The initial investor reaction was positive with markets rallying on the back of a deal that was larger and swifter than expected. The IMF has provided a $50billion credit facility in exchange for Argentina promising to implement $7billion of spending cuts and ensure the autonomy of the Central Bank. On paper the agreement is positive. Argentina needs foreign funds to plug a fiscal deficit caused by overextended state spending – with markets less willing to lend the money the IMF’s loan is vital. Meanwhile the IMF’s demand for a faster fiscal deficit reduction also makes sense, as it will eventually free Argentina’s essential financing needs from the whims of international investors.
But not everyone greeted the decision positively. Protests broke out in Argentina, where citizens remember the IMF’s role in compounding the 2001 economic disaster. It took five years of harsh austerity for Argentina to finally pay off the IMF and many Argentinians resent being brought back under its control.
“not everyone greeted the decision positively…”
Even for those who don’t hate the IMF, the episode has undermined Macri’s image of being a competent steward of the economy. These sentiments matter because the administration lacks a majority in both houses of parliament, leaving it reliant on compromise deals. For it to pass the IMF budget cuts, which call for a fiscal deficit of 3.9% to be reduced to 0% by 2020, it will need opposition support. This is further complicated by the 2019 elections, which fall in the middle of the period.
Before this debacle Macri was considered a safe bet for the next election, but having to campaign while implementing harsh cuts from the hated IMF will prove difficult. However, the crisis puts the different strands of the Peronist opposition in an equally tricky position. Refusing to co-operate will not play well with those voters who blame the previous Peronist administration for the current economic troubles. Yet agreeing to work with the IMF, will been seen as betrayal by hardcore Peronists. Faced with this dilemma the opposition is likely to split. Macri may well prevail in 2019 by virtue of leading a smaller but more united party.