Violating own statutes, IMF authorizes Argentina to use bailout loans to prop up currency
Argentina's Central Bank announced that it would intervene more actively in the currency market, reversing a previous pledge to let the peso float freely within a designated band.
The central bank also reserves the right to sell up to $250 million a day should the peso weaken past 51.45 to the dollar (currently around 46 pesos).
The policy, though publicly endorsed by the IMF, violates the Fund's own Article VI, which bars the use of IMF funds to prop up a local currency.
For countries relying on IMF loans, the only response authorized by Article VI is currency controls - something the right-wing Mauricio Macri administration refuses to consider.
“The IMF has never allowed the use of its own loans to fend off a run on the currency,” former Deputy Economy Minister Emmanuel Álvarez Agis noted.
“But Macri was able to exploit an inconsistency in the (bailout) agreement: The first section has it that you can't manipulate currency markets; but its debt sustainability clause concedes that what would most make the debt unsustainable is a sharp fall in the currency.”
Flagging peso and polls
The central bank is under pressure from Macri, who's entering his re-election campaign amid an economic crisis and 24% approval, to prop up the flagging peso.
Carlos de Sousa of Oxford Economics believes the central bank could burn through $14-18 billion of its gross reserves in a bid to prop up the peso.
After Macri's 2016-17 carry-trade debt bubble imploded in April 2018, the central bank torched $16 billion in reserves between March and September and raised baseline interest rates from 27% to 74%.
The debt crisis forced Macri to turn to the IMF - which granted Argentina a record $56 billion bailout program, only to see the currency lose 56% of its value against the dollar from a year ago.
Argentina’s central bank does not have much room for error.
While IMF loans have swelled Central Bank reserves to $72 billion, net reserves — those actually available, short of seizing dollar deposits, to fend off any potential runs are $22 billion.
Skeptics fear that a return to discretionary intervention could spell disaster for Argentina and set the country on a course to again burn through its dwindling stock of foreign reserves, to no avail.
The crisis would likely be inherited by Macri's successor, who will face around $40 billion in annual debt payments until 2024.
At: https://www.ft.com/content/635058a0-6cdd-11e9-80c7-60ee53e6681d
Labor union members prepare meals in an improvised soup kitchen in Buenos Aires during the May 1st Labor Day celebrations.
Since Macri's 2016-17 carry-trade debt bubble imploded in April 2018, 253,000 jobs have been lost and inflation has more than doubled to nearly 60%.
IMF South America head Roberto Cardarelli reportedly admitted during a monitoring visit in February that the IMF bailout is “unsustainable” and that his “sole mission was to help guarantee Macri's re-election, at Washington's request.”
