Argentina’s Friendships Could Jeopardize Its Debt Relief

Fifteen years ago, Argentine President Néstor Kirchner triumphantly announced plans to prepay Argentina’s $10 billion debt to the International Monetary Fund, putting an end to the fund’s “interference.” Argentines cheered the IMF’s exiling. After all, the lender was widely loathed for its role in the country’s spectacular economic collapse in 2001. That year, amid a prolonged recession and capital flight, the fund suspended support for Argentina, leading to a $100 billion default and economic collapse. By 2007, Argentina had recovered, and Kirchner retired as the only modern Argentine president to leave office with an approval rating above 50 percent.

Last year, Kirchner’s former chief of staff, Alberto Fernández, successfully ran for president by campaigning against a familiar villain. In 2018, the IMF had again bailed out Argentina, approving a $57 billion rescue package, its biggest loan ever. Fernández blasted the agreement as “harmful” and hinted he would disobey its austerity requirements. A top campaign surrogate, Sergio Massa, now Argentina’s lower house speaker, said the IMF should not “punish” borrowers with budget cuts that deepen recessions. “The dead cannot pay,” he said.

Politically, the tactic was easy to understand. Even after IMF funds poured into Buenos Aires to stanch the 2018 currency crisis, 56 percent of Argentines still disliked the institution, according to the ArgentinaPulse survey. In office, however, Fernández has made peace, not war, with the IMF. As Argentina faces a grim economic forecast in 2020, dramatically worsened by the coronavirus pandemic, a new IMF deal could be vital. But Fernández’s regional diplomacy, including his handling of Bolivia’s electoral tensions, could jeopardize Argentina’s suddenly easygoing relations with the fund.

Fernández inherited a shrinking economy and sagging demand for Argentina’s farm exports, and his approach to the IMF, once in office, has reflected those grim conditions. Fernández’s finance minister, Martín Guzmán, has had a series of friendly encounters with IMF officials, including a meeting in Rome with Managing Director Kristalina Georgieva.

The IMF has reciprocated. In February, it thrilled Argentine authorities by declaring Argentina’s debt “unsustainable,” saying the budget cuts needed to cover the country’s interest payments were “not economically nor politically feasible.” That conclusion strengthened Argentina’s negotiating position in upcoming high-stakes talks with private creditors.

Argentina’s relationship with the IMF is not entirely without drama. During a recent visit to Cuba, former President Cristina Fernández de Kirchner—N­éstor Kirchner’s widow, who now serves as vice president—demanded a “steep discount” on Argentina’s $44 billion IMF debt. Not surprisingly, the IMF has not agreed to loan forgiveness. But it has remained supportive of Argentina’s new government, despite heterodox economic policies, including price controls, capital controls, and tax hikes, that will likely discourage production and exports in the long term. Publicly, fund economists have been mum on the structural reforms included in Argentina’s 2018 IMF agreement, including politically sensitive changes to the labor code. Nor have they weighed in on Argentina’s plans to run budget deficits until at least 2023.

That may be because Argentina is a graveyard for IMF programs. Over the years, its failures to stabilize the country have come to symbolize the limits to austerity. Georgieva, who inherited the Argentina program from Christine Lagarde at the end of September 2019, is clearly hoping to limit further damage to the fund’s reputation. Her approach has already been rewarded: Fernández has agreed to submit to the IMF’s periodic reviews, known as Article IV consultations. Given Argentina’s history, that was not a minor concession. Kirchner railed against the fund’s surveillance, and after Fernández de Kirchner succeeded him in 2007, the IMF censured Argentina for failing to provide accurate economic data—the first time it had punished a member for that offense.

Argentina is a graveyard for IMF programs. Over the years, its failures to stabilize the country have come to symbolize the limits to austerity.

But the fate of Argentina’s relationship with the fund—and its prospects for a new agreement with the lender—does not rest only on its ties to IMF leadership. The United States controls 17 percent of the votes on the fund’s Board of Governors, by far the largest share, and securing U.S. support is Buenos Aires’s top priority for the diplomatic relationship. That has put Fernández on a foreign-policy tightrope, laboring to please leftist factions in his coalition while wary of ruffling feathers in Washington.

U.S. President Donald Trump considered Fernández’s rival, former President Mauricio Macri, an ally and friend, and the White House reportedly was instrumental in securing the 2018 IMF bailout Fernández has criticized. Nevertheless, Fernández has studiously sidestepped tensions with the White House. This past December, before his inauguration, he traveled to Mexico to meet Trump’s top Latin America advisor, Mauricio Claver-Carone, to reassure Washington he would not replicate the leftist foreign policy that frayed relations under Fernández de Kirchner.

