LATIN AMERICA AND THE IMF – PAST AND PROSPECTS (Case studies: Argentina, Brazil, Venezuela)

The recent economic and social developments in Latin America and especially the prospect of an electoral year for nearly all of the countries in the region are closely watched by analysts who see that, while currently in all of these countries pragmatic and moderate candidates are dominating the polls, there is a high risk of hard populist turns to the right and the left that could radically change policies toward security, trade, the economy, and Latin America’s relationships with the world.
This risk is considered to be mainly the result of poor economic policy and large-scale corruption, but also a consequence of the policies enforced in Latin America by the international financial institutions, especially the International Monetary Fund (IMF).
Recent developments
Starting with November 2017, nearly two out of three Latin Americans will choose a new leader over the next 12 months. Chile, Paraguay, Colombia, Mexico and Brazil will hold presidential elections and other eight Latin American elections are scheduled in 2019, a process that is already seen as being the most consequential regional political realignment in a generation.
The region experienced a leftist revival during the 2000s, with left-wing presidents from Argentina, Bolivia, Brazil, Chile, Ecuador, Venezuela, Guatemala, Honduras and Nicaragua who benefited from the period of high commodity prices and relentless Chinese demand for natural resources. The trend began to reverse, both politically and economically, once commodity prices began falling in 2011. Restored to power, the region’s political moderates applied some of the IMF inspired measures and have produced positive economic results in recent years. Most of the region’s economies are growing after six years of crisis, but the growth is not yet seen by the average people.
In spite of Latin America’s economies improving, the liberal policies are seen as frustrating for many voters and faith in democratic politics around Latin America is at historic lows. The proportion of Latin Americans supporting democracy fell from 66 percent in 2014 to roughly 58 percent, with more than 40 percent saying they are prepared to support a military coup to tackle crime and corruption. Young people are especially disillusioned – with 20 million of Latin American aged 15-29 being unemployed. The prospect of low-paying jobs is forcing a good number into the informal economy, including crime.
Populists and strongmen
In the case of Brazil, President Michel Temer, who has overseen his country’s recovery this year has only a 3 percent popularity rating, largely owing to public disgust with far-reaching government corruption scandals and kickback schemes, and the fact that most Brazilians have yet to feel the stirrings of economic recovery. A majority of Brazil’s citizens are suspicious of existing political institutions: over 70 percent say they care less about the political parties competing for votes than the message of individual candidates, and more than 91 percent believe no political party is free of corruption.
The fact that almost 60 percent would like to see a president who does not belong to one of the big parties favors presidential candidate Jair Bolsonaro, a former army captain who at various points in his political career has advocated shutting down the National Congress and restoring military rule. Modeling himself on U.S. President Donald Trump, he has also long been an advocate of protectionist economic policies, looser gun laws, and repressive approaches to public security. Bolsonaro is currently on the second place in most of the polls for 2018, with a strong chance of even winning it.
In Mexico, the war of words with Washington has reduced the political space for cooperation. If pushed too far, Mexican voters may well prioritize domestic pride over economic probity. The political fortunes of Andrés Manuel López Obrador, a former mayor of Mexico City and a leftist nationalist, are rising. After two failed presidential runs in 2006 and 2012, AMLO, as he is known, is at the top of most of the polls for 2018. There is a real possibility López Obrador will be elected, initiating a hard left turn of the country.
Colombia’s political landscape is also getting more unstable, with many Colombians being upset with the government of President Juan Manuel Santos. Colombia’s former Vice President Germán Vargas Lleras and ex-mayor of Bogotá Gustavo Petro lead in the current polls, but as in Brazil, Colombians disapprove of traditional parties. The forces of the far right, including their standard-bearer, former President Álvaro Uribe (who served from 2002 to 2010) are gathering force.
An exception seems to be Argentina, where a more moderate path is seen as possible after the reforms pushed by President Mauricio Macri which are improving investment and household spending. In 2016, more than a decade after its economists were last welcomed in Buenos Aires, an IMF delegation has returned to Argentina for its first “article IV” economic consultation[1] in Argentina since its economists were last received in 2006. Roberto Cardarelli, who led the IMF team, said that “important progress has been made” since Mauricio Macri took office and unveiled a wave of reforms.
The October 2017 midterm vote in Argentina was considered a referendum on the reformist agenda and, after his governing coalition scored a resounding victory, President Macri said he will seek more sweeping reforms for Argentina, especially in tax, education and labor.
The conservative leader has been pushing a free-market reform agenda to try to overhaul Argentina’s economy, but his ordering of layoffs of state workers, the elimination of tariffs aimed at protecting local industry, and hikes in utility rates has also fueled labor unrest.
IMF against corruption
In an assessment issued mid-October of Latin America economic health, the International Monetary Fund declared that Latin American and Caribbean governments need to crack down on corruption in order to make their economies more durable and the benefits of growth more widespread. “Weak governance and entrenched corruption are weighing on inclusive and sustainable growth in Latin America and the Caribbean.”
The IMF considers that the region needs to recognize that corruption and its link to violence and weak rule of law discourages investment and increases business costs. The report suggested that high levels of corruption appear to divide the emerging economies of the region from advanced economies which benefit from better rule of law. That is most noteworthy in Brazil, where huge graft scandals have brought down top politicians and added to the recent recession.
The IMF also admitted that tackling corruption it is a substantial political challenge, and requires a broad-based strategy. “Earlier experiences suggest that a successful anti-corruption strategy would entail strong political leadership, legal and judicial reforms, enhanced transparency and accountability, and above all, stronger monitoring and enforcement,” it said.
In a blog post entitled “Latest Outlook for The Americas: Back on Cruise Control, But Stuck in Low Gear,” issued last July, IMF’s Director for the Western Hemisphere Department, Alejandro Werner warned that amid low confidence, domestic demand continues to remain weak across most economies, and is expected to only recover, based on a decline in political and policy uncertainty across some major economies. He recommended that Latin American countries pursue structural reforms including improving education and infrastructure, tackling corruption and promoting investment in order to boost growth.
The IMF’s assessments and activities show the interest of the Fund with regard to Latin America, although it still faces an overall negative attitude in most of the countries.
