Michael Hudson: Argentina’s New $50 Billion IMF Loan Is Designed to Replay its 2001 Crisis, July 23, 2018.
The recently elected neoliberal government of Mauricio Macri has decided to seek a $50 billion IMF credit line, which will only enable more capital flight for the upper class and greater unpayable debt for the rest of the population, says the economist Michael Hudson.
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
For several months now. Argentines have been taking to the streets to protest against neoliberal austerity measures of President Mauricio Macri. The most recent such protest took place on July 9 on Argentine’s Independence Day. There have also been three general strikes thus far. In the two years since he took office, President Macri has laid off as many as 76,000 public sector workers, and slashed gas and water and electricity subsidies, leading to a tenfold increase in prices in some cases.
The government argues that all this is necessary in order to stem inflation and the decline of the currency’s value. Last month, Macri received the backing of the International Monetary Fund. The IMF agreed to provide Argentina with a $50 billion loan, one of the largest in its history. In exchange, the Macri government will deepen the austerity measures already in place.
Joining me now to analyze Argentina’s economic situation and its new IMF loan is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri Kansas City. Welcome back, Michael.
MICHAEL HUDSON: Good to be back, Sharmini.
SHARMINI PERIES: Michael, why is it that Argentina needs such a huge credit line from the IMF?
MICHAEL HUDSON: For precisely the reason that you explained. Its neoliberal policy aims at rolling back the wage increases and employment that Mrs. Kirschner, the former president, achieved. So it’s part of the class war to shrink the economy. To lower wages, you have to cut back business so as to cut back employment. Like almost all IMF loans, the purpose is to subsidize capital flight out of Argentina before this austerity occurs, so that wealthy Argentinians can take their money and run before the currency collapses.
The loan will indebt Argentina so much that its currency will continue to go down and down, chronically wrecking the economy. That’s what the IMF does. That’s its business plan. It makes a loan to subsidize capital flight, emptying out the economy of cash, leading the currency to collapse, as it has recently collapsed. As soon as the $50 billion was expended, wasted in letting wealthy Argentinians take their pesos, convert them into dollars, move them offshore – to the United States, to England, to the Dutch West Indies, and offshore banking centers – then they let the currency collapse.
The IMF model’s basic assumption, which it’s announced for the last 50 years, is that when you depreciate a currency, what you’re really lowering is the price of labor. Raw materials and capital have an international price. But when a currency goes down, it makes imports much more expensive, and that causes a price umbrella over the cost of living. Labor has to pay a higher domestic price for grain, food, oil and gas, and for everything else.
So what Macri has done is to agree with the IMF to wage class war with a vengeance. Devaluation leaves Argentina so hopelessly indebted that it can’t possibly repay the IMF loan. So what we’re seeing is a replay of what happened in 2001.
SHARMINI PERIES: Exactly. I was going to ask you, now, that was only 17 years ago, Michael. Argentinians do have memory here. They know what happened. They experienced it as well. Now, that was back in 2001 during the economic crisis when unemployment had increased so dramatically. That country went through a series of presidents and went through a series of crises. And we saw images very similar to what we have seen in, in Greece not too long ago. Now, tell us more about that history. What exactly happened during that crisis, and then eventually how did Nestor Kirschner relieve the economy and come out of that crisis?
MICHAEL HUDSON: Well, the IMF staff said, “Don’t make the loan. There’s no possible way Argentina can pay it. It’s all going to be made to the oligarchy for capital flight. You’re giving the IMF money for crooks, and you’re expecting the Argentine people to have to pay.” So Argentina very quickly was left broke.
Although that was 17 years ago, for the last 17 years the IMF has had a slogan: “No more Argentinas.” In other words, they said, they were never going to make a loan that is only given to oligarchs for capital flight. That’s what happened when it lent to Ukraine, to the Russian kleptocrats, and to the Greek banks to move offshore. Yet here again, we’re having a replay.
After Mrs. Kirschner came in, it was obvious to everybody, as it had been to the IMF staff (many of whom had resigned) that Argentina couldn’t pay. So about 80 percent of Argentina’s bondholders agreed to write down the debt to something that could be paid. They saw that either it’s a total default because they can’t pay, or they would write it down very substantially to what could be paid, because the IMF really made an incompetent – not incompetent, but outright corrupt – insider deal.
