnings in the country’s press that sanctions may be inevitable – but it also underlined how little influence the Fund has these days over the South American maverick.

Bad relations between the Fund, investors and Buenos Aires have generated noise both inside and outside the country, which has been locked out of international capital markets since its debt default in 2001.

But turning down the volume and listening instead to the mood music reveals much about the IMF’s dwindling authority and can deliver a salutary lesson to capital markets about what determined policymakers can achieve without them.

In short, defaulting on bonds worth US$81bn may have bruised Argentina’s credit rating – but it has not hurt its economy.

The latest round in Argentina’s tug-of-war with the IMF relates to the credibility of the country’s inflation data. The political manipulation of inflation figures is nothing new and in 2007 the then-president Nestor Kirchner put his own appointees in charge of the national statistics institute, Indec.

Three rates now compete for prominence in the public mind: Indec’s own rate, which has had year-on-year price rises hovering between 9% and 10%; a survey of inflation estimates by private-sector research firms, favoured by opposition congressmen, which puts it at about 24%; and estimates by Torcuato Di Tella University which have generally placed 12-month inflation expectations even higher at closer to 30%. The country’s powerful CGT labour federation has even hinted it would elaborate its own index.

The upshot is that most independent economists agree that Argentina is experiencing stagflation.

The IMF has been dismissive of the nation’s benchmark CPI and in February [2012] gave Buenos Aires six months to provide accurate figures.

Drama

But the tussle is in fact a sideshow to a bigger drama in which it is the IMF that has been forced on to the defensive.

Since 2006, when Argentina paid off its entire US$9.8bn debt to the lender, it has also been the only G-20 country that refuses to accept an annual IMF review and the inevitable policy constraints that go with it.

Argentina’s assertive stance stresses the merits of being free of the Fund, a position that reaches back to the 2001–02 meltdown and the genesis of the dynasty established by Kirchner and Cristina Fernandez. Their hostile disposition stemmed from what is often accepted to have been the Fund’s role in stoking the crisis and mismanaging its aftermath.

In the 1990s the IMF lent billions of dollars to Argentina, lauding it as an exemplar of its reform agenda and propping up a controversial exchange rate policy, the convertibility programme, pegging the currency to the dollar.

Walter Molano, emerging markets analyst with BCP Securities, said: “They have a very antagonistic type of attitude and that’s because in Argentina there’s a general sense – and I think rightfully so – that the IMF and the international community was largely to blame for their woes, for the perpetuation of the convertibility plan, for the massive amount of indebtedness that they got themselves into, and for the horrible crisis and how that then unfurled.”

“Argentina was used as the poster-child for the IMF economic reforms during the 1990s and it co-operated 100% with all of the IMF diktats.”

In August 2001, as confidence collapsed, Argentina pleaded with the IMF for a last-ditch US$8bn standby credit, which the Fund coughed up largely in an effort to inoculate itself from blame for the country’s eventual crisis. But when the IMF did eventually withdraw its support, Buenos Aires was forced to default.

Kirchner skilfully stitched together a country tearing itself asunder behind a recovery strategy by blaming the IMF for Argentina’s woes. In 2005 he made a take-it-or-leave-it offer to swap the defaulted bonds for new ones worth 35 cents on the dollar and, while 93% of bondholders had accepted by 2010, holdout creditors dominated by vulture funds as well as 60,000 individuals from Italy snared the country in legal action.

Buenos Aires has shrugged off a series of US court judgements in favour of creditors and its image was not helped by the decision of Fernandez in April this year to expropriate 51% of YPF from Spain’s Repsol. Hardline critics duly condemned the move as evidence of a populist turn and there was wild talk of Argentina being forced out of the G-20.

Argentine officials insisted the move was essential to reverse declining oil and gas output.

Turning up the heat

But some Argentine commentators fear the impact of worsening relations with Washington and multilateral bodies. The US has been cranking up the pressure, concerned about Argentina’s stance towards creditors and its failure to honour awards against it by the courts and the World Bank’s International Centre for Settlement of Investment Disputes.

Matters have not been helped by a ruling earlier this month by an Argentine judge ordering the arrest of Credit Suisse executive and former US Treasury undersecretary David Mulford over a 2001 swap. Mulford is closely identified with economic negotiations under former US President George Bush, a key supporter of former President Carlos Menem, the architect of the convertibility plan which he then used as a springboard for harsher reforms.

Add to this gripes on trade – the US, EU, Japan and Mexico have filed complaints against Buenos Aires at the WTO over import restrictions – and the very mention of  Argentina reinforces a sense of exasperation among its G-20 partners. When Nicolas Eyzaguirre, director of the IMF’s western hemisphere department, left the fund last month to head a television channel in his native Chile, one could almost hear the sigh of relief.

Yet while there is clearly a weariness about Argentina’s transgressions, there is also a more nuanced understanding among some analysts of its behaviour.

“Argentina is in a very comfortable situation – the only big threat facing it is the slowdown in Brazil, but it has a solid balance of payments situation and a solid fiscal situation and the debt levels are very much manageable”

The country remains in a solid economic position, and since the 2005 swap GDP has risen an average 7% a year. After defaulting, Argentina let the peso float – and by 2003 the economy was soaring on the back of higher soyabean and grain prices. Export taxes pushed reserves to record levels, allowing Fernandez to tap these for debt payments.

Molano said: “Argentina is in a very comfortable situation – the only big threat facing it is the slowdown in Brazil, but it has a solid balance of payments situation and a solid fiscal situation and the debt levels are very much manageable.”

Moreover, although the holdouts will probably hamper any return to global markets, the government has made it clear it has no current need for the capital markets.

There have also been few real consequences over the nationalisation of YPF and, as if to underline its confidence, in July it reportedly began sounding out banks about a possible international bond deal to cover capex – a move met with incredulity among investors.

Diego Ferro, portfolio manager at Greylock Capital Management, said: “Obviously we can be very judgemental about how wrong the actions were but if you look at it from the position of the Argentine government, they did it and nothing happened.”

The capital markets remain very much a local affair, but are by no means moribund. The local commercial loans market is vigorous as, in the face of currency restrictions, Argentine companies opt to take on debt rather than give up dollars.

And, in the final analysis, in Argentina as in many Latin American countries wrestling with the IMF is more of a political asset than a liability.

Ferro said: “It has been a very political thing trying to show independence from the IMF and it is hard to see anything the IMF can do about this from a political standpoint. Indeed, it may even be good politically for the President to show what the IMF does to the country if there are any sanctions against it.”

So if the IMF’s best bet for increasing pressure on Buenos Aires is by picking a fight over inflation statistics, it is a further sign of how limited is its room for manoeuvre.

In short, the Fund’s reputation in the country has all but collapsed but it has largely held its tongue about Argentina’s transgressions – mindful that a shouting match could rake up memories of past errors.

As Molano pointed out: “They have really no authority over Argentina. It was a lab experiment that went very badly for the IMF.”

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