Last July, Bolivia’s President Evo Morales has been highlighting his government’s independence from international money lending organizations and their detrimental impact the nation. “A day like today in 1944 ended Bretton Woods Economic Conference (USA), in which the IMF and WB were established,” Morales tweeted. “These organizations dictated the economic fate of Bolivia and the world. Today we can say that we have total independence of them.” Morales said Bolivia’s past dependence on the agencies was so great that the International Monetary Fund had an office in government headquarters and even participated in their meetings.
The IMF: before and after the “Washington Consensus”
During the last decades, Latin American nations experienced cycles of populism, neoliberalism, or dictatorship, but also simultaneous efforts to strengthen or weaken their interaction with the IMF. For instance, while the dictatorships of the 1970s in Argentina, Brazil and Chile were friendly to the IMF, the leftist (or ‘neopopulist’) administrations have adopted powerful anti-IMF stands.
IMF recent history
The outbreak of the Third World debt crisis in 1982 initiated the era of international financial rescues led by the IMF. Authorities ruled out direct negotiations between debtor countries and creditors as unrealistic. The largest U.S. banks had made sovereign loans that exceeded their capital. Most banks were eager for the IMF to provide funding, as were Third World countries that wished to avoid default and gain access to easier credit.
In the early stages, IMF loans did not necessarily require structural adjustment since authorities believed that indebted nations needed some time to get their finances in order. By 1985, it had become obvious that deep-rooted problems in developing country economies were preventing them from growing out of their debt. A new strategy was then announced by U.S Treasury Secretary James A. Baker whereby new money from the IMF and commercial banks would be based on market reforms. In exchange, indebted countries were to liberalize their economies.
IMF interventions in crisis countries have been justified on the grounds that fund conditionality promotes market reforms and that emergency lending helps avert systemic threats to the international economy. However, when it lends to governments uninterested in reforms, the Fund’s credit does little to promote policy or structural changes. In such cases, the Fund suspends credit until it receives promises or evidence of policy change in the right direction. At that point, the Fund releases credit again taking the pressure off the recipient government to reform. Indeed, the fund cannot afford to watch a country reform on its own without the IMF’s involvement. Thus, once a county receives IMF credit, it is likely to become dependent on fund aid for most, if not all, of the following years.
By 1987, it became evident that that strategy was not working. Countries did very little in the way of economic reform, though they continued to receive funding. IMF conditionality appeared to provide little incentive to reform. By financing governments that were uninterested in serious liberalization and structural adjustment, the Fund actually delayed reforms in Latin America during the 1980s. Latin America became more indebted, private commercial banks in the United States were able to postpone recognizing losses, and the living standards of Latin Americans fell.
The IMF and the “lost decade”
During the Latin American debt crisis of the 1980s, a period often referred to as the “lost decade”, many Latin American countries became unable to service their foreign debt. This originates in the 1970s, when two large oil price shocks created current account deficits in many Latin American countries. At the same time, these shocks created current account surpluses among oil-exporting countries. With the encouragement of the U.S. government, large U.S. banks were willing intermediaries between the two groups, providing the exporting countries with a safe, liquid place for their funds and then lending those funds to Latin America.
Latin American borrowing increased dramatically during the 1970s. At the end of 1970, total outstanding debt from all sources totaled only $29 billion, but by the end of 1978 it was $159 billion. By 1982, the debt level reached $327 billion and the nine largest U.S. banks held Latin American debt amounting to 176 percent of their capital. On the other hand, the tightening of the U.S. and European monetary policy during the same period led to a rising of the nominal interest rates globally, and in 1981 the world economy entered a recession. Commercial banks began to shorten re-payment periods and charge higher interest rates for loans. The Latin American countries soon found their debt burdens unsustainable.
In August 1982, Mexican Finance Minister Jesús Silva Herzog informed the Federal Reserve chairman, the U.S. Treasury secretary and the International Monetary Fund (IMF) managing director that Mexico would no longer be able to service its debt, which at that point totaled $80 billion. Other countries quickly followed suit and, ultimately, sixteen Latin American countries rescheduled their debts. In response, many banks stopped new overseas lending and tried to collect on and restructure existing loan portfolios. The abrupt cut-off in bank financing plunged many Latin American countries into deep recession.
As the crisis spread beyond Mexico, the United States took the lead in organizing an “international lender of last resort,” a program under which commercial banks agreed to restructure the countries’ debt, and the IMF and other official agencies lent the funds to pay the interest, but not principal, of the loans. In return, the countries agreed to undertake structural reforms of their economies and to eliminate budget deficits. Although this program averted an immediate crisis, it allowed the problem to fester. Instead of eliminating subsidies to state-owned enterprises, many countries instead cut spending on infrastructure, health, and education, and froze wages or laid off state employees. The result was high unemployment, steep declines in per capita income, and stagnant or negative growth – hence the term the “lost decade”.
The “Washington Consensus”
The economic reforms that the IMF and the World Bank required in exchange for their support were summarized in 1989 by British economist John Williamson, who coined the term “Washington Consensus”, a set of 10 economic policy prescriptions considered to constitute the “standard” reform package promoted for the developing countries affected by economic crises by the international financial institutions. The prescriptions included policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy.
Subsequent to Williamson’s use of the terminology, and despite his emphatic opposition, the phrase “Washington Consensus” has come to be used in a second, broader sense, to refer to a more general orientation towards a strongly market-based approach (sometimes described as market fundamentalism or neoliberalism).
The “Washington Consensus” consisting of the strictly economic aspects of the IMF-borrower partnership developed into a complex relationship, with a multitude of routine and almost ritual interactions that continues even when the countries have no more loan agreements with the IMF. These interactions include detailed weekly reports to the IMF’s headquarters from the central banks of the borrowing countries, trips to Washington by presidents and ministers, periodic IMF missions to the country and, in some instances, the fixed presence of IMF officials in national central banks and ministries of economy. This “routine of dependency” exists at various levels over time and emerges as an integral component of the IMF’s and the borrower’s economic and political life.
IMF missions proceed the same way: a number of IMF economists serve as permanent residents in borrowing countries; the IMF Executive board approves all the loan arrangements; and all the stand-by arrangements (SBAs) follow the same guidelines and include a clause that defines uniform monitoring processes.