Unfortunately, the oligarchy had a fatal clause put in the original bond issue, saying that Argentina would agree to U.S. arbitration under U.S. law if there was any dispute. Well, after the old Argentine bonds depreciated in price – the bonds that were not renegotiated as part of the 80 percent – you had vulture funds buy them up. Especially Paul Singer, the Republican campaign donor who tends to buy politicians along with foreign government bonds. He sued, demanding 100 percent on the dollar, not the 40 cents or whatever they’d settled for. The case was assigned to the senile, dying Judge Griesa in New York City. He who said there was something about a clause that said investors have to be treated symmetrically. Argentina had said, “That’s fine, we’ll pay the other 20 percent the same as what the 80 percent of all agreed to. The majority rules.” But Griesa said, “No, you have to pay the 80 percent all the money that the 20 percent demands. That’s symmetry.” He let the hedge funds win. That set Argentina on the road to go bankrupt again, wreck the government, and bring back the oligarchy.
That ruling caused turmoil. The United States State Department set out to support the oligarchy by doing everything it could to destabilize Argentina. The Argentine people voted in a government that was supported by the United States, hoping it would be nice to them. I don’t know why foreign countries think that way, but they thought maybe if they voted neoliberal, the United States would agree to forgive some of its debt.
Well, that’s not what neoliberals do. Macri did just what you said at the beginning of the program. He announced that he was going to cut employment, stop inflation by making the working class bear all of the costs, and would borrow – actually, it was the largest loan in IMF history – the $50 billion to enable the Argentine wealthy class to move its money offshore. That’s what the IMF does.
SHARMINI PERIES: Right. So let’s imagine you are given the opportunity to resolve this issue. How would you advise the Argentine government in terms of what can they do to stabilize the economy, given the circumstances they’re facing right now?
It doesn’t have to be this way
MICHAEL HUDSON: Very simple. I’d say that this debt is an Odious Debt. There is no way Argentina can pay. The clause that bankrupted it was put in as a result of tens of thousands of professors, labor leaders, and land reformers having been assassinated. The United States financed an assassination team throughout Latin America after Pinochet in Chile, to support what was basically a proxy government. The Argentine loan said it would follow U.S. rules, not Argentine rules. That basically should disqualify that debt from having to be paid. And it should say the IMF debt is an odious debt, given under fraudulent purposes solely for purposes of capital flight.
SHARMINI PERIES: Now, Michael, just one last question. Did you want to add something to what you were saying?
MICHAEL HUDSON: Well, once it doesn’t pay the foreign debt, its balance of payments will be more stable. But creditors have always used violence in order to get their way. I don’t see how the Argentina situation can be solved without violence, because the creditors are using police force and covert assassination. They’re just as bad as the Dirty War that had that mass assassination period in the late, into the late 1980s and early ’90s. There’s obviously going to be not only the demonstrations that you showed, but an outright war, because it’s broken out in Argentina more drastically than anywhere else right now in Latin America, except in Venezuela.
SHARMINI PERIES: Michael, at the moment, the Fed is gradually increasing interest rates and the dollar is gaining in value. This is sucking the financial capital not only in Argentina but in many places around the world. Also, you know, they’re going to be soon in crisis as well. What is, what can the developing economies do?
MICHAEL HUDSON: Here’s the problem: When the United States raises interest rates, that causes foreign money to flow into the dollar, because the rest of the world, Europe and other areas are keeping low interest rates. So as money goes into the dollar, to take advantage of the rising interest rates, the dollar rises. That makes it necessary for Argentina or any other country, third world country, to pay more and more pesos in order to buy the dollars to pay that foreign debt.
Argentina and other Third World countries have violated the prime rule of credit: never to denominate debt in another currency that you can’t print. Now, the dollar debts become much more expensive in peso terms. As a result, throughout the world right now, you’re having a collapse of bond prices of Third World debt. Argentine bonds, Chilean bonds, African bonds, Near Eastern bonds. Third World debt bonds are plunging, because the investors realize that the countries can’t pay. The game looks like it may be over.
The good side of this is that Argentina now can join with other Third World countries and say, “We are going to re-denominate the debts in our own currency, or we just won’t pay, or we will do what the world did in 1931 and announce a moratorium on intergovernmental debts for German reparations and the World War I Inter-Ally debts.” An international conference is needed to declare a moratorium and say, what is the amount that actually can be paid? The aim would be to write down third world debts to the amount that should be paid.
The principle that countries have to support is that no country should be obliged to sacrifice its own economy, its own employment, and its own independence to pay foreign creditors. Every country has a right to put its own citizens first and its own economy first before foreign creditors, especially when the loans are made under false pretenses, as the IMF has made pretending to stabilize the currency instead of subsidizing capital flight to destabilize the currency.
SHARMINI PERIES: All right, Michael. I thank you so much. And we’ll continue this conversation. There’s so much more to discuss, and so many countries here in this situation for that discussion as well. I thank you so much for joining us today.
MICHAEL HUDSON: Thanks. I think it’s going to get worse, so we’ll have a lot to discuss.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.