‘Winter is coming’: Argentina’s most recent crisis

Latin America has a problem with populism. From Bolivia’s Evo Morales to Venezuela’s Hugo Chávez, from Nicaragua’s Daniel Ortega to Brazil’s Luiz Inácio Lula da Silva, backlash politics in the region has repeatedly taken the shape of left-of-centre parties, sometimes sources of rampant authoritarianism. Former President of Argentina Cristina Fernandez de Kirchner did not divert from such trend. Her bullying of the media, constant attacks on the central bank’s independence, repeated attempts to subjugate the judiciary to executive power and indifference towards the free reign given to corrupt officials within her party (potentially including herself, as the corruption charges filed against her indicate) has not set her administration apart from that of Brazil’s Workers Party (PT), for example, and the subsequent corruption scandal and economic fiasco that followed its rule. That explains why Argentinians elected Mauricio Macri, an anti-populist and market-friendly reformist, to the presidency in 2015. That also explains, even more eloquently, the euphoria among foreign investors when the new government began its adjustment program as an attempt to make Argentina’s economy ‘normal’ again. Although progress has been made in that sector, the most recent currency/foreign-debt crisis in a country infamously known as a ‘serial defaulter’ by economists has made Mr. Macri’s political survival more difficult, but even more essential.

As in most cases in history, this economic crisis is a result of a wide range of variables and cannot be considered in isolation. Mr. Macri inherited a closed, disarrayed and highly abnormal economy from his Peronist predecessor. Apart from her authoritarian instincts, Mrs. Kirchner and her late husband and Former President, Nestor Kirchner, openly defied Argentina’s creditors in the aftermath of the 2001 economic collapse by refusing to negotiate a settlement of the debt and by vilifying the IMF for their doomed rescue operation during the crisis. The result was financial isolation and a series of money-printing schemes to finance the government’s ever-growing spending bill. Such fiscal and monetary irresponsibility inevitably caused inflation to rise despite the government’s attempts to keep it in check via costly subsidies. The government was even accused of ‘misrepresenting its inflation data’ in order to hide annual rises of more than 40% in prices. It also imposed currency controls to maintain an artificially overvalued peso.

Upon assuming command, Mr. Macri largely abolished the self-harming money-printing practice and agreed to gradually depreciate the peso by lifting currency controls. He slowly eliminated inefficient subsidies to avoid a sudden inflationary outbreak and stroke a deal with foreign investors that opened the doors once again to credit markets in a time of low interest rates. Consequently, investors poured money into the country and the economy boomed in 2017 with a 2.9% increase in GDP. The government finally seemed set on course to correct its fiscal deficit and even issued the country’s first 100-year bond, which investors enthusiastically bought as optimism filled the streets of Buenos Aires.

Such change in mentality and economic policy is more than welcome in a region aforementioned as a breeding ground for overspending and interventionist populist governments. Argentina itself was a victim of a succession of highly incompetent presidents and dictators, thus seeing its European-level economic standards at the beginning of the 20thcentury decline sharply over the decades. However, since the beginning of this year, its chronic economic troubles and heavy dependence on volatile foreign investment have counter-attacked in full force. The once low international borrowing costs are no more: the US Federal Reserve has increased interest rates and the dollar has become dangerously more expensive for Argentinians. Adding to that is a plunge in investors’ confidence in the government’s ability to control inflation (it is expected to reach 42% this year, and GDP to shrink by 2.4%), intensifying their move away from risky assets. Another latent threat is that an already traumatised population may run to the banks to withdraw their money as they did in 2001. The central bank has now risen interest rates dramatically to 60% and sold billions of its foreign currency reserves to preserve the peso’s value. Since the cheapest source of credit currently available is the IMF, Mr. Macri has now asked the fund for a $50bn rescue package, which will probably come with tough conditions given the country’s historical lack of ‘strong economic fundamentals and policy track records’. The fiscal adjustment (more commonly known as austerity) that will be required should not be blind, however, to the damage and retrogression a new populist backlash could bring to the country and, therefore, should opt for the least politically disruptive strategy available.

Unfortunately, the very act of summoning the IMF already demands considerable political capital, which Mr. Macri is willing to spend if it means not having to turn to alternative – and prohibitively expensive – sources of credit, at least until the next presidential election in 2019. According to a recent poll, 75% of Argentines think that asking the IMF for help is a ‘bad move’. Nevertheless, the president still enjoys around 40% of popular approval, which is impressive considering the ‘shock therapy’ he has bravely pursued over the last three years. A hopeful sign is that the IMF recently appointed Gita Gopinath as its new chief-economist. Her distinguished expertise in exchange rates, capital flows, sovereign debt and the power of the dollar make her uniquely qualified to assist the Argentinian government. In any case, what Argentina needs more than anything is patience, political moderation and strong and consistently applied economic reforms. In his quest for strengthening Argentina’s democracy, Mr. Macri has restored the independence of institutions such as the central bank, recognised the importance of greater economic freedom and turned to competent technocrats for permanent solutions to the crisis, not the easy and barely durable remedies applied by populist governments in the past. This already sets him apart from other emerging economies facing similar shocks at the moment, such as an increasingly autocratic Turkey, where President Recep Tayyip Erdogan has made a mockery of monetary policy by refusing to let the central bank increase interest rates even though inflation is dangerously high.

As the economist Simon Kuznets famously remarked: ‘There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina’. As more countries have been able to copy Japan’s model of industrialisation, Argentina has not yet succeeded in overcoming its isolated classification. Despite the government’s recent failures, attacks against it should always take into account that the Peronist alternative is worse and that the meaningless label ‘neoliberal’ attributed to Mr. Macri’s policies by his political opponents is mostly ideological, not critical. The President has not turned inwards for answers, as some countries have done in recent years, but outwards. He has not given up on the international liberal order and Argentinians should not do it either.