The mechanisms are generally conducted by the same individuals, who perform the same actions, based on the same instructions, rules, economic premises and goals. According to Claudio Loser, former head of the IMF’s Western Hemisphere Department from 1994 to 2002, IMF may be compared to three other structures with a similar cohesion and vertical discipline: the old-style Communist parties, the Vatican and the military. Everything is very structured, there is a lot of work, but very little freedom of action.
As to the results, a privatization wave swept through the region between 1990 and 1995. In that brief period, direct foreign investment in Latin America and the Caribbean surged from $126bn to $278bn USD (an increase of 120 percent). An estimated 1,500 public companies were sold to the private sector, closed, or declared bankrupt. This affected utility companies as well as other key sectors such as industry, transportation, logistics, and communications.
The “Post-neoliberalism”
The “lost decade” was followed by a so-called “post-neoliberal” phase, between 1995-2015, when many of the “Washington Consensus” principles were cast aside, since they – and the IMF – were considered as having brought the deterioration of the industrial frameworks, the neglected public sectors, the political systems in crisis and the disintegrating societies.
The neoliberal model was considered as having failed at the end of the 20th century, giving way to widespread economic, social and political crises and leading to a change in the political orientation of many countries in the region. The new governments initiated social assistance and employment protection programs.
Political change also led to greater state intervention in the economy, with both formerly privatized enterprises and privately owned firms being nationalized. In some cases government presence increased on company boards, businesses were expropriated, and contracts governing the exploitation of natural resources were modified to benefit national interests. Different strategies were used to encroach on the private sector and areas of economic profitability that had been its preserve.
While different according to the specific condition of the countries, the coming back of the state in the economy was seen as leading to a steady economic growth, also benefitting from strong commodity prices. This significantly improved fiscal policy, and reduced their debt. Some of the structural changes brought about by the neoliberal model also persisted, creating a political, economic, and social framework that can be called post-neoliberalism, a quest to re-establish the state as the principal mechanism of social integration.
The end of the “Washington Consensus”
The experience and especially the IMF failures in Latin America and elsewhere led to a more cautious pragmatism showed by the Fund in the decade since the financial crisis, while still maintaining that free trade and open markets boost growth and raise living standards.
The first big change came in 2011 when, as money streamed into emerging markets from the west, where low interest rates had killed any prospect of investment returns, developing nations began to overheat. The governments found themselves powerless in the face of market forces. Recognizing the danger and under pressure from the growing economic clout of its fast-growing developing nation members, the IMF distanced itself from the “Washington Consensus” and declared that “capital flow management tools are useful”.
The second change seen in the past decade was that welfare has been included into the IMF’s policy framework and safety nets are present in its programs. While previously, individual hardship was glossed over as a necessary cost of aggregate progress, recently Christine Lagarde, the IMF’s managing director, repeated that governments must “consider what sectors are going to be affected by trade and technological change and what measures will be taken to help people adjust”. Last October, the IMF advocated workers’ rights to help tackle the issue of chronically low wage growth. Countries “should consider correcting distortions that may have reduced workers’ bargaining power excessively”, it said. It even went further, advocating higher income taxes for the rich. Cutting tax has been an article of faith in the Washington Consensus and considered a stimulant for entrepreneurialism and growth. It has gone far enough, the IMF said, and top tax rates should be raised in some countries to counter inequalities.
While this new approach does not change the IMF’s core belief in free markets and open trade, the crisis forced it to revisit its market fundamentalism while the rise of populism has demonstrated that globalization can only survive if the growth it delivers is inclusive and has democratic support. The end of the “Washington Consensus” is also an admission that politics has trumped economics.
Case studies: Argentina, Brazil, Venezuela
The developments in Argentina, Brazil and Venezuela are symptomatic with regard to the complex relationship between the IMF and Latin America.
Argentina: from default to development and return of the IMF
In Argentina, the privatization wave was launched in 1989 under President Carlos Menem (1989-1999), according to the principle ‘Nothing that should be state-owned shall remain in the hands of the State’ and covered key industries such as steel, petrochemicals, shipbuilding and oil, electricity and gas, ports, power plants, mortgage lending, and social security. For many years Argentina was considered the IMF’s “top student” Also, in the hope of eliminating hyper-inflation and years of currency turmoil, Argentina adopted a “currency board regime”, which pegged the peso to the dollar. As a result, inflation dropped sharply, price stability was assured and the value of the currency was preserved. But Argentina still had external debts and needed to borrow more money to pay them. The fixed exchange rate caused cheap imports, which yielded a constant flight of dollars from the country, as well as the progressive loss of industrial infrastructure and employment.
At the same time, government spending stayed high and corruption was rampant. While Argentina’s public debt grew enormously during the 1990s and the country showed no true signs of being able to pay it, the IMF kept lending money to and postponing its payment schedules. Eventually, Argentina plunged into deep recession, made even worse when Brazil, its largest export market, devalued, and many economists considered that Argentina’s implosion had the IMF’s “fingerprints” all over it. The Argentines deemed the IMF second only to ‘the government’ as most culpable for causing the economic and political crisis.In late 2001, confrontations between the police and citizens became a common sight. The declaration of the state of emergency worsened the situation, giving way to violent protests, which ended up with several people dead, and precipitated the fall of the government and the escaping of the Argentine President in a helicopter. During the last week of 2001, the interim government, facing the impossibility of meeting debt payments, defaulted on the larger part of the public debt, totaling US$132 billion.
When the Argentine banking system was collapsing in December 2001 – January 2002, the Fund did not provide any financial support, and it did not provide any net funds at all in the ensuing year (2002). On the contrary, the IMF together with the World Bank and other international financial institutions drained about 4 percent of GDP out of the economy, with most of that going to the IMF. The Fund also tried to influence government policy, pushing for spending cuts, as well as a tighter monetary policy including inflation targeting. The IMF also wanted Argentina to change its bankruptcy law as well as the repeal of an “economic subversion” law under which the government could investigate acts by firms, banks, or individuals that damage the economy or cause harm to large sectors of the population.
