Argentina Heads for Another Crackup

As it fails to honor its reform commitments, inflation is soaring. Sound familiar?

WSJThe resignation of Argentine Economy Minister Martín Guzmán on July 2 comes three months after he renegotiated his country’s $45 billion debt with the International Monetary Fund. The fund says the stabilization and growth program it worked out with Mr. Guzmán is still on track. But widespread fears that a sharp devaluation of the peso is coming, along with higher inflation, suggest otherwise. The country could be headed for another crackup.

The March rescheduling of the IMF debt wasn’t the primary time Mr. Guzmán purchased extra time for the world’s most infamous deadbeat to repay what it has borrowed. In August 2020 he led a restructuring of some $65 billion in sovereign debt held by main bondholders equivalent to Fidelity Management & Research Co., Monarch Alternative Capital LP, VR Capital Group, Greylock Capital Management and Pharo Management LLC.

The 39-year-old center-left economist ought to have been writing his personal ticket inside the federal government of President Alberto Fernández.

The 39-year-old center-left economist should have been writing his own ticket inside the government of President Alberto Fernández. Instead, he found himself battling Vice President Cristina Fernández de Kirchner —no relation to the president—who opposes even the minor reform commitments he made to the IMF. Mrs. Kirchner won.

President Fernández quickly filled the vacancy created by Mr. Guzmán’s departure with Silvina Batakis, an ally of Mrs. Kirchner and her hard-left faction inside the Frente de Todos ruling coalition. Ms. Batakis’s resume isn’t reassuring. She’s a former minister of the economy for the province of Buenos Aires (2011-15) who left her successor with empty coffers and forced him to turn to the federal government for emergency help to pay the salaries of public employees.

When Fidel Castro died in November 2016, Ms. Batakis tweeted a photo of the late military dictator in revolutionary garb and quoted his call to the “struggle.” In a 2019 tweet, Ms. Batakis advised that to “combat” poverty requires “a state that plans and intervenes.”

Worry has quickly spread that Ms. Batakis will abandon even mild attempts to end the fiscal profligacy and money printing that has generated inflation now running at more than 60% a year, and accelerating. 

On Wednesday IMF Managing Director Kristalina Georgieva tried to ward off panic. She tweeted that she’d had a “very good call” with Ms. Batakis, “to discuss implementation of Argentina’s program.” Reuters reported that Ms. Batakis “had already spoken with the head of the IMF’s Western Hemisphere department and committed to support the objectives of the [renegotiated] IMF program.”

Yet it’s worth recalling that a March 2022 IMF staff report on the Guzmán program warned that it is “subject to exceptionally high risks,” including that it “may fail to engender confidence and strengthen stability.” Those risks have now gone up. Both the Paris Club and Inter-American Development Bank say that any new lending arrangements require guarantees of reform commitments to the IMF. 

Argentina is by far the fund’s largest borrower. To put its $45 billion debt in perspective, Egypt, the next-largest borrower, owes the Washington-based multilateral a mere $12 billion. Argentine borrowing at the IMF is now at 1,000% of its quota.

In December 2015 when center-right President Mauricio Macri took office, expectations were high that he would tackle the age-old Argentine practice of printing pesos to pay government bills. But he failed to right-size public spending, preferring a gradualist approach to working with a Congress he didn’t control.

By May 2018 international financing was drying up as markets began to lose faith in Mr. Macri. When the peso came under attack, the IMF stepped in with a $30 billion emergency package that soon became part of a $57 billion standby agreement. Mr. Macri lost his re-election bid in October 2019, but when he left office a few months later Argentina had drawn down $44 billion from that agreement.

Argentina had payments due of $19 billion this year and $20 billion in 2023. The “extended fund facility” that Mr. Guzmán secured delays those payments, pushing their start to the second half of 2026 and extending the life of the loan to 2034. 

But that won’t save Argentines from another round of hyperinflation driven by government “experts” who believe in modern monetary theory—which posits that printing money to pay bills doesn’t have to cause inflation if tax rates are high enough.

The public knows better. Since 2017 the peso has lost 87% of its official market-rate value, which is now roughly 130 to the dollar. In the black market the currency now trades at around 265 to the dollar. 

Argentine economist Aldo Abram told me last week that “inflationary expectations are spiraling out of control” because “the central bank is robbing the public of its purchasing power.” As demand to hold pesos collapses, triple-digit inflation is becoming more likely, he said. Even with lots of flexibility and latitude from the IMF, it’s hard to see how this doesn’t end in tears.