Argentina will crash unless reality dawns
Argentina went to the polls on Sunday to choose the candidates in the presidential election to be held on October 27. President Mauricio Macri was expecting to finish neck and neck with Peronist opposition leader Alberto Fernández. He was not even close. Fernandez won the primary by 47% to 32%, enough to secure the presidency.
The peso tumbled, while the local stock index lost 48% of its value in dollar terms. Government dollar bonds lost about 25% on average, with yields rising to about 35% on short-term notes, while credit
default swaps implied a default probability of 75%.
Macri has vowed to fight back, blaming voters for the market crash. This presidential loss of touch with reality may have scared markets even more than the prospect of Cristina Fernández de Kirchner’s return (the former president is Fernandez’s running mate).
Notwithstanding the slew of dollars the IMF has been pouring into Macri’s government ($50bn of a $57bn programme should be disbursed while he is still president), it is not difficult to understand why people turned their back on his government.
His reformist political campaign emphasised the fight against corruption, public investment and Argentina’s new “integration into the world”.
But the electorate were more convinced by the vivid arguments coming from their pockets. The economy is in recession and unemployment is higher than in 2015, when Macri took office. Inflation is running at close to 50% and public debt has more than doubled.
Despite the corruption scandals that engulf Kirchner, a large majority of Argentinians feel they have good reason to believe “with Cristina we were better off”. Not all of those who are economically nostalgic for her time in power are willing to stomach seeing her in government again. But Macri can no longer count on cajoling the middle class into voting for him on the basis that he can keep the markets happy.
Investors are worried about what Macri might do to enhance his almost negligible chances of being re-elected. If he believes that stabilising the exchange rate could help him recover middle-class support, he might use those IMF dollars to prop up the peso.
That would be disastrous. The IMF would surely stop the flow of financing, forcing a default on public debt. The fund considers Argentina’s debt to be “sustainable but without a high probability”. In IMF jargon, this implies the possibility of restructuring public debt.
To avoid this, the government needs to count on private investors’ willingness to refinance all their claims at maturity. Macri’s denial of political reality and Fernandez’s comeback make this increasingly unlikely.
Moreover, private investors are smart enough to know the IMF, as a privileged creditor, will be first in line. If there is not enough money to honour all the debts, it is their credits that will be restructured at a loss.
Fernandez, though now the favourite to become president, is unwilling to take the initiative. On Monday he argued there was not much he could do for Argentina’s economy, stating: “I am just a candidate.” While that is technically true, investors would appreciate seeing him start to act like a responsible statesman, rather than as a campaigner bidding only to unseat the incumbent.
If Fernandez were to call for an IMF meeting, make some market-friendly comments and appoint a credible economics team, Argentina could avoid yet another crash. The country desperately needs to ensure a smooth transition. Alas, Macri is resisting the inevitable and Fernandez pretends he can make no positive contribution.
Markets may yet confront both with reality and bring Argentina to its knees. /© The Financial Times 2019
● Torres is a senior fellow at the Centre for International Governance Innovation and a former executive director at the IMF.