Life after default
It was commonly believed at the time that Argentina would pay a heavy price for its default, the largest ever for a sovereign borrower. However, the Argentine economy contracted for only three months after the default. The real economy began recovering even while the financial system was still in disarray.Part of this was a result of the devaluation of the peso, which gave a large boost to exporters and increased the impact of exports on the economy.
Argentina’s economic recovery began in the second quarter of 2002, and the country’s economy reached its pre-recession level of real GDP in the first quarter of 2005. A number of government policies seem to have contributed to this recovery. Perhaps the most important of these policies was the government’s exchange rate policy. In 2003, the government began to articulate what would become the central bank’s exchange rate policy for the rest of the recovery, that of maintaining “a stable and competitive real exchange rate.”
The Argentine government’s policy of pursuing a stable and competitive exchange rate was unorthodox and controversial. The conventional wisdom among central bankers today is that the central bank should not target the exchange rate, and most central banks would not do it. Most central banks may target inflation itself, or intermediate variables such as short-term interest rates and monetary aggregates, but not the exchange rate. It is generally believed to be incompatible with controlling interest rates in the domestic economy, in an economy with open capital markets.
Another important policy concerns the default and renegotiation of the government’s external debt. The Argentine government was subject to considerable pressure from the IMF in the years following the debt default to offer better terms to the defaulted foreign creditors. But in the end, a debt swap in 2005 was arranged that took $67.3 billion of foreign debt off the books. This was a record 65.6 percent “haircut” and was very important to Argentina’s recovery.
Two unorthodox taxes levied by the government were also important to the recovery. One was a new export tax which allowed the government to get some of the windfall profits that exporters received as a result of the devaluation. The other tax, already in existence, was the tax on financial transactions.
Another policy that contributed to the recovery was a program that provided a monthly stipend (150 pesos) to heads of households who were unemployed with children of up to 18 years-old (or disabled of any age), and to those where the head of the household was ill. At its height (2003), the program reached 20 percent of all households, with 97.6 percent of beneficiaries under the poverty line.
Following the default, two thirds of the outstanding debt was written off. Combined with favorable global commodity prices, prudent internal investment and Chinese demand for Argentina’s soya exports, the economy went on to become one of the fastest-growing in the western hemisphere. 11 million were taken out of poverty and prosperity returned for many. Despite the initial pain and becoming a pariah on the global markets due to its refusal to cede to the IMF policy recipe, debt default proved the right thing to do.
In 2005, as a large and consistently growing fiscal surplus made it possible, Argentina shifted to a policy of debt relief towards the IMF: paying the IMF in schedule, with no negotiation whenever possible, with the intention of gaining independence from it. On December 15, 2005, following a similar action by Brazil, Argentina announced that it would pay the whole debt to the IMF. The debt payments, totaling 9.810 billion USD, were previously scheduled as installments until 2008. Argentina paid it with the central bank’s foreign currency reserves.
Not surprisingly, Argentina’s relationship with the IMF became complicated, especially since 2006, when Argentina ceased to submit its economic statistics to be validated by the IMF.
During the successive governments of Nestor and Cristina Kirchner (2003-2015), many re-nationalizations were also undertaken. For the most part, this occurred in response to poor management that jeopardized the businesses in question and sometimes, indirectly, the nation’s socio-economic stability.
In November 2003, Argentina’s postal service nationalized in response to mounting unpaid license fees and the discovery that the severance pay of 3,000 laid-off workers had been recorded in the company books as an investment. The radio spectrum was nationalized a few months later after its owners defaulted on a promised $300 million investment.  In 2006 when, after years of corporate neglect, Aguas Argentinas, the water supply and sanitation system run by the French group Suez, allowed contaminated water to be distributed throughout the southwest region of Buenos Aires, the government seized the opportunity to shift water management to state-owned Aysa. In 2007, the state recovered control of the Tandanor shipyards, whose owners never honored the contract, and the aircraft manufacturer Fábrica Militar de Aviones, purchased for 67 million pesos from Lockheed Martin.
During the successive mandates of Cristina Fernández de Kirchner (CFK) between 2008-2011 and 2011-2015, Aerolíneas Argentinas, the pension fund, the national oil company and the railway were nationalized.
–  Aerolíneas Argentinas was nationalized after failing to pay its employees and its suppliers, which had left it facing imminent closure. The sale of the airline in the early 1990s to the Spanish Marsans group was emblematic of the practice of asset stripping, with most of its assets taken over by the foreign group. In 2008, when the airline’s assets were in the red by some $1.2 billion, the Tribunal of Accounts of the Nation evaluated the company as having negative net worth, so for legal reasons the Argentine government paid a symbolic amount of one peso to represent compensation for expropriation.
Marsans filed a 1.2 billion-dollar claim with the International Centre for Settlement of Investment Disputes (ICSID), the international arbitration institution operating under the auspices of the World Bank and in 2015 sold the lawsuit to Burford Capital Ltd, a British investment company known for financing corporate litigation, also called a “vulture fund.” Burford’s business model is known for providing cash and legal assistance to companies who have started lawsuits that they see as potentially winnable and profitable, in exchange for securing the rights over potential compensation they might receive.
In July 2017, the arbitration tribunal ruled against Argentina for “illegally expropriating the investments” of Marsans and ordered Argentina to pay $320 million plus interest and legal fees to Marsans for expropriating its airline.
– The nationalization of the social security system consisted in transferring pensions from a privately funded corporation to a framework of intergenerational liability in which actively employed workers subsidize passive ones. By recovering the pension fund, the state was able to tap into the fiscal resources that stemmed from the contributions of active salaried workers. In this way, the government financed several important social programs and strengthened social security.
– In 2012, the government nationalized the oil company YPF, the country’s largest privately owned corporation, by expropriating 51 percent of the shares held by Spanish energy giant Repsol. The move came after a flurry of divestment by the company, which brought Argentina’s energy trade deficit to unimaginably low levels. From the time Repsol acquired YPF in 1998 until the end of 2011, oil reserves dropped by 54 percent; and gas reserves, by 97 percent. In February 2014 the government agreed to pay compensation to Repsol within the framework of an overall strategy on the part of the state to align itself with international markets.
