The US has one clear goal in sight: to get Argentina to sever its ties with China, particularly by terminating a long-standing currency swap agreement.
As we warned just over a month ago, the wheels are beginning to fall off the Mileis’ faux libertarian clown bus. But if anything, the show is getting even weirder.
Last Friday (11/04), as the country experienced its third general strike since Javier Milei’s government took office 16 months ago, Milei gave a televised address to the nation. Flanked by his senior cabinet members, Milei told the Argentine people that his government had finally lifted the currency controls once and for all so that people can once again buy dollars unhindered.
Economic stability, he said, had finally returned to the country — all thanks to another IMF bailout, Argentina’s 23rd since becoming a member of the fund in 1956.
Fake Libertarians Celebrate While IMF Staffers Refuse to Sign
To my knowledge, this is the first time that an Argentinean government, or indeed any national government, has responded to an IMF bailout with jubilant celebration. The fact that this is a government of pseudo-libertarians to whom the IMF should be anathema makes it all that more surreal.
Argentina’s Finance Minister Luis Caputo, a serial debtor and former JP Morgan Chase banker who already burdened Argentina with a $57 billion IMF loan in 2018, even thanked his wife and children for their support during the negotiations, as if he were winning a lifetime award.
At the same time, some senior IMF staffers were so opposed to the deal that they were willing to walk away from their jobs, according to La Política Online (LPO):
The opposition that this situation generated among the staff of the organisation, led to the firing of several management cadres. First it was the Chilean Rodrigo Valdés, who as director of the Western Hemisphere was the persion who naturally had to lead the Argentine case. Valdés is a consistent critic of Argentina’s hyper-indebtedness favoured by the Fund.
And now it has emerged that Turkey’s Ceyla Pazarbasiogluel, the director of the IMF’s Strategy, Policy and Review Department (SPR), refused to sign off on the new loan. In her place, two minor officials intervened to trigger the loan. “Totally outside the manual,” the Fund itself acknowledged to LPO.
The SPR is known as the “alpha male” of the IMF’s departments, or the IMF’s “politburo” — metaphors that illustrate its enormous power behind the scenes, since no major report can be published without its approval, as a former member of that committee revealed in an article in the Financial Times.
The IMF’s original $57 billion bailout of Argentina in 2018 was already the biggest in the Fund’s 81-year history. At the time, many warned that Argentina would end up bailing on the bailout. As my former WOLF STREET colleague Wolf Richter wrote at the time, “No one should ever lend dollars to Argentina, not even the IMF. This always ends the same way: in a default.”
And so it proved. In recent weeks, a default was looking more and more likely. The Central Bank of the Argentina Republic (BCRA) had burnt through more than $40 billion of the country’s foreign exchange reserves in a futile attempt to keep the peso artificially high, and thus inflation (in pesos) artificially low. In the process, it had not only run out of reserves, it had taken them into negative territory, and was now auctioning off other state assets to contain the run on the dollar.
Now, even senior staffers at the IMF are warning about the risks of doubling down on the Fund’s exposure to Argentina’s debt. Buried within the text of the new agreement is an admission by the Fund itself that Argentina’s even more bloated debt load is practically unpayable. From LPO:
What is striking is that even without Pazarbasiogluel’s signature on the contract, the SPR warns in the fine print of the agreement about the risk of the IMF’s larger than ever exposure to Argentina.
The Fund’s maximum credit to Argentina, assuming disbursements are made as scheduled, is projected to reach 1,352% of the country’s quota in 2026. This would be the Fund’s largest exposure in absolute terms in its history.
Argentina is receiving loans not just from the IMF but also the World Bank and the Inter-American Bank, all of which will have their own sets of terms and conditions. The IMF will be providing just under half of the total $42 billion bailout ($20 billion) while the World Bank will chip in an extra $12 billion, and the IAB, $10 billion. The latest loan package increases Argentina’s total debt to multilateral institutions to over $80 billion.
Needless to say, attached to the IMF bailout are all the usual structural adjustment reforms (pensions reform, labour reform, fast-tracked privatisations, tax reforms and currency devaluation…) that the IMF itself admitted almost a decade ago don’t work yet continues to apply. Javier Milei, who before entering politics described the IMF as a “perverse institution”, will happily abide.