He has been particularly cautious on Venezuela, a close partner under Argentina’s last Peronist president, Fernández de Kirchner. In 2013, she awarded Venezuelan strongman Nicolás Maduro the Order of San Martín, the country’s highest honor. This time around, Fernández has largely kept his distance. Argentina, for example, has remained a member of the Lima Group, a collection of Latin American countries strongly opposed to the Venezuelan regime and largely allied with Juan Guaidó, the legislative leader who also claims the presidency.

On occasion, Fernández’s Venezuela policy has irritated the United States. He invited a Venezuelan representative to his inauguration, leading Claver-Carone to boycott the ceremony. He also withdrew recognition of Guaidó’s ambassador in Buenos Aires. But for the most part, U.S. officials seem satisfied with Argentina’s approach.

Recently, however, Fernández has upended his charm campaign by mounting a surprisingly spirited defense of Evo Morales, the longtime president of Bolivia who resigned in November at the urging of the armed forces. The White House celebrated the ouster of Morales, who had been the last survivor of the so-called pink tide that brought leftist leaders to power throughout Latin America in the early 2000s. The U.S. State Department quickly announced plans to assign an ambassador to La Paz for the first time in over a decade. On Twitter, Trump praised Bolivia’s interim president, Jeanine Áñez, despite complaints about repressive policing and prejudice against the country’s indigenous majority since Morales’s ouster.

Fernández takes a different view. He immediately recognized Morales’s disputed reelection in October, offering “total support” and criticizing the U.S. response. After Morales fled La Paz, Fernández denounced his removal as a coup and demanded that Argentina’s outgoing president, Macri, push for Bolivia’s “return to democracy.” Fernández offered Morales asylum in Buenos Aires, where Morales regularly weighs in on Bolivian politics. (Bolivia recently postponed its presidential election, which had been scheduled for May 3.)

In recent weeks, Fernández has ramped up his uncharacteristic Bolivia crusade. After two researchers from the Massachusetts Institute of Technology cast doubt on the allegations of electoral fraud that led to Morales’s ouster, Fernández doubled down on his position, championing the study even as the Organization of American States defended the conclusions of its election observers. (MIT later distanced itself from the report.)

In recent weeks, Fernández has ramped up his uncharacteristic Bolivia crusade.

Fernández’s motivations are not entirely clear. It is possible his Bolivia policy is designed to satisfy supporters of his powerful vice president, who admires Morales. Fernández de Kirchner, who invited Fernández to run for president, retains the loyalty of many of Peronism’s activists, including the Cámpora youth movement. The manner of Morales’s downfall might also have troubled Fernández. The Argentine left harbors deep resentment of the armed forces, which seized power in 1976 and murdered as many as 30,000 in a so-called Dirty War against domestic opponents. Today, fewer than half of Argentines have confidence in their military, according to Latinobarómetro. That skepticism might have predisposed Fernández to reject the role of the Bolivian armed forces in Morales’s resignation. There is also a large Bolivian population in Argentina that supports Morales. Finally, unlike Maduro, Morales has built personal ties to Fernández that could shape Argentina’s approach to its neighbor.

Whatever the origins, Fernández’s defense of Morales is jeopardizing his relationship with the United States at a critical moment. In part thanks to the coronavirus, which has choked Argentina’s tourism sector and depressed prices for its major farm exports, Argentina’s economy is projected to shrink by 2.5 percent this year, and its populist government is struggling to meet public expectations of big increases in social spending. What little cash it had available is now needed for emergency economic stimulus to address the pandemic, such as tax cuts and infrastructure spending.

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Argument

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Benjamin N. Gedan

An agreement with the IMF would be a godsend, postponing repayment and sending an encouraging signal to Argentina’s private creditors. Those negotiations would be difficult in any circumstance, as Peronism’s spendthrift style and resistance to market liberalization do not jibe with IMF tastes. But they would be far more complicated with resistance from the U.S. Treasury, which could demand strict conditions for any new IMF program.

So far, Treasury has been vague. After U.S. Treasury Secretary Steven Mnuchin met Guzmán at the G-20 meeting in Riyadh, Saudi Arabia, in February, he issued a statement noting blandly that the two had “discussed his government’s plans to implement economic policies.”

Since Fernández came to power, the White House and State Department have been more enthusiastic about the prospects of maintaining close ties, despite a history of bad blood between Peronists and the United States. Following Fernández’s election, Trump congratulated the president-elect by phone, and U.S. Secretary of State Mike Pompeo said the United States and Argentina “shared democratic values and priorities.” But the White House has not announced an Oval Office visit for Fernández, and his foreign minister, Felipe Solá, has not yet made it to Pompeo’s office. Fernández’s Venezuela policy may placate the White House, but as Bolivia continues to move toward an eventual election, he may be spending down much of the good will he built up.