– The last nationalization of the Kirchner government was that of the railway and took place in 2015. After the nationalization, the state paid $1.2 billion to China for the renovation of urban passenger trains and was to place the entire rail system under the banner of the newly rehabilitated state-run Ferrocarriles Argentinos.
Back to centre-right and the IMF
After 2010, Argentina’s economy has lost momentum, inflation has surged to around 30% and poverty appeared to be creeping back. Growth was underpinned by unsustainable public spending, and the central bank was running perilously low on currency reserves.
Argentina shifted towards the centre-right in 2015, by giving a presidential victory to former president of Boca Juniors, one of Argentina’s biggest soccer clubs, and Buenos Aires mayor Mauricio Macri. Son of an Italian-Argentine construction magnate, Macri successfully presented himself as the candidate of change at a time when many voters were concerned about inflation, slowing growth and crime. He also promised to strengthen institutions, introduce more pro-business policies, cut deals with foreign creditors and realign Argentina’s foreign policy away from Venezuela and Iran and closer to the U.S. Soon after his election, an IMF delegation came to Argentina, a decade after the Fund being expelled from the country.
Eager to pre-empt IMF demands to liberalize the economy and deliver austerity in order to attract foreign investment and loans, President Macri’s ‘shock doctrine’ strategy to abruptly reverse many of the Kirchner presidencies’ policies, has rattled multiple sectors of society. Currency controls were removed, provoking a sharp devaluation of the Argentine Peso and provoking a 54% increase in the cost of living. 1.4 million citizens fell below the poverty line in the first four months since President Macri took over.
Critics point out that the Macri administration’s economic policy represents nothing less than Argentina returning to the same fiscal deficit model – financed by external debt and the associated instability it generates – that operated in the 1990s under IMF tutelage.
Whilst the privilege of re-joining the IMF will mean that Argentina will have to indebt itself by a further $400 million, the 2016 budget approved by congress added $40 billion overall to the 2015 debt.
While default is not an option that most countries would want to consider, the costs of Argentina’s default turned out to be vastly less than commonly believed at the time. In hindsight, it seems clear that the government made the right decision to prioritize its immediate economic recovery over satisfying foreign creditors and international credit markets. In Argentina’s case, the IMF was opposed to most of the major economic policies that contributed to the country’s rapid economic recovery. Argentina’s break with the Fund was therefore one of its most important decisions, and it has lessons for other developing countries.
On the other hand, Argentina’s recent shifting to the centre-right may be significant for South America’s other left-leaning governments, such as Venezuela and Brazil, which are also grappling with the end of a decade-long commodities boom and accusations of financial mismanagement.
Brazil: kicking out and calling back the IMF
In Brazil, the state is in control of the main sectors of the economy, since the privatization process led by Fernando Henrique Cardoso[2] was financed mainly from public funds. That afforded the Brazilian government a relatively large shareholder stake in numerous industrial companies, an initiative that increased in the following years through direct share purchasing. After a big blackout incident in 2001, the federal government also extended its influence in the electricity sector through increased regulatory control.
In October 2002, Brazil was almost crushed by foreign debt, with pundits from Washington to São Paulo predicting imminent defaults, and in this context the public, voted out the ruling elites and voted in Luiz Inácio Lula da Silva, a metal worker who never went to college, an union leader who would win two presidential mandates and was once described by Barack Obama as “the most popular politician on Earth”.
Lula kicked out the International Monetary Fund when Brazil paid the $15.5 billion it owed them in December 2005. No longer was the government beholden to the designs of the Fund’s financial demands. It became a net lender to the IMF instead. To the public, the Lula government gave Brazil its economic sovereignty back. They hated the IMF and Lula quickly became the most popular president in the Americas, if not the world, based on his approval rating in the 80s.
Brazil rode a commodities boom during his reign, and as consumer spending grew half the population joined a new lower middle class. In 2010, Lula’s last year in office, Brazil’s economy grew a spectacular 7.5%. In the same year, Lula designated as successor a former Marxist guerrilla, Dilma Roussef and got her elected, but soon the commodities boom ended. In 2014, with public spending soaring, came Brazil’s first deficit in more than a decade. The country lost its investment grade as its economy began to shrink.
According to a forecast by the International Monetary Fund released last October, in 2022, Brazil will have the 12th largest debt in the world, representing 96.9% of the Brazilian GDP. The worsening of Brazil’s situation is a reflection of the deterioration of public accounts, with revenues (falling due to the recession) not keeping pace with the growth of expenses. The Brazilian government also assesses 2017 as the fourth consecutive year of a large deficit in public accounts.
Domestic politics has made the situation worse, due mainly to a massive corruption scandal at the state-owned oil giant Petrobras, in which senior officials of the traditional political parties, as well as prominent businessmen were involved. After the corruption scandal broke, millions of demonstrators flooded Brazilian streets calling for Dilma Rousseff’s impeachment which was voted in 2016 on charges of breaking budget laws. However, many politicians who voted for her impeachment also faced their own corruption charges.
An adjustment program difficult to reach
The political fallout of the Petrobras affair has severely damaged Brazil’s credibility and affected the fiscal-adjustment effort, forcing the economy into a downward spiral. In this context many economic analysts pointed out that Brazil needed the support of the international community and should negotiate an adjustment program with the International Monetary Fund. The IMF would give the adjustment program its stamp of approval and make its own resources available, so that Brazil does not have to tap international capital markets for a reasonable period.
In the year since the removal of Rousseff, Brazil has undergone a period of dramatic “structural adjustments” promoted by interim President (unelected, former vice-president) Michel Temer in the form of austerity measures. In 2016, while the military budget increased by 36 percent, budget cuts were made to agrarian reform, women’s advancement, climate change mitigation, environmental protection, Indigenous rights, and children’s rights.
One of the most contested measures includes a social security reform which would raise the social security retirement age to 65 years, reduce death pension benefits, raise social security contributions by civil servants and end labor rights in the countryside, effectively allowing practices that are considered by the penal code as being equal to slavery. Also under Temer, for the first time in 15 years, Brazil didn’t have a real increase in the minimum wage for workers. The austerity measures triggered waves of protests and strikes.
