Argentina’s attraction to short-term investors was relatively simple: high risk, high gain and the carry trade – where borrowers in one country with low interest rates then lend in another with high rates. Exorbitant interest rates of 60% to 80% in pesos made Argentinian bonds attractive even with a brutal devaluation. The fact that they could get repaid very quickly by investing in the country’s 30-day bonds was an added attraction.
Some bond traders may lose out now if the new government ends up defaulting properly, but don’t bet on it. Those who refused to accept a haircut in the early 2000s – the so-called vulture funds – were eventually paid back in full in 2016.
The other major question is why the IMF extended new credit to the country in this situation. Even before Macri’s technical default, it had defaulted eight times in the past. According to one narrative, the economy still looked a reasonable bet until investor confidence was shaken from the Peronists winning the election. Yet even in December 2018, the fund’s review acknowledged “significant risks to debt sustainability”.
The IMF lent Argentina 11 times its quota of funds available to supplement state reserves, even before the amount was increased. It delivered 80% of the committed funds in just 13 months, right before an election. It exposed 47% of the fund’s outstanding credit to a single country.
The IMF probably saw an opportunity to impose strict discipline on Argentina. The loan came with the usual conditionalities: inflation targeting, tighter monetary and fiscal policy – not least a 25% cap on annual nominal wage rises, despite 60% inflation – plus budget transparency and some new anti-corruption plans.