Few phrases are more powerful in economic policy than the simple words: “There is no money.”
< p> A decade of British politics was defined by the famous – or perhaps infamous – note left by Labor Party spokesman Liam Byrne when he resigned from the Treasury in 2010. David Cameron, who became prime minister at the same time, could point to this message every time the opposition criticizes the Tories' decision to tighten budget strings.
Now Argentina's new economy minister is also linking his policies to the same problem.
Louis Caputo warned about this. a week with “no money left” as the new Buenos Aires administration laid out sweeping plans to address the country's deep-seated problems.
Spending will be cut by almost 3% of GDP. Subsidies for energy and transport have been eliminated. Half of government ministries will be closed.
The most interesting thing is that the peso will be devalued by 54%, which will bring it closer to the price on the black market.
The troubled currency has already fallen more than 50% this year, and the new devaluation will raise the official rate to 800 pesos per dollar.
Caputo is merely the ax of Javier Miley, the chainsaw-wielding right-wing economist who stormed into Argentina's presidential office last month promising sweeping reforms to cure the country's economic ills.
These problems are as follows. entertaining. Inflation exceeds 140%. GDP will contract by about 2.5% this year. Argentina defaulted on its debts again in 2020, compounding its failures to pay creditors in 2001 and 2014.
A persistent reliance on borrowing is at the heart of the problems, he argues. Miley's solution is to drastically cut expenses.
During the campaign, Miley was considered something of an oddball. But now, in power, the establishment welcomes his bold reforms.
Investors flocked to Argentine bonds on Wednesday, pushing down the country's borrowing costs. This is the type of positive spiral that Miley will need if his plan works: cutting spending will lower market interest rates and thus save the government even more money.
Sergio Armella, an economist at Goldman Sachs, said: “While further details of the measures announced by Mr. Caputo are not yet known, our initial impression of the announcement is positive.”
“Fiscal profligacy is at the root of Argentina's macroeconomic problems and prompt fiscal adjustment is most important.”
Perhaps most importantly, the International Monetary Fund (IMF), headquartered in Washington, is providing support. Kristalina Georgieva, the IMF's managing director, immediately welcomed the “decisive measures.”
Georgieva's tone differs markedly from the IMF's response to efforts to liberalize the UK economy.
The fund made an extraordinary attempt to pressure Liz Truss and Kwasi Kwarteng to reconsider their mini-budget last year, a package of tax cuts aimed at boosting economic growth. The IMF said the UK should “reconsider tax measures, especially those that benefit people on high incomes.”
Britain's efforts to cut its deficit also drew the ire of the IMF in 2013. Its chief economist said George Osborne, the then chancellor, was “playing with fire” with his plans to keep spending on a short leash.
There are significant differences between the British and Argentine experiences. Firstly, the scale of the crisis facing the disaster-prone Latin American country is different to any of the UK's woes.
The interest rate landscape is now very different from the situation in 2013. There were hopes then that governments would be able to borrow at low interest rates for the long term – something we now know was a fantasy.
An additional difference that may be more likely to attract Washington's attention is the fact that Argentina is the IMF's largest borrower. More than a quarter of all outstanding IMF loans went to Argentina.
The IMF has struggled to reach agreement with previous Buenos Aires governments when it comes to reforming the economy. Consequently, Miley's chainsaw economics are attractive – he looks like someone the IMF could do business with. The institution would very much like to know that there is at least a prospect of one day getting its money back.
The IMF says: “These bold initial actions aim to significantly improve public finances in a way that protects the most vulnerable in society and strengthen the exchange rate regime. Their decisive implementation will help stabilize the economy and lay the foundation for more sustainable private sector-led growth.”
Miley hopes the sharp break with the past will act as shock therapy in the service of liberalizing the crisis-hit economy. The inspiration is Milton Friedman, the Nobel Prize-winning economist whom the president idolized so much that he named one of his dogs after him.
Radical changes of this magnitude have a checkered history. Friedman's policies inspired much of the economic reforms in Chile in the 1970s and '80s, which transformed the economy even as human rights suffered under the dictatorship of General Pinochet.
The term “shock therapy” was also used to the liberalization of the Soviet Union and the Eastern Bloc countries after the collapse of the USSR. Countries like Poland have achieved impressive prosperity even as Russia has descended into banditry.
Miley's reforms do not guarantee success. Ratings agency Fitch noted that his party does not have a strong position in parliament, making it difficult to carry out radical changes. It is also difficult to lift capital controls without releasing large cash flows out of the country.
Fitch analysts continue to believe that “a restructuring or other default event of some kind is more likely than no coming years,” not least because Argentina faces a wave of foreign currency bond payouts in 2025.
Armella at Goldman Sachs agrees that the economic crisis may get worse before it gets better. A weaker currency will make imports more expensive, and Mr. Armella said inflation is “likely to accelerate in the coming months.”
Given Argentina's economy is extreme in almost every way.
Given Argentina's economy is extreme in almost every way.
p>< p>But the way the IMF welcomed Miley's policy package could serve as a lesson for many other countries.
Caputo says Argentina has an “addiction” to debt. While many other countries are not yet in such dire straits, they are dabbling in the same poison.
The IMF's own Fiscal Monitor warns that “in all countries, public finances are becoming increasingly difficult to balance” as “debts generally are rising around the world, and borrowing costs are rising.”
Even in the UK, which has never defaulted, debt is a serious problem.
The Office for Budget Responsibility warns that on current trajectories, public debt will rise from almost 100% of GDP now to more than twice the size of the economy in the 2060s. .
In contrast, Argentina's debt is about 90% of the size of its economy, although interest costs are much higher than in the UK.
Argentina has had a budget deficit for 113 years. 123 years old. Similarly, the UK has only had a surplus for 19 years since 1900. Chronic debt is a problem for all of us, especially as interest rates have surged from historic lows seen after the financial crisis and during the pandemic.
Miley, the shaggy-haired Argentine outsider, may not be the envoy of the small state that expected by the global economy, but his chainsaw warning that there is no money left resonates far and wide.
Since the IMF has accepted his message, perhaps others should listen.
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