In May 2017, in its “Western Hemisphere Regional Economic Outlook,” the IMF urged Brazil to maintain the austerity measures. Consequently, policy makers have increased the pace of interest rate cuts for the second time this year amid record-high unemployment and slowing inflation. The administration has won investor praise for efforts to shore up Brazil’s finances and boost private sector activity. While this year’s growth estimates remain pessimistic, confidence has risen as the budget deficit has dropped, the currency has gained and inflation diminished.
Return of the military?
Michel Temer himself has been charged with corruption, racketeering and obstruction of justice, after being secretly recorded when recommending a powerful businessman to deal with a close aide who was later filmed receiving $152,000 in cash in a suitcase. However, there have been no massive street protests similar to those that led to the impeachment of Dilma Rousseff, on charges of breaking budget rules. And unlike Rousseff, Temer has retained the support of financial markets who like austerity measures such as privatizing government services, a 20-year cap on expenditure and a planned pensions’ overhaul.
According to independent observers, the lower house of congress first voted not to suspend the president for a trial after Temer was charged with corruption, shortly after his government agreed to spend $1.33bn on projects in the states of lawmakers who were due to vote. Many of those lawmakers are allied with powerful agribusiness and evangelical Christian lobbies, and face their own graft investigations. Environmentalists say Temer’s administration is reducing Amazon protection in return for their support.
Although Temer won a second vote in the lower house of congress on whether to suspend him for a trial, trust in Brazil’s political leaders has been drastically undermined. That lack of trust is feeding support for an authoritarian solution to the crisis, which could have serious consequences in next year’s presidential elections.
Former prosecutor general Rodrigo Janot, who filed corruption charges against the ex-presidents Inácio Lula da Silva and Dilma Rousseff, said both main Brazilian parties for 15 years had accepted bribes for decisions relating to ports, airports, droughts, oil rigs, tax breaks and hydroelectric plants in the Amazon. He also said that Temer’s party abandoned Rousseff’s governing coalition because it had failed to stop the graft investigation, which in turn led to the lower house of congress approving impeachment proceedings.
Prosecutors allege Brazil’s government was run like a cartel for years, with political parties selling favors, votes and plum appointments to powerful businessmen. They say Temer took over the scheme when he took power last year, after his predecessor was impeached and removed from office, and that his party has since received about $190m in bribes.
Since 78% of Brazilians support the graft investigation, their disillusionment over the way it is playing out at the highest levels is seen as opening a dangerous gap for populists and extremists in next year’s presidential elections. In September the high-ranking army general Antonio Mourão said that in his view, if Brazil’s institutions could not remove those involved in illicit acts from public life, “we will have to impose this.” Such a view enjoys the support of a growing number who argue that Brazil’s armed forces should intervene – as they did in 1964, when they installed a dictatorship that lasted 21 years – an option supported by 43%, according to a September online poll.
Venezuela – from socialism to chaos… and the IMF
Between 1958 and 1993, Venezuela’s political order was given by the so-called “Punto Fijo” Pact, a coalition of the two main political parties, Democratic Action, (AD), a social-democratic party, and the Committee of Independent Political Electoral Organization, (COPEI), which was social-Christian. Both parties agreed to form a national unity government, on a minimal shared agenda, and on distributing among themselves the control of public institutions. This resulted in a society in which business groups, state bureaucracies, and oil workers’ livelihoods all revolved around and relied upon the economic rent yielded by Petroleos de Venezuela (PDVSA) the state oil company. Meanwhile, the “Punto Fijo meritocracy” excluded a considerable share of workers, peasants, and marginalized groups.
In time, AD and COPEI grew apart from the social bases that had previously supported them. This, compounded by a decline in oil rents, brought about an economic and political crisis ending, at the beginning of 1989, in the massive popular uprising against the government of Carlos Andrés Pérez (1989-1993) known as the Caracazo. The privatization process was almost completely halted by the uprising. Only a few companies were privatized and the national oil company PDVSA kept its state-owned status.
The violent repression of the protests resulted in hundreds dead and thousands missing. The worst financial crisis in the history of Venezuela was followed by negotiations with the IMF and enacting the “Venezuela Agenda,” a plan consisting of orthodox monetarist measures, cuts to welfare programs and the internationalization of the oil industry. Once again, the measures were met with social unrest.
This crisis coincided with the beginning of Hugo Chávez’s political activity following his release from prison after a failed coup attempt in 1992. In 1997, Chávez founded the Movement for a Fifth Republic (MVR) with the support of parts of the military, intellectuals, and left-wing militants and won the presidential elections the next year.
The government of Hugo Chávez (1999-2013) put forward an ambitious nationalization plan that did not target only the previously privatized companies but also wholly private ones, including Venezuela’s largest enterprises: the Sidor steel mill; the power companies Seneca and Electricidad de Caracas, Compania Anonima Nacional Telefonos de Venezuela (CANTV) and the Bank of Venezuela. Chávez also nationalized the cement companies Cemex (Mexico), Lafarge (France), and Holcim (Switzerland) as well as the largest fertilizer producer and hundreds of small businesses. As to the oil sector, the official policy was to nationalize new wells in the Orinoco belt and expand the state presence in PDVSA. Chinese and Russian investment also increased in the form of joint ventures with PDVSA.
El Chavismo
Chávez’s initial project featured anti-imperialist discourse, efforts to recover national sovereignty, emphasized the centrality of the State, and was led by a military strongman who spearheaded significant programs for wealth redistribution. A new constitution confirmed the capitalist character of the Venezuelan economy while giving the state exclusive rights over the oil industry and other sectors of public or strategic interest. It also incorporated various mechanisms for wider popular participation, and reversed neoliberal reforms, significantly expanding economic, social, and cultural rights.
The first tension for Chávez’s administration involved PDVSA. The company’s direct contribution to the state increased, as efforts to internationalize it halted. Later, Venezuela took the initiative in OPEC, and drove an agreement to control prices alongside countries like Libya and Iraq, aggravating relations with the United States. Domestically, this confronted Venezuelan capital by limiting the power of large agricultural estates and giving the government political and economic control over PDVSA. Both acts were labeled by opponents as attacks on private property.
During Chávez’s second administration (2001-2007), his confrontations with the right-wing opposition intensified, and in 2002, Chávez faced a coup d’état, ultimately thwarted by popular revolts that strengthened him politically. This allowed for the dismantling of certain sectors of the opposition and the establishment of a new pact with the popular groups on which Chavismo depended.
