BREAKINGVIEWS-Argentina’s shock therapy short-circuits IMF

By Jon Sindreu

LONDON, Oct 22 (Reuters Breakingviews) - Javier Milei's policy success and popularity are falling faster than Argentina's inflation rate. The president's harsh fiscal discipline and ill-advised peso propping will be tested in Sunday's congressional elections. They may expose the folly of adhering to the Austrian school of economics and the International Monetary Fund’s misguided loan conditions.

Global financiers initially welcomed Milei and his libertarian miracle. He tamed inflation to about 30% in September from 210% in 2023, when pesos printed by the central bank were doubling annually. Milei and the IMF, which lent Argentina another $20 billion, share the view that currency crises stem from excess money. The stabilization plan has therefore focused on swinging the budget to a surplus and allowing capital to flow more freely.

In developing nations, however, a sharply weaker currency leads to inflation because imported raw materials become pricier. The spiral persists as workers demand more money to regain purchasing power, which leads to printing more cash.

To wit: Milei’s devaluation pushed inflation to 290%. By the end of 2024, the exchange rate had returned to its inflation-adjusted level, according to the Bank for International Settlements, and the monetary base was expanding beyond 200% annually. Milei calls this an “empirical mirage,” but has since allowed only smaller monthly peso depreciations.

When questioned about the currency being only 15% weaker in real terms than when he took office, Milei invokes the Austrian-style theory that true equilibrium prices are unknowable. Markets belie such solipsism: disinflation burned through more than a quarter of Argentina's foreign-exchange reserves before the April rescue.

The IMF’s nearly $60 billion exposure to Buenos Aires will channel dollars to service debt that's unlikely to be fully repaid. Argentina's $20 billion U.S. swap facility also threatens to encourage Milei's hapless economic whims.

Argentina would be better off bringing in dollars through trade by leveraging its commodity exports and diversifying into more advanced industries. Aggressively raising interest rates, as Russia did after the 2014 ruble crash, and then keeping the currency undervalued by accumulating reserves and controlling capital and imports, a staple of South Korea's and Taiwan's development, would be unorthodox policy. It also stands a better chance of working than loading up on debt and waiting for a slow correction in the inflation-adjusted peso.

As things stand, the country's current account is in deficit, thanks to the overvalued currency and a private credit boom. Domestic savers and overseas investors are justifiably worried about a potential devaluation, with the dollar's value strengthening to a record 1,490 pesos this week. Come Monday, Argentina may become far less Austrian.

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CONTEXT NEWS

Half of Argentina's lower chamber and a third of the senate are up for election on October 26, in a fresh test for President Javier Milei's Liberty Advances party and its aggressive economic reforms after losing in a local Buenos Aires ballot in September.

The U.S. dollar was trading at a record-high 1,490 pesos on October 21, a day after Argentina finalized a $20 billion currency swap facility with the United States. President Donald Trump has suggested that his administration may stop supporting the peso if Milei suffers another electoral defeat.