June 12 (NBD) -- The International Monetary Fund (hereinafter referred to as "IMF") announced last Thursday that it has reached a staff-level agreement with Argentina on a 36-month stand-by arrangement amounting to 50 billion U.S. dollars. It is noteworthy that this staff-level agreement still needs to be approved by the IMF's executive board.

As the peso plumbed new low against the U.S. dollar and the domestic financial market was in turmoil, Argentina announced on May 8 its decision to seek help from the IMF. However, the move didn't win the praise and support of the Argentines but reminded people of the painful memories of the financial crisis 17 years ago. Tens of thousands of Argentines marched through Buenos Aires to protest the talks between their government and the IMF.  

With regard to the IMF's 50-billion-U.S. dollar financial aid for Argentina, NBD conducted an exclusive interview with William R. Cline, a senior fellow at the Peterson Institute for International Economics (PIIE), a private, nonprofit, nonpartisan research institution devoted to study of international economic policy. Dr. Cline is an expert in emerging markets especially Latin America. He was also deputy managing director and chief economist of the Institute of International Finance and what's more, he was deputy director of development and trade research, office of the assistant secretary for international affairs, the U.S. Treasury Department. 

William R. Cline (photo downloaded from PIIE's portal)

Argentina breaks the ice to seek IMF aid

In the early 21st century, Argentina was plunged into a devastating economic collapse. At that time, a partial deposit freeze and a partial default on public debt led to high levels of unemployment and political and social unrest. The crisis happened while the authority's economic plan was under the close scrutiny of an IMF-supported program.

NBD noticed that the IMF has engaged in Argentina's economic reform since 1991 through the Convertibility Plan. Before the crisis, the IMF has continuously offered the Argentine government financial aid for several years. On April 12, 1996, the IMF approved a stand-by credit for Argentina to support its 1996-1997 economic program. On February 4, 1998, the IMF again approved a three-year credit for Argentina under the Extended Fund Facility in support of the country's economic reform for 1998-2000.

The crisis in the early 21st century caused damage to the IMF's reputation severely. In the IMF and Argentina, 1991-2001 released by the IMF's Independent Evaluation Office in 2004, the international organization evaluated its role in Argentina during 1991 and 2001 and suggested a number of lessons for future work. 

NBD: Given that the IMF has become a "dirty word" in Argentina, what other actions could the Argentine government take except asking the IMF for help?

William R. Cline: The government has already crossed the bridge of seeking IMF support despite political unpopularity of the IMF. Alternatives such as new controls on capital outflows would cause serious distortions. The black market exchange rate had reached extreme levels under the controls of the previous government.

NBD: How likely do you think the IMF's executive board will approve this staff-level agreement reached with Argentina?

Cline: The IMF would welcome an opportunity to restore its image in Argentina, where it is blamed by the public for the default and devaluation of 2002. The board is likely to approve the staff recommendation.

NBD: In the statement announced on June 7, Ms. Christine Lagarde mentioned, "this is a plan owned and designed by the Argentine government". Fourteen years ago, the Independent Evaluation Office in the report, IMF and Argentina, 1991-2001, once said, "strong ownership should not deter the IMF from forcefully making its views known". The current statement indicates that the IMF appears to be more a lender this time who offers Argentina financial support. Could you explicate the role of the IMF in this case? Except for financial support, do you think there will be any other assistance that the IMF would offer Argentina in the future?

Cline: The Macri policies are a major improvement over those of the previous government. The IMF's role is mainly to help restore market confidence rather than force massive policy changes in Argentina. The fiscal deficit is high at 6 percent of GDP this year, and the main thing the IMF will want to do is make sure that the government succeeds in cutting the deficit to the baseline the IMF projected in its recent World Economic Outlook. The new crisis suggests tightening rather than loosening these targets.

Loan meant as a backstop to supplement Argentina's foreign exchange reserves

NBD: Argentine peso plumbs new low against the U.S. dollar and the country's bonds and stocks are also under pressure. Will this three-year, 50-billion-U.S. dollar stand-by arrangement ease economic turbulence in Argentina? And to what extent?

Cline: The IMF program should help stabilize a run on the Argentine currency and buy time for the government to implement fiscal reforms. The currency has been declined by almost 30 percent since the second half of 2017 . The aid from the IMF should help restore its competitiveness and curb the external current account deficit, which is high at 6 percent of GDP. In part the situation reflects new pressures on emerging markets from the combination of a stronger dollar and higher U.S. interest rates. The timing of the new pressure was closely linked to the recent rise in the U.S. 10-year interest rate above the psychologically important threshold of 3 percent. Countries like Argentina and Turkey with high inflation and a high portion of debt denominated in dollars or other foreign currencies became subject to new scrutiny.

NBD: In the IMF and Argentina, 1991-2001, the IMF once mentioned that "financial engineering in the form of voluntary, market-based debt restructuring is costly and unlikely to improve debt sustainability if it is undertaken under crisis conditions without a credible, comprehensive economic strategy". Will the 50-billion-U.S. dollar financing deal with the IMF pose a heavy burden on Argentina's solvency, which may threaten its economy further?

Cline: The 50 billion U.S. dollars is not being spent on government salaries. It is meant as a backstop to supplement foreign exchange reserves and convince markets the currency will not plunge sharply further. The government is likely to pursue policies, including on interest rates, that will make sure the 50 billion U.S. dollars is not used to finance a massive outflow of capital.

NBD：In the statement by Ms. Christine Lagarde on June 7, the priority of Argentina's economic plan to reduce its deficit is emphasized. In the meantime, to "offer opportunity and support to those living in poverty" is also of great significance and "the government is committed to ensuring social assistance spending will not decline during next three years". Recently Argentina's Treasury Minister Nicolas Dujovne announced 780 million U.S. dollars worth of public spending cuts at a press conference. Argentines took to the street and protested it. Do you think that Argentina's economic plan has any contradiction?

Cline: The emphasis on avoiding sharp cuts in social assistance makes sense in terms of moderating political opposition to the program of needed cuts in fiscal spending.

NBD: For the IMF, one lesson from the Argentine crisis is that the significance of alternative strategies and "stop-loss rules". Is there a need for plan B in case the financial support and the economic plan won't work as expected? If it is, do you have any idea what plan it could be?

Cline: The Argentine public knows by now that radically different alternatives, such as the 1990s Convertibility Plan in which the peso was supposed to be fixed permanently to the U.S. dollar to bring down high domestic inflation, tend to end in disaster.  

Email: lansuying@nbd.com.cn