To secure the continuity of the Chavista process, the government began to implement a new social policy through the Misiones (Missions). Profits from oil rent were distributed, improving the people’s income, health, education, communication, and access to culture. In contrast with neoliberal policies, the Chavista government’s social spending was aimed at reducing inequality, as well as building a new social and productive network along with the institutions needed to support it.
In the same period, Chávez became the leader of the price control strategy of OPEC and challenged the U.S.’s policy by creating an alliance with the governments of Brazil and Argentina, supporting the governments of Bolivia and Ecuador, and establishing the ALBA (Bolivarian Alliance for the Peoples of Our America).
In 2007, Chávez announced that the “transition” phase of Venezuela had ended and that the moment had come to go forth towards “21st Century Socialism” and to build the Venezuelan United Socialist Party (PSUV). He thus proposed a constitutional reform declaring that the Bolivarian Republic of Venezuela was socialist, giving the president extraordinary powers, while also reasserting the state’s ownership and control of hydrocarbons, the elimination of restrictions on reelection, and the political and territorial reorganization of the country. The proposal was ultimately rejected through the 2007 constitutional referendum.
After 10 consecutive quarters of sustained high growth of the economy – due in large part to high public spending and private consumption, fuelled by high oil prices[3] and historically low interest rates – in 2007 Venezuela cut its dependence on the multilateral lending institutions. It paid its debts to the World Bank five years ahead of schedule. The IMF had closed its offices in Venezuela in late 2006.
However, even with the price of oil around $100 a barrel, the interventionist model of the Chavismo began to be unsustainable. Debt was rapidly rising and food shortages were beginning to appear.
The suspect death of Hugo Chávez
Hugo Chávez was unable to be sworn in for a fourth term after the 2012 election due to his illness. Diagnosed with cancer in June 2011, he was treated in Cuba and the type of cancer he was diagnosed with was never made public. His death was announced on 5 March 2013, almost two years after he was first diagnosed. Shortly after, rumors began according to which Hugo Chávez may have been assassinated by plots coordinated by Western intelligence actors, involving exposure to high levels of radiation, or infection with a cancer-causing virus.
According to investigative journalist Eva Golinger[4], before his death, Hugo Chávez was the target of several assassination attempts, including during the failed coup d’état in April 2002, when he was kidnapped and set to be assassinated but loyal military forces returned him to power within 48 hours. Evidence obtained by the journalist using the US Freedom of Information Act (FOIA), showed that the US agencies were behind the coup and supported, financially, militarily and politically, those involved.
A lesser-known plot against Chávez was discovered in New York City during his visit to the United Nations General Assembly in September 2006. According to information provided by his security services, during standard security reconnaissance of an event where Chávez would address the US public, high levels of radiation were detected in the chair where he would have sat. The chair was removed and subsequent tests showed it was emanating unusual amounts of radiation. According to accounts by the presidential security at the event, an individual from the US who had been involved in the logistical support for the event and had provided the chair was shown to be acting with US intelligence agents.
According to evidence obtained by the journalist, in 2006, the U.S. government formed a special Mission Manager for Venezuela and Cuba under the Directorate of National Intelligence. This elite intelligence unit was charged with expanding covert operations against Chávez and led clandestine missions out of an intelligence fusion centre (CIA-DEA-DIA) in Colombia.  It was later discovered that several close aides to Chávez who had private access to him fled the country after his death and collaborated with the U.S. government.
The main suspect was Leamsy Villafaña Salazar, one of Chávez’s closest aides for nearly seven years, a Lieutenant Colonel in the Venezuelan Navy who had privileged and highly confidential knowledge of Chávez’s comings and goings, daily routine, schedule and dealings.
Leamsy remained with Chávez throughout most of his illness up to his death in March 2013. In December 2014, news reports revealed that Leamsy had secretly been flown to the U.S. from Spain, where he was allegedly on vacation with his family. The plane that flew him was said to be from the DEA. He was placed in witness protection and news reports have stated he was providing information to the U.S. government about Venezuelan officials involved in a high level ring of drug trafficking. Another explanation for his going into the witness protection program in the U.S. could include his involvement in the assassination of Chávez.
Quite revealing were Salazar’s allegations that Chávez died not in March 2013 but in December of 2012. This was done in order to preserve the continuity of government authority and serve the interests of current leader Nicolás Maduro. If proved true, it would strengthen opposition claims about the legitimacy of the Maduro government and dozens of executive orders previously believed to have been signed by Chávez between December and March 5.
From socialism to humanitarian crisis
Nicolás Maduro, who was nominated as Chávez’s successor following his death in 2013, came to power during a dramatic decline of profit from oil rents. By 2015 income from crude oil exports had fallen 40% and, by 2016, foreign debt had grown 350% since 1998. The situation was exacerbated by the authoritarian tendencies of the government, inherited in part from Chávez’s regime and worsened by the political ineptitude of the new president, Nicolás Maduro, a former bus driver who rose through the Chávez movement.
Nicolás Maduro has been strengthening his grip on the economy and society, and a constitutionally sanctioned transfer of power seems almost impossible. The government has the legal tool to maintain power; control of a Constitutional Assembly that supersedes all other pre-existing powers. It also has the money to maintain power in the form of oil revenues that feed a system through which military and government officials profit from the opacity of the exchange rate system, the trading of sovereign and quasi-sovereign bonds and the state distribution of goods. Opposition street protests this year left more than 125 people dead.
This was accompanied by the growing militarization of the state: a third of the secretaries (12 out of 31) and governors (13 out of 20) have military background, in addition to the key role that other members of the military have come to play in the economy. The lack of democratic control has opened the window for corruption, this time particularly in the allocation of foreign currency, the ports, and food distribution.
General inflation and inflation of food prices have reached alarming levels. Malnutrition has risen, along with an increase in the number of people who claim to eat two or fewer times a day. Furthermore, the tendency towards poverty reduction that Chavismo initiated in the early 2000s has reversed, with more than half of all homes living in extreme poverty in 2016.
