The size of the IMF’s recent $57.1bn rescue package for Argentina — the biggest non-precautionary loan ever from the Fund — may have looked impressive but it is not large enough, according to Robin Brooks, chief economist of the International Institute of Finance (IIF).
“The programme needs to be bigger,” he told GlobalMarkets in an interview. His comments came as Argentina is seeking official approval for its revamped agreement from the IMF board. “What Argentina really needs is $75bn for three years,” he said.
The latest crisis in Argentina was triggered by a combination of twin deficits and a currency crisis. Argentina’s financing needs are estimated at around $25bn per year by the IIF. Without capital flight, the figure would go down to some $15bn, according to Brooks. But capital flight is “inevitable”, he said.
Argentina’s policy response to the crisis was a classic mix of fiscal tightening (the government intends to eliminate the primary budget deficit as early as next year), monetary policy tightening including sharp interest rates, and a reserve requirement increase.
“[IMF president] Christine Lagarde has made this [programme] a clear priority for the institution. There’s a lot of political goodwill to make this programme work,” Brooks said. Nevertheless, the political context and the potential political risks cannot be ignored. Pushing for a tough fiscal adjustment that would plunge the country into a deep recession in an election period might be very risky, he said.
Conservative president Mauricio Macri will seek re-election in October next year. “The reason we argued for a bigger programme is so that you can do a softer fiscal adjustment to help the current government win the election. This is the key,” Brooks said.
The alternative to Macri’s policies could be a very unorthodox populist government, he argued, which might jeopardise the implementation of the current programme.
“If you have a market-unfriendly populist win the election next year, anything can happen,” Brooks said. “Then the whole political sustainability of the programme could be in question.
“I have talked a lot to the IMF mission to upsizing the programme. There is still a good amount of time before the elections, so there is an opportunity to make this work.”
WEAK SENTIMENT
Nevertheless, other market analysts have said the current agreement stands on its feet. “I think it is generous enough, large enough and it is front-loaded enough,” said Alberto Ramos, Latin America chief economist at Goldman Sachs. “They have access to $36bn between now and the end of next year.
“But there is also a problem of weak sentiment. The locals [the Argentines] when they see episodes like this, volatility in the FX market… their inner fears come to the fore and they become hyper-defensive. You have to convince them this [programme] is going to work,” he said.