In most of the world, the International Monetary Fund is just a multilateral financial institution. In Argentina, in contrast, the fund is a fundamental and highly controversial part of economic and political life. As if to highlight that, the country’s ruling Peronist coalition is currently unraveling from internal divisions following a recent agreement between the government and the IMF, approved only weeks ago.
The Peronists returned to power in 2019 due to a clever political move by former President Cristina Fernandez. Aware that she herself was too polarizing, she anointed Alberto Fernandez—a moderate who is no relation—as presidential candidate, while she ran as vice-president instead. The experiment proved successful, as they handedly defeated the pro-market incumbent, Mauricio Macri.
They were helped by Macri’s unpopular decision a year before to turn to the IMF for assistance amid a serious economic crisis. Though the fund disbursed $44 billion, its largest loan ever, the package did little to prevent the crisis from deteriorating, which was one of the principal factors behind Macri’s defeat. The Fernandez-Fernandez ticket came into office promising to revive the economy, prioritize the poor and avoid IMF-imposed austerity. That was all easier said than done.
Even before the pandemic, Argentina’s economic situation was dire. The economy has been stagnant since the end of the commodities boom in 2011. Chronically high inflation reached 50 percent by the end of Macri’s term, and the value of the peso plunged. Moreover, the country has suffered from a constant current account deficit leading to a lack of hard currency, the cause of stop-and-go cycles that have plagued Argentina’s economy since the 1970s.
All these problems were worsened by the prolonged lockdown imposed by Alberto Fernandez, which did little to protect Argentines from the impact of COVID-19, while plunging the economy into an even worse crisis. GDP collapsed by 10 percent in 2020. The poverty rate shot to over 40 percent. And the Central Bank’s reserves were nearly depleted. When the ruling coalition lost the 2021 midterm congressional elections, divisions between the president and his mentor cum vice-president exploded and engulfed the government.
One of the key challenges facing Alberto when he came into office was public debt. In 2020, Finance Minister Martin Guzman—a disciple of heterodox economist Joseph Stiglitz—managed to restructure the country’s debt held by private-sector creditors. But the biggest obstacle remained: the $44 billion that Argentina owed to the IMF, most of which was due for repayment in 2022 and 2023. After prolonged negotiations, Guzman reached an agreement with the fund in March to refinance Macri’s 2018 loan, just in time to avoid a potentially devastating default.
The conditions of the deal were relatively lax by IMF standards: Argentina won’t start repaying interest or capital until 2026, and the deal lacks the fund’s usually strict conditionality in terms of structural reforms. But it quickly became clear that Alberto and Guzman had exaggerated when they promised Cristina and her left-wing followers an agreement that would include no austerity measures whatsoever. Among other things, they agreed to cut the primary fiscal deficit from 3.5 percent today to zero by 2025, drastically reduce Central Bank financing of the Treasury and increase interest rates to contain inflation.
As it has done many times before, Argentina’s government is focused on surviving until the next election, rather than discussing ways to overcome the country’s chronic crises.
Every one of these targets involves inflicting more pain on middle class and poorer Argentines, Cristina’s traditional electorate. Especially sensitive will be cuts to electric and gas subsidies, indispensable to reduce fiscal spending. Cristina is convinced that the government is heading toward economic disaster and defeat in the next presidential election in 2023, and she is trying to distance herself from the IMF deal and the government of her own creation that spawned it. While her followers still occupy key positions in the federal bureaucracy, her allies in Congress rejected the agreement, which only passed because of opposition support.
Tensions within the coalition are rising by the day. Alberto and Cristina are reportedly not on speaking terms, a sign of profound irresponsibility in the middle of a very serious economic context. Inflation, which might top 60 percent in 2022, is accelerating, and all “easy” cuts to public spending have already been made. Social tolerance for further tax increases is limited. Moreover, the war in Ukraine has shattered Guzman’s projections. Commodities prices have skyrocketed, which is good news for Argentine wheat exports but puts upward pressure on food costs and will mean more spending on oil and gas imports.
If the coalition has not broken apart, it is likely because both Fernandezes still need each other. Alberto is convinced that abiding by the IMF deal is the only way to restore long-term economic stability and growth, not unlike what Macri argued when he was president. He is backed by most Peronist governors and lawmakers, some of whom want the president to show force and break with his vice-president and former mentor. Alberto, however, knows that he cannot replace the leadership Cristina exercises over large swaths of the poor that make up the Peronists’ voting base.
Cristina would prefer to fight the fund and continue to print money to cover the deficit and maintain subsidies, regardless of the consequences. Her only recipe to combat inflation is even stricter import restrictions and price controls. History shows such crusades end in economic chaos and even harsher stabilization plans. As long as Alberto is in office, however, Cristina can indulge in her delusions.
Despite their very public differences, the two Fernandezes’ poll numbers have dropped in tandem: Argentines see them as a team even if they themselves don’t. The most optimistic scenario is for Alberto and Cristina to postpone a final showdown until presidential primaries scheduled for August 2023, when the president is likely to face a challenge for the Peronist candidacy from Cristina’s hard-core wing of the governing coalition.
Maintaining even a fictional coalition until then will not be easy. Every quarterly visit by IMF staff to monitor Argentina’s compliance with the recent agreement might force Alberto to choose between breaking with the fund and risking default, or imposing more austerity and seeing his public image and his coalition collapse. Even if Argentina’s long-term prospects are good—something the president repeats like a mantra—the near term will be plagued with bad economic news and rising prices.
At the same time, a Peronist defeat next year is far from certain. The primaries of the largest opposition coalition also promise to be intense, with a potential clash between Macri, who feels vindicated by the Peronists’ debacle, and the more moderate mayor of Buenos Aires, Horacio Rodriguez Larreta. Moreover, a rising libertarian right could take votes away from the center-right opposition, indirectly benefiting the Peronists.
As it has done many times before, Argentina’s government is focused on surviving until the next election, rather than discussing ways to overcome the country’s chronic crises. Achieving macroeconomic stability is a requirement for sustained growth, but it is also politically and socially unattainable, as the cost of the reforms would be immediate and unbearable for most of the population, while its benefits are uncertain and far in the future. How this story unfolds will depend in part on the relationship between three awkward partners: Alberto, Cristina and the IMF.
Bruno Binetti is a nonresident fellow at the Inter-American Dialogue and a doctoral candidate at the London School of Economics.