U.S. sanctions and Russian money-lenders
On March 9, 2015, U.S. President Barack Obamaissued a presidential order declaring Venezuela a threat to its national security and ordered sanctions against seven Venezuelan officials who were involved in the violation of Venezuelans’ human rights. More sanctions were imposed on August 25, 2017, when the U.S. government barred U.S.-based financial institutions from dealing in new Venezuela sovereign and PDVSA bonds, including existing bonds owned by the country’s public-sector entities.
Although the sanctions will hamper the government’s access to the markets to repay or restructure its debts, they do nothing to curtail non-market alternatives such as financing from China and Russia. They are also counter-productive: 73 per cent of Venezuelans were against U.S. sanctions and this may even help the government to regain some support from the population. The sanctions come from a big neighbor with an interventionist past and distrusted by many in the region.
On the other hand, Russia has become Venezuela’s lender of last resort. Rosneft, Russia’s largest oil company led by Igor Sechin, a close ally of President Vladimir Putin, recently lent $6bn to Venezuela’s state oil company PDVSA. The Maduro government has shown it is willing to mortgage the country’s assets to a foreign power. For Russia, it would mean access to more oil reserves than Saudi Arabia, but even in such a case, experts say that there is not enough Russian money to keep Venezuela afloat.
Russia’s recent agreement to roll over some $3 billion in debt will not save Venezuela since the restructuring deal, of which the details are not yet known, is not comparable to the $52 billion worth of debt owed to holders of Venezuela and oil firm PDVSA bonds.
Default speculations
In this context, some analysts proposed to expel Venezuela from the International Monetary Fund, since the government of Venezuela’s policies are at odds with the IMF through law. At the beginning of November, the IMF issued a warning to Venezuela for failing to provide the institution with economic data on time and gave it six months to address the lack of some statistics.
The last time Venezuela had a so-called Article 4 consultation was 2004 and officials say the lack of information is similar to that of the Soviet bloc countries before the fall of the Berlin Wall.
Such a move would spark a sovereign and quasi-sovereign debt default, making the regime ultimately unsustainable. A sovereign default would most likely keep Venezuela out of other financing arrangements such as loans from China, Russia and other forms of commercial lending, as creditors do not usually want to lend to a debtor in arrears.
In this context, on 2 November, Nicolás Maduro, Venezuela’s authoritarian president, announced that he would order a “refinancing and restructuring” of foreign debt worth about $105bn, roughly ten times Venezuela’s foreign-exchange reserves. It would be the second-biggest sovereign default in history, after Greece which in 2012 restructured $261bn of liabilities. In Latin America, the closest precedent is the Argentine crash of 2001, when the government in Buenos Aires simply stopped making payments on $82bn of debt.
However, in the same speech in which he declared his intent to refinance the debt, the president also proclaimed that PDVSA would pay its final installment of $1.2bn on a bond that matured on November 2nd. Just a week earlier, the company also made good on an $842m payment of principal amortization.
The president invited banks, bondholders, and “everyone involved in foreign debt” to the country to take part in talks, theoretically scheduled for November 13th. The chances of a consensual workout, however, appear to be nil.
Observers have a number of theories for the decision to pay today and renegotiate tomorrow. One interpretation is that Mr. Maduro may hope to continue paying debts owed by PDVSA, which provides 95% of the country’s foreign income, while avoiding to pay the debts contracted by the Venezuelan state itself. Another theory is that Mr. Maduro may have intended to send the prices of his country’s debt tumbling. A sell-off would enable either Venezuela or its foreign patrons, primarily Russia and China, to buy back the obligations cheaply. That, in turn, would allow Venezuela to retire its debt at lower cost, or to put it in the hands of sympathetic allies. A more conspiratorial explanation points out that the government had spooked markets by making use of 30-day grace periods to delay a series of interest payments, in order to make sure that friendly cronies made the final profit before payments ceased.
Re-engagement with the IMF
Other financial experts consider that assistance from the IMF with debt restructuring should be of particular interest to Venezuela, which has much to gain from a voluntary arrangement with creditors.
Notwithstanding Nicolás Maduro’s declarations, several IMF experts recently said that the fund has begun preparations for a possible rescue of Venezuela that could require $30bn or more in international help annually and come alongside one of the world’s most complex bond restructurings and a big test of Fund rules.
Officials insist no rescue is imminent and publicly say they are simply conducting normal surveillance, but in recent months IMF staff quietly crunched numbers for a potential bailout that, were it to happen, could be bigger financially and more politically complex than its much-criticized involvement in Greece.
If Venezuela and PDVSA are both deemed insolvent, the question becomes whether or not there will be a political transition with the political outcome beholden to serious economic reforms, probably under an austere International Monetary Fund bailout program.
The scale of Venezuela’s needs would probably be a main issue, since experts calculated that it might need $30bn a year in help from the international community, far more than might be available.
Former IMF officials believe that a bailout is highly improbable, since it is unlikely that the Fund and the Maduro administration would find enough common ground on policy issues to support a program.
According to financial experts, Venezuela may even benefit from the shift in the IMF’s policy, meaning that the Fund and its leading G7 shareholders understand that countries recovering from a crisis need adequate breathing space to resume growth. In this sense, Venezuelans and the IMF would share a common interest in a broad and successful debt operation to conserve the country’s cash and support economic and social stabilization.
By re-engaging with the IMF, Venezuela should be able to unlock significant financial assistance from the international community to meet humanitarian needs and to support a re-orientation of the economy. Just by starting the process, several billion dollars of assistance might be unlocked in weeks – with minimal conditions – to help Venezuela meet urgent needs.
More significant assistance could come once Venezuela reaches agreement on a detailed medium-term economic plan with the International Monetary Fund and the World Bank, which would entail months of painful negotiations. But, with such an agreement, Venezuela might obtain tens of billions of dollars of support through a combination of new loans and an officially supported debt-restructuring operation.
[1] Article IV consultations are typically annual examinations between the IMF and member countries that are required under Article IV of the IMF’s Articles of Agreement.
[2] Minister of Foreign Affairs (1992-1993), Finance Minister (1993-1994) and President (1995-2002)
[3] Venezuela has the world’s largest oil resources outside the Middle East
[4] Also an attorney, American-born and naturalized Venezuelan citizen

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