Loosening Currency Controls
“Today we are breaking the cycle of disillusionment and disenchantment and are beginning to move forward for the first time,” Milei said. “We have eliminated the exchange rate controls on the Argentine economy for good.”
Even in the most generous of readings, this is only partially true. Some currency controls not only remain in place but appear to have got even tighter. A statement issued by the central bank on Friday suggested that the loosening of currency controls will not apply to those who use cash. In order to be able purchase foreign currency banknotes, the central bank said that “customers’ use of local currency cash must not exceed the equivalent of USD 100 (one hundred US dollars) in the calendar month for all entities and for all the indicated purposes.”
In other words, the currency exchange controls not only remain in place but will actually intensify for anyone using cash — before the latest IMF bailout, Argentineans could exchange up to 200 dollars’ worth of pesos in cash per month. Needless to say, $100 does not get you far in today’s Argentina, which thanks to Milei’s policies has become the most expensive country in dollar terms in Latin America.
Government representatives have since countered that citizens and businesses will be able to buy unlimited sums of dollars and send them overseas — but only using online banking. This is great news, of course, for well-heeled corporations and investors, including those who have made huge returns by betting on the roughly 30 percentage-point interest rate differential between Argentina and the US — all made possible by the Milei government’s unsustainable policy to keep the peso artificially high against the dollar.
Just as happened in 2018, it looks like an IMF loan is about to be used to finance capital flight out of the country. In 2018, the then-Macri government’s prior lifting of capital controls allowed the financial speculators who had invested in Argentine bonds to get their money out of the country before the next default.
It’s a different story for the legions of Argentineans who don’t use online banking, preferring instead to have their savings, mainly in dollars, outside the banking system. This is largely because of their well-earned distrust of the banking system. It was, after all, only a generation ago that President Fernando De la Rúa imposed brutal restrictions on the withdrawal of money from banks, which would come to be known as “el corralito”. As inflation surged following repeated devaluations, many Argentines lost their life savings.
Today, more and more people who do have bank accounts are having their bank accounts frozen due to failure to pay all their taxes on time or comply with the ever more onerous tax obligations. As we’ve reported previously, Milei’s government, despite its libertarian pretensions, has massively increased the tax burden during its 16 months in office, especially for lower and middle classes.
Another way Argentineans will be instantly impacted by the bailout deal is through devaluation of the Argentine peso, and the resulting inflation it will fuel. One of the conditions of the IMF bailout is that the Milei government and central bank allow the Argentine peso to trade within a so-called currency band ranging from 1,000 to 1,400 pesos per dollar. On its first day of trading within the band, the official exchange rate fell 12%. It will probably fall a lot further.
Just two months ago, Milei said there was no way his government would devalue the peso.
The upshot of all this is that Argentina is likely to see a sharp resurgence in inflationary forces in the months to come. The Milei government’s most touted achievement — its supposed taming of inflation, achieved through the brutal application of austerity — was totally unsustainable. Inflation was already beginning to surge back in recent months. The country continues to boast the highest official inflation rate of any country not at war, and Milei is now talking about bringing price inflation to zero by mid-2026. Only his most committed followers will believe him.
Meanwhile, the austerity will intensify. The only way the government has of bringing inflation under control is to kill the economy, and even that’s not working.
US Secretary of State Pays a Call
On Monday, just three days after the IMF mission left Argentina, the US Treasury Secretary Scott Bessent arrived. It is unusual for a US treasury secretary to visit third countries, especially those with smallish economies, notes the Argentinean sociologist Atilio Boron in an essay on the possible reasons for Bessent’s visit. Besides participating in multilateral fora such as meetings of the G7, the G20, and the IMF, treasury secretaries rarely travel in an official capacity to countries that are not of decisive importance to the functioning of the global economy.
Which is why the visit of Donald Trump’s Treasury Secretary Scott Bessent to Argentina yesterday (14/04) raised a few eyebrows, especially given the turbulent global economic and geopolitical backdrop.
As trade officials in Washington awaited the arrival of Maros Sefcovic, the trade chief of the European Union, one of the US’ biggest trade partners with nearly $1 trillion in two-way trade last year, Bessent was sitting down to do business with Javier Milei, the president of a country that accounts for a mere $16.3 billion in total annual trade with the US.
It’s not hard to see why. The obvious answer, says Boron, is China…
Read the full article on Naked Capitalism
Nick Corbishley 