Christine Lagarde last visited Buenos Aires in March. The head of the IMF came to town to meet finance ministers from the world’s 20 leading nations, a group that Argentina heads this year.
The weather was still summery, the mood breezy. Ms Lagarde openly praised President Mauricio Macri: “the first two years of his reforms have been amazing”. She even took the opportunity to catch a show with her husband at the famous Rojo Tango club. After the cabaret finished, she asked to “reserve a table in July . . . when I will return”.
Two months later, rising global interest rates have spun Argentina around. A run on the peso forced Mr Macri to dispatch officials to Washington this week to seek an emergency multibillion-dollar loan instead. It was a sombre reversal for the 59-year-old former businessman. Mr Macri had come to power in 2015 promising to make Argentina a “normal country”. Yet now he is fighting a financial crisis. Such abnormality is sadly normal in Argentina. As the old joke goes, the world has four kinds of economies: developed, developing, Japan’s and Argentina’s.
The country is, in many ways, a special case. A hundred years ago, at about the same time that the Titanic hit the iceberg, Argentina was among the 10 richest countries in the world. Today it ranks 87th. In all, it has defaulted on its debt eight times, suffered hyperinflation twice, and gone through 20 IMF-supported economic programmes in 60 years. The most brutal of these ended in 2001, triggering a $100bn default and crushing devaluation. The spectacular collapse left one in five Argentines unemployed, and with an understandable allergy to anything associated with the IMF. It also led to 12 years of populist rule. All this has made Mr Macri’s subsequent quest for “normality” harder still.
I vividly recall a trip to Buenos Aires in early 2016, shortly after Mr Macri took office. At government meetings, I was struck by officials’ sharp focus and transparency — a stark contrast to similar meetings during the previous administration of Cristina Fernández (if her officials deigned to show up at all).
Many of his deputies told me that when they began their jobs they had found a disorder that verged on sabotage: servers had been ripped out and files destroyed. Vice-president Gabriela Michetti even said she burst into tears when she realised the waste and theft that had previously flourished. Shortly after my visit, a former public works secretary was found hiding black plastic bags stuffed with $9m in cash inside a convent.
Ms Fernández was part of the leftist “pink tide” that swept to power in South America at the start of this century. Her predecessor and husband, the late Néstor Kirchner, broke with the IMF in 2006. A political bruiser, Kirchner even sported a plaster on his head at his inauguration. Yet he balanced the books and it was only after his wife took over that the economy truly went off the rails. Ms Fernández cast herself as a latter day Evita Perón, a patron of the poor, but left the presidency with a considerable personal fortune.
Other South American countries now face similar populist legacies. Indeed, the IMF may have a busy few years in the region. Hyperinflationary Venezuela is certainly the worst case. But Brazil is only just emerging from its deepest-recorded recession. And Ecuador, mortgaged to China, is fast running out of funds.
Cleaning up the mess left by unfulfillable populist promises is hard. It takes ambitious, market-friendly and socially sensitive reforms of the kind that Ms Lagarde praised in Argentina. Mr Macri has liberalised the exchange rate, slashed blanket subsidies and put in place a tough structural reform package. But contrary to his image as heartless businessman, he has also boosted pensions and increased targeted cash transfers for the poor. With the IMF now involved, it is an open question if those will be cut back.
Still, Argentina is very different to what it was in 2001, as is the IMF. Back then, Anne Krueger was the fund’s first deputy, and her “big idea” was a bankruptcy court for financially failed nations. Ms Lagarde seems more interested in issues like equality and equity: the IMF even criticised itself recently for being too “neoliberal”. Still, the IMF usually requires austerity. Given Argentine history, that will damage Mr Macri’s domestic popularity, and thus the sustainability of his programme.
All of which begs the question: if Mr Macri’s reforms really are so fabulous, what went wrong? The simple answer is that he wanted to avoid the brusque shock treatments of the past. Such “gradualism” required ample foreign financing. For a while, ultra-low global interest rates made that easy: Argentina sold more than $100bn of bonds in just two years.
As US homeowners and emerging markets worldwide are now discovering, those days of easy money are coming to an end. A central flaw of Mr Macri’s plan to make Argentina “normal” was that it rested on borrowing rates that were not normal at all.