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Will the IMF pay for its faults in Argentina? The International Monetary Fund’s $45 billion loan to Argentina in 2018, its largest ever, was a monumental failure. Now it turns out it may also have been illegal. Roberto Bissio LAST 26 January, while hurried last-minute negotiations were conducted to avoid Argentina defaulting on its 2018 standby agreement (SBA) with the International Monetary Fund (IMF), 10 former leaders from Latin America and Spain demanded that the IMF ‘take responsibility for having granted a record loan to the government of [former president] Mauricio Macri of $45 billion to be paid back in a short time, absolutely impossible to comply with, in order to benefit him electorally and to limit the next administrations’. The signatories, including Lula da Silva (Brazil), José Luis Rodríguez Zapatero (Spain), José Mujica (Uruguay) and Ernesto Samper (Colombia), demanded ‘the immediate elimination of the loan surcharges and the granting of terms that allow for economic growth without brutal adjustments or fiscal restrictions that subject the Argentine people to conditions of impoverishment’. Two days later, Argentina paid (on time) some $700 million to the IMF, and President Alberto Fernández announced that an agreement had been reached with the Fund for a new loan which would enable payment for the old one and contribute $5 billion to building Argentinian reserves. This new loan is to be paid back in 10 years, with four years’ grace, and will be disbursed in tranches over 30 months, during which Argentina will have its performance surveyed every three months (before each new disbursement) by the IMF. The main indicator of compliance will be a ‘fiscal path’ to gradually reduce the government deficit to 2.5% of gross domestic product (GDP) in 2022 (from an estimated deficit of 3.2% in the current government budget), 1.9% in 2023 and 0.9% in 2024. This would, according to an IMF staff report, ‘allow for spending increases on infrastructure and science and technology, and would protect targeted social programmes’. The agreement still needs to be finished and signed by the negotiators and then approved by the Argentinian Congress and the IMF board. And this needs to happen soon. Under the terms of the 2018 agreement, Argentina must pay back $19 billion in 2022, including $3.9 billion in the first trimester. This sum is more than double current reserves. Without an agreement, default is unavoidable. While President Fernández and Economy Minister Martín Guzmán celebrated the deal as a ‘solution to a big problem’, Máximo Kirchner, leader of the governing coalition bloc in parliament, announced his resignation from this role, out of disagreement with the negotiation strategy ‘and even more so with its results’. Máximo’s father was the deceased President Néstor Kirchner and his mother is ex-president and current vice-president Cristina Fernández de Kirchner. CFK, as she is frequently referred to, has been demanding that the burden of the agreement should fall on the beneficiaries of massive capital flight that the previous loan allowed or even encouraged. Good, bad or ugly? Alberto Fernández notoriously smiled in satisfaction when announcing the agreement, which covers the whole of the $45 billion Argentina got from the IMF since 2018 (out of $55 billion in standby) and extends repayment for 10 years. This is the maximum term admitted by the IMF, as its support to countries is supposed to be for short-term emergencies. Further, the new loan returns to Argentina the money already paid on account of the 2018 SBA and will not request any further disbursement until after the end of the current presidential term in 2024 (re-election to a second term is possible). The agreement does not request privatisations, social expenditure cuts or even budget cuts, as long as the fiscal deficit is gradually (and slowly) reduced. With economic growth of 10% in 2021, and 4-6% forecast for 2022, minister Guzmán is confident that increased revenue can wipe out the deficit and still leave fiscal space for increased government investment in badly needed infrastructure. Economic pundits highlighted as an Argentinian victory the public IMF staff statement that ‘we have reached understandings on a framework for monetary policy implementation as part of a multipronged approach to addressing persistent high inflation’. This means that current capital controls will continue, which is unusual in IMF programmes, and that inflation is conceptualised as having multiple causes and is therefore not to be dealt with through monetary policies only, as the IMF itself had recommended to Argentina in its failed 2018 SBA. Guzmán commented: ‘No one in our political space can be happy with the IMF, but everything that could be done has been done.’ Critics of the agreement point to the IMF request that energy subsidies be cut, which will directly affect the poor, whose numbers have grown from less than a quarter of the population to over 40% due to the combined impact of COVID-19 and the economic crisis that the SBA aggravated instead of resolving. Further, Argentina will have to submit its economic policies to the oversight of the IMF every three months for the next two-and-a-half years, each time risking a disastrous end of the deal. ‘Some may wonder what option I am offering,’ said Máximo Kirchner. ‘To start with, let’s call a spade a spade: not talk about a tough negotiation when it was not, let alone talk about “benefits”. Reality is hard. I saw President Kirchner burn his life in this kind of situation.’ In September 2003, President Néstor Kirchner temporarily defaulted to the IMF rather than accept its conditions. ‘This was an extraordinarily gutsy move as the IMF was seen as having the power to cut off even trade credits to a country that defaulted to them. No one knew for sure what would happen. But the IMF backed down and rolled over the loans,’ wrote Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington. Ultra vires As leader of the majority faction in the governing coalition, CFK had demanded repayment over 20 years of the 2018 loan, with no interest or conditionalities of any kind. To the argument that such conditions would be unprecedented for the IMF, the reply was that the 2018 loan was not only the biggest in IMF history, but also blatantly illegal and therefore requiring an exceptional solution. On 27 January, just hours before the new agreement was announced, Guido Croxatto, director of the National School of the State Bar and Lawyers Corps, admitted in a TV interview1 that the legal defenders of the Argentinian state were seriously considering challenging the 2018 standby agreement with the IMF as ‘ultra vires’ (beyond the powers) as it violated core provisions of the IMF’s Articles of Agreement. ‘When international organizations act beyond their legal capacity, they are deemed to act ultra vires. It follows that any acts that overstep the powers of international organizations – as determined in their founding treaties – are invalid and void.’ The hypothesis that the IMF acted beyond its legal powers in the 2018 agreement was developed in detail by Karina Patrício, lecturer in Commercial Law at the University of Leeds in the UK.2 The analysis is largely based on the conclusions of the IMF itself in its Ex-Post Evaluation of Exceptional Access Under the SBA,3 its Articles of Agreement and relevant international law: ‘Substantive rules that enable the IMF’s functional competence to provide balance of payments support to its members – set forth in Article I of the Articles of Agreement – were violated in the SBA in a way that is too manifest to be open to reasonable doubt, thereby raising suspicion that the SBA’s approval was ultra vires. In particular, the programme was characterized by egregious assumptions and accounting inconsistencies that meant the objectives were impossible to attain.’ In light of such analysis and how this huge loan had been speedily approved when President Mauricio Macri was running for re-election, the former leaders who wrote to the IMF concluded that the Fund should ‘take responsibility’. Is the legal challenge a rhetorical argument? Is that path closed if Argentina signs a new agreement with the IMF? The answer is ‘no’ to both questions. Since the IMF does not want its loans to be renegotiated, it was at pains to make it clear that the $45 billion under the new loan does not automatically cancel the pending $45 billion of the previous loan. Both agreements will co-exist. Argentina must continue repaying the 2018 loan, even if it uses for that purpose over the next 30 months the monies transferred by the IMF under the new loan. The illegality of the first would thus be independent from the validity of the new one, once it is properly approved by the IMF board and the Argentinian legislature. Since the IMF has no review body in its governance, Patrício argues that ‘only the International Court of Justice (ICJ) would have the power to advise on the legal validity of the SBA through its advisory route, either upon request of the UN’s General Assembly (where Argentina or any group of Member States could initiate the process) or the IMF itself’. If the ICJ declares the 2018 SBA void, the IMF as a UN agency must abide and the loan will cease to have legal effect. What happens next? The scenario of an ultra vires act by the IMF would be unprecedented and therefore relevant principles of international law ought to be applied. ‘In the absence of either a valid underlying agreement or an internationally wrongful act upon the SBA’s approval – in which case a duty to compensate for damages would arise’ – Patrício argues that ‘the inter-party effects of the SBA’s invalidity are to be governed by the international law of unjust enrichment’. This means that the IMF should restitute the lending rate, surcharges, commitment fee and service charge in the transaction to Argentina, which in turn should restitute the principal to the IMF. But as Argentina is in no condition to immediately return some $40 billion still pending, negotiation of an extended time horizon for settlement is still required. Such financial obligation, explains Patrício, would be governed by the international law of unjust enrichment and not by IMF rules. The IMF would ultimately get its money back, but without additional charges, and would not have any say over the Argentinian economy. Further, ‘while there appears to be no jurisprudence in international law on liability for damages of staff members of international organizations, relevant principles of English private law in analogous cases seem to suggest that the restitution owed by the IMF to the Republic of Argentina is without prejudice of the liability for damages of staff members and officials who may be found to have provided negligent advice to the Executive Board regarding the Fund’s capacity to enter into the agreement.’ ‘We must never again allow suffocating indebtedness,’ said President Fernández in his message to Congress requesting approval of the new agreement. He described the previous IMF loan as ‘misappropriation of funds’ since it went mostly to finance capital flight. ‘I have asked for a criminal complaint to be filed to determine who were the perpetrators and participants in the greatest fraudulent administration and embezzlement of funds in living memory. ‘We are the ones who want to free ourselves from the debt that others took on. It would be good for them to recognise their mistakes,’ he remarked, recalling that the agreement that formalised the relationship between the Macri administration and the IMF had not passed through the national Congress. Christine Lagarde, who was IMF Managing Director at the time and is currently head of the European Central Bank, and the Executive Board of the IMF are clearly not free of blame, as some of its members actively pushed to expedite the 2018 SBA, others looked the other way and all approved each of the tranches without reading the warnings that the staff reports did carry, even if in veiled technical jargon. According to the governance principles that the IMF itself recommends, a board cannot be at the same time player and referee. Whatever the path Argentina finally chooses – or is forced to choose – the 2018 SBA, the biggest failure in the IMF record, revealed severe problems in the governance of the institution charged with preserving international financial stability. At a time when dozens of countries are facing the prospect of severe debt problems in the coming months, it would help avoid further failures if there were more clarity and consensus about the rules of the game – and what to do when a player is caught cheating. Roberto Bissio is an Uruguayan journalist and coordinator of Social Watch, an international network of civil society organisations reporting on how their governments meet international commitments. Endnotes 1 https://www.youtube.com/watch?v=3kzycrH3iSg 3 https://www.imf.org/en/News/Articles/2021/12/22/pr21401-argentina *Third World Resurgence No. 350, 2022, pp 18-20 |
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