How Milei made Argentina deserving of an IMF bail-out

Javier Milei can barely contain his excitement. Since December, when the IMF’s last agreement with Argentina ran out, the country’s president has sought a fresh bail-out. Indeed, his efforts include an executive order to remove the need for Congress to approve the deal. On March 30th Argentina’s finance minister said that the government hoped for 40% of the money, which may amount to $20bn, up front. Three days later, Mr Milei hopped on a plane to Mar-a-Lago to meet Donald Trump and, he hoped, help close the deal.

For the IMF, the world’s emergency fund, this is a strange situation. Borrowers tend to arrive furious, dejected and desperate, and none more so than Argentina. Since its first bail-out in 1958, the country has become the fund’s most difficult customer, endlessly stacking up debts, which now come to $41bn (or 28% of all of the IMF’s lending). Mr Milei’s first deal will be Argentina’s 23rd. As the fund contemplates just how much cash to hand over, the question is whether his vim can overcome the country’s spendthrift tendencies.

Argentina’s most recent bail-out, agreed in 2022, exemplifies these tendencies. It was a bail-out of another bail-out, which went wrong after ministers failed to stop investors fleeing. Most of the cash went on paying back earlier loans. Targets the fund set for belt-tightening, liberalising regulation and removing capital controls became increasingly strict as time wore on, but Argentina failed to reduce its deficit, at the same time as it burned through foreign reserves. Politicians proved unwilling to risk painful reforms. The fund could do little to change their minds: it had sunk too much money into Argentina to make any threats of abandonment convincing.

Mr Milei wants to work with the fund both because Argentina needs cash (see chart), and because the reforms it seeks have lots in common with his own. He has cut spending by 5% of GDP and slashed red tape since taking office in late 2023. In doing so, he has turned a fiscal deficit into a surplus, while sinking economic growth. Since he has also tamed inflation, however, his approval ratings remain solid.

Economic necessity is the most convincing reason for the IMF to get behind Argentina. Mr Milei has repeatedly devalued the peso, which is pegged to the dollar, but not fast enough to stop inflation from pushing up the real exchange rate to dangerous levels, putting pressure on Argentina’s paltry reserves. Moreover, each time Mr Milei devalues, he risks capital flight, which further drains reserves and could spark inflation. To bulk up Argentina’s currency buffers, he needs to liberalise the exchange rate, which is only possible with lots of dollars to reassure investors of the country’s ability to service its debt and pay import bills. That is why Mr Milei is pushing for a hefty up-front sum.

A currency crisis would leave Argentina unable to repay its debt—a nightmare for the IMF. Each time the fund doles out more cash, it deepens both the country’s reliance on handouts and the risk to its own finances. Far better to give Mr Milei firepower now, since few leaders have tried harder to remove Argentina from the IMF’s books. As Kristalina Georgieva, the IMF’s boss, has admitted, Mr Milei has “earned it”.