How can the IMF bail out Argentina when it has two exchange-rates?

by Shaun Richards

There is something of a wearying familiarity about the concept of Argentina defaulting. Rather along the lines of the quote from the US baseball coach Yogi Berra ” it is just like deja vu all over again.” Although for some apparently hope springs eternal.

Argentina sold $2.75 billion of a hotly demanded 100-year bond in U.S. dollars on Monday, just over a year after emerging from its latest default, according to the government.

The South American country received $9.75 billion in orders for the bond, as investors eyed a yield of 7.9 percent in an otherwise low yielding fixed income market where pension funds need to lock in long-term returns.

That was from Reuters on June 20th 2017 and the words “hotly demanded” were mindboggling even at the time with the fact the latest default had only been a year before. Actually there was a warning in the article.

“It’s awfully premature for Argentina to issue 100-year bonds,” said Jorge Piedrahita, chief executive officer of Puma Investments. “When you look back in history, I’m not sure we can find a 20-year period where Argentina has not defaulted.”

In essence it was always going to be a race between how long you could collect the 8% for and the inevitable default. It only took just over a couple of years before places like BondEValue were reporting this.

The century bonds traded as low as 45 cents on the dollar while yields on the shortest-term dollar bonds Argentina has outstanding traded up to above 50%. According to analysts, the 100-year bonds will repay investors less than 40 cents on the dollar if the sovereign were to default.

Oh Well as Fleetwood Mac would say.

That came only a couple of months after Christine Lagarde who was then head of the International Monetary Fund had declared this.

I reiterated the IMF’s support for #Argentina’s economic program which is starting to yield results and should lay the foundation for sustainable growth.

At least she did not call it “shock and awe” as she had with Greece just before the economy collapsed.

Where are we now?

From January 28th.

“IMF staff and the Argentine authorities have reached an understanding on key policies as part of their ongoing discussions of an IMF-supported program.”

 

As ever it involves austerity which is rather against the fiscal orthodoxy these days.

IMF staff and the Argentine authorities have agreed on the fiscal consolidation path that will form a key policy anchor of the program. The agreed fiscal path would gradually and sustainably improve public finances and reduce monetary financing

It is hard not to think best of luck at a time like this with this part.

We agreed that a strategy to reduce energy subsidies in a progressive manner will be essential for improving the composition of government spending.

After all it follows on from this.

On June 20, 2018, the Executive Board approved the largest stand-by arrangement in the Fund’s history, in support of Argentina’s 2018-21 economic program. After an
augmentation in October 2018, access under the arrangement amounted to US$57 billion(1,227 percent of Argentina’s IMF quota)

The Exchange Rate Problem

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There was a clear basic warning from the century bond in that it was issued in US Dollars. Argentina has its own currency but has chosen to issue in another one. The reason is that its own currency is always falling and checking it we see that it has fallen another 20% over the past year and is at 105.8 versus the US Dollar as I type this. This is an obvious issue but there is more and it is highlighted in a Twitter reply to Gita Gopinath of the IMF.

It is impossible for any program to work with an exchange rate gap of more than 100%; the favorite sport of every Argentine is to get subsidized dollars from the central bank. ( @monfe813 )

The Buenos Aires Times explained this last September.

On the one hand, we have the official dollar, which is mainly for exports and imports and very few capital transactions (a commercial dollar) and on the other hand, the CCL, used for savings and capital movements (a financial dollar). This reality cannot be maintained for long, especially with a gap of 80 percent in which there are enormous incentives to seek mechanisms permitting the purchase of dollars at the official rate and sale at the parallel rate.

The gap as the tweet hinted at is wider now because the “blue dollar” is being quoted at 211-215 or double the official rate. So you can see the incentive to change your money up at the central bank or BCRA. The problem is the questions they will ask! The real issue here is the likely corruption and that is before we get to the issue of how businesses can trade under such a system or the drain on the foreign exchange reserves as whilst the BCRA can create as many Pesos as its likes ( and often has) it cannot create US Dollars.

In December, the international reserves of the BCRA decreased by USD 1,867 million, ending the month at a level of USD 39,663 million.

In something of an irony nearly all of that was a repayment to the IMF. But I note that the current figure is US $ 37.2 billion so over US $ 2 billion has departed since. So the restrictions resulting in an unofficial exchange-rate of double the official one are not stopping funds from slip-sliding away.

Interest-Rates

Back on the 11th of January  we noted the rise in the official rate to 40%. There was a further perspective in the increase being 2% when if we switch to the UK or US we see that people are in some cases freaking out about numbers lower than that for 2022 in total and maybe for the whole tightening phase.

But the switch in western monetary policy which is mostly shown in higher bond yields will have an impact on Argentina in addition to its own increase.

Comment

There are various issues here but let us start with the monetary situation. We have looked at the exchange-rate and interest-rates and for younger readers the latter will feel like from another world. I have just checked the figures for the monetary base and it has risen by 42.5% over the past year so it is no surprise we also see this.

The General Level of the Consumer Price Index registered a monthly increase of 3.8% in December 2021, and accumulated an increase of 50.9% in the twelve months of 2021.

It has not worked out remotely like MMT would predict. Although we also have to remember that things started in a mess.

The problem for the IMF is enforcing austerity in such a situation as this.

BUENOS AIRES, Feb 8 (Reuters) – Thousands of Argentines marched through the streets of Buenos Aires on Tuesday to protest against a likely deal with the International Monetary Fund (IMF) to revamp more than $40 billion of debt the country cannot pay back.

Regular readers will now I was against the last bailout led by Christine Lagarde. Now I feel the IMF may well be singing along with Taylor Swift one more time.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

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