ARGENTINA: History repeats itself?

The current economic and financial situation of Argentina appears to be risky and its forecast bleak. The Government is finally adopting measures to eliminate fiscal imbalances with the support of the IMF. For many too late and for others the beginning of a long road to solve the structural problems that haveaffected Argentina’s economy for more than fifty years. The pessimistic view finds striking similaritieswith the period preceding the crisis of 1989 and 2001. I summarize the comparisons for better understanding and further analysis:

• THE FINANCIAL SIMILARITIES TO 2001

In 2000 – 2001 the government of the Alliance (political coalition opposing the Peronist Party that won the presidential elections in 1999) after failing to implement economic reforms and facing lack of external lending, entered into an agreement with the IMF and obtained first a disbursement of two billion and another one in February 2001, for the same amount.

As the economic deterioration also continued, the Government entered into a new agreement with the IMF where it applied a “zero deficit” law in July 2001 and by adopting the law with it became the recipient of additional financial aid: in September, it obtained a “bailout” for 8 billion dollars (6 billion dollars from the IMF and another 2 billion from the World Bank).

Despite the implementation of fiscal adjustment policies, the relief lasted just three months. In December foreign exchange and bank accounts limitations were implemented as the Fund stopped attending thecountry financial needs (called “corralito”). There was no way then to avoid the debacle and everythingexploded.

The resemblance to the current government management of the crisis by Cambiemos is more than evident. In January of this year the Government received 9 billion dollars of its last debt placement in the open markets. In May already without funding it went again to the IMF to request a financing similar to that above described of the Alliance, obtaining 15 billion in June. After just three months at the end of September the level of reserves at the Central Bank are the same as in June. The Fund’s money lasted again for only three months.

In spite of this clear failure, we insist again with another agreement with the IMF, with a new attempt to obtain a “zero deficit” balance. Although what is now agreed with the IMF in this second agreement is more like what was applied in 1989.

• THE FINANCIAL SIMILARITIES WITH 1989

In August of 1988 the then government of Alfonsin (Radical Party opposed to Peronism) launched the so- called “Spring Plan” to contain a dismal economic situation. Under this plan a strong fiscal adjustment was applied to reduce the deficit and tariff increases were authorized in public services, betting that a hard recession could contain inflation and the run on dollar. In addition, the Spring Plan was accompanied by the support of the World Bank and bank reserves were raised and interest rates were raised to very high levels.

That is to say, an economic formula was applied that was almost identical to the current one, which also combines adjustments, tariffs increases and high interest rates, being the only difference in that it is now only the IMF behind the plan and not the World Bank.

The Alfonsin plan went relatively well the first three months (similar to the 2001 crisis). They attracted dollars to the country by paying high interest rates (similar to the current measures). The pressure on the dollar was decompressed somewhat and the fall of the economic activity made the inflation decrease substantially, reducing it to a monthly digit. However, in December everything became complicated again: the capitals that had entered the country began to leave, increasing the pressure on the dollar, which had become the key anti-inflationary anchor. The Central Bank began selling foreign currency to calm it, but the pressure could not be stopped. In addition, being 1989 an election year, fears of the return of Peronism to power took over the markets, redoubling the exchange rate pressure (another similarity with the present situation).

Against this background, the World Bank cut off its aid to Argentina since it was no longer convenient to continue supporting the country. As a consequence, the Central Bank withdrew from the exchange market in February 1989 to protect its reserves and the final run ended in a hyperinflation burst, consequently ensuring the Peronist triumph.

As we pointed out above, today there are striking similarities with both crisis. At the end of 2019 there will also be a presidential election, where there is also fear in the markets of the return of Peronism to power as in 1989. The capital that is invested in government notes as a result of the high interest rates of 70% that the Central Bank is paying, may also fade away if the situation does not improve and the chances of the return of Peronism in the next presidential elections increase. It happened before in 1989. If the similarities continue to grow, it is worth wondering if the IMF will not stop helping Macri as the World Bank did with Alfonsin.

There is a “déjà vu” feeling which makes people wondering what will the government be willing to doto avoid repeating once again the tragic consequences of the past?