After two years of wrangling, the International Monetary Fund (IMF) approved a new $45 billion refinancing agreement with Argentina, the country’s 22nd. The IMF sweetened the deal by offering Argentina a much-needed reprieve from debt payments until 2026.
Already imminently due to make a $2.8 billion payment in March, Argentina will instead receive $9.8 billion in the IMF’s special drawing rights. Announcing the deal, President Alberto Fernandez said: “We had a rope around our neck.”
Argentinians have taken to stashing staple products and buying bitcoin and other digital assets as a hedge against inflation. Imagine renting an apartment, and your rent goes up 40-50% every year. That’s what it’s like in Argentina.
Inflation topped 50% in 2021 and is expected to rise in 2022, so people are squirreling away all the goods their cupboards will bear. In Argentina, it seems unwise to save, so people just spend their paychecks, either buying dollars, crypto, or nonperishables.
As a result, Argentinians hold $305 billion dollars and they are increasingly resorting to bitcoin to obtain more competitive dollar-peso exchange rates, to the tune of 300% from 2019 to 2021.
Oddly, tucked into the small print, the new deal includes a provision requiring the Argentinian government to “discourage the use of cryptocurrencies with a view to preventing money laundering, informality and disintermediation.”
Buenos Aires has been in the thick of a boom in digital assets, and more Argentinians are getting paid in Bitcoin than any other country, according to Deel, a payroll company with operations in 150 countries. The IMF sees this as a risk because it provides a vector for a digital run on the Argentinian peso and the national banking system, fair-weather friends of the Argentinians in the past.
The IMF and Argentina: On again, off again for 64 years
Argentina has a turbulent relationship with the IMF going back to 1958, but the IMF just can’t quit Argentina. The first administration of President Nestor Kirchner closed out all outstanding debt in 2007, vowing that Argentina would never borrow from the IMF again.
Then, in 2018, with the peso buffeted by 25% inflation, President Mauricio Macri took out more loans from the IMF, much to the exasperation of the Argentinian left, which as the current governing party has now inherited the debt.
Nestor and his wife Cristina Fernandez de Kirchner, a former president and current vice president, had a son, Maximo Kirchner, who became the president of the party, Frente de Todos. That is until he resigned in protest of the new IMF deal on January 31, 2022.
The opposition party, Juntos Por el Cambio, has painted the disunity in the ruling coalition as a sign of its impending demise, arguing that the Kirchner family is irresponsible.
In effect, the IMF is obligating the Argentinian government to coerce its citizens against the rational behaviour they have learned after repeated inflationary crises. Strict capital controls work against the logic of the market, but the IMF sees no other way forward in view of the risk of digital assets eluding capital controls and replacing the peso.
Argentinian politics is a zero-sum game. Each party is happy to criticise the other as they cope with governing in an environment of continuous domestic turmoil.
The IMF’s Argument
Argentina also plans to continue its payment digitisation process “to improve the efficiency and costs of payments systems and cash management,” according to the letter of intent. So, the IMF is putting its institutional finger on the scale against bitcoin adoption because it believes that the risks to unstable countries could quickly become systemic due to unregulated digital capital flight.
Last year, the IMF’s executive board discussed a staff paper, in which the Fund’s economists argued, “Digital money must be designed, regulated, and provided so that countries maintain control over monetary policy, financial conditions, capital account openness, and foreign exchange regimes. Payment systems must grow increasingly integrated, not fragmented, and must work for all countries to avoid a digital divide. Moreover, reserve currency configurations and backstops must evolve smoothly.”
In developing countries, the average worker and small investor with access to digital assets is looking for a hedge against endogenous shocks. Bitcoin and Ethereum, among many others, present a safer store of value, in contrast to their national currencies.
The IMF answers that digital assets like Bitcoin have matured since the onset of the pandemic and now move greatly in tandem with traditional holdings like stocks, amplifying the risk of contagion because of the possibility of spillovers of investor sentiment. Although they perform like traditional assets, digital assets aren’t secure or insured or regulated like traditional investments. For many crypto-anarchists, libertarians and other sundry DeFi enthusiasts, that’s precisely the point.
Between the Lines
The stage is set for a confrontation between Argentine citizens and the government, should they try to enforce a ban on crypto amid worsening inflation. In February, the rate reached 52.3%, and JPMorgan Chase has forecasted that consumer prices will increase more than 60% in 2022.
The IMF is not only pushing Argentina to regulate digital assets, the Fund wants a reduction in government deficits, an increase in interest rates, and significant cuts to energy subsidies, things sure to go over well with a desperate and impoverished population.
At a press conference, Ilan Golfajn, IMF Director Western Hemisphere Department, stated: “As you realised, part of these efforts is to improve public finances is based on the reduction of energy subsidies. We expect to reduce energy subsidies by 0.6% of GDP in a way that protects the poor, not in an uniform way, in a way that can generate the savings and be progressive and socially responsible.”
A reporter dutifully followed up on this claim, prompting Julie Kozak, IMF Deputy Director Western Hemisphere Department, to elaborate: “the lower income segments of the population would be more protected and those with a higher payment capacity would have their subsidies eliminated. And this progressive way of increasing energy tariffs will help free up resources within the budget to reorient spending to more productive areas of investment.”
That at least sounds humane, but the reality is, of course, more complicated because even the middle-income group has little extra money to pay higher energy prices. As usual, the IMF can be counted on to recommend its services as a solution, even to problems caused by its services.
The IMF’s weighted voting structure reflects global power divisions, meaning the IMF, like the World Bank and the UN, is dominated by the US and Europe. In the IMF, the US controls 16.5% of voting power while Argentina has a mere 0.66%.
All of the Bretton Woods Institutions, not only the IMF, are ultimately projections of G7 power and prerogatives, meaning North America and Europe. With that in mind, “the risk to reserve currency configurations” begins to rhyme with “US foreign policy imperative.”
Likewise, the commitment by the Argentine government to discourage the use of digital assets may likewise be read as a resignation under duress, not the same thing as enthusiastic agreement.
When the Macri administration made the last agreement with the IMF back in 2017, “law 27432“ was passed, eliminating subsidies for public television, radio, film, music, and libraries across the country by late 2022. In effect, this will take away the funding for every public organ that supports Argentinian culture, including the Instituto Nacional de Cine y Artes Audiovisuales (INCAA), the Instituto Nacional de Musica, the Instituto Nacional de Teatro, the Commission Nacional de Bibliotecas Populares, among others.
The president of the INCAA was fired by executive decree, and the expectation is that all staff members of every organisation will be dismissed. The impact will be enormous for the youth whose creative dreams have depended on this funding, and the country will experience a massive brain drain of young talent forced to seek their fortunes abroad, as happened when thousands of young film professionals moved to Mexico City after President Macri first cut the budget of INCAA in 2017.
Maybe, the Argentinian population will not mind losing most of the character that distinguishes it from a country like the US, where art and culture are luxuries exclusively for the rich. More likely, there will be street protests, social upheaval, and human and capital flight.
After the agreement is finalised, it will remain to be seen if the laws will be enforced in a market with overwhelming incentives to abuse any law and defy any financial authority.
Author: Tim Tolka, writer, journalist, and BI researcher
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The Editorial Team at #DisruptionBanking have taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this Article. This Article is most definitely not Financial Advice.