Another IMF loan for Argentina? Its fallout could be ugly

Argentina is the IMF’s largest debtor, accounting for about 37% of its total outstanding credits: 31.1 billion special drawing rights out of 84.2 billion and 28% of the total approved credit of 110 billion. In 2018, the IMF approved a $57 billion loan to Argentina, its largest ever to a single country, nearly $45 billion of which was disbursed. But the financing stopped after President Mauricio Macri lost his re-election bid in 2019, and the loan is now widely seen to have been politically motivated.

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The disbursed funds financed a capital flight of around $24 billion by carry-trade speculators. The rest was used to amortize roughly $21 billion in unsustainable sovereign bonds, debt that had to be restructured in 2020, by when I was Argentina’s economy minister. 

The IMF admitted this failure in 2021 in an evaluation of its 2018 ‘stand-by arrangement’ with Argentina. It concluded that there should have been capital-account regulations to prevent capital flight, as well as debt restructuring to avoid IMF resources being used to repay unsustainable public debt with the private sector. 

Now, the IMF is dealing with Javier Milei, the far-right radical who became president in December 2023. Since then, the country has seen a resurgence of carry-trade activity (when investors borrow at a low interest rate to invest in another currency or asset promising a higher rate of return).

The Milei government’s use of the exchange rate as a nominal anchor to contain inflation produced a sharp real appreciation of the peso, resulting in outsize returns on local-currency financial investments. With investors expecting a stable official exchange rate and government interventions in the parallel ‘blue-chip’ market, they bet heavily on carry trades. In just the past 15 months, carry-trade returns in dollars have reached 43%.

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But this capital inflow did not translate into sustainable investment in the real economy. Instead, the money went into short-term financial speculation, and we are now seeing flows reverse. The government wanted a new IMF loan so that it could intervene in the currency market to manage the exchange rate ahead of this year’s legislative elections.

Unlike in 2018, Argentina now has a law, passed almost unanimously in 2021, requiring congressional approval for any IMF financing, with the aim of preventing massive forex borrowings without proper legislative oversight. But the Milei government bypassed the law by issuing a decree of ‘necessity and urgency.’ Its unilateralism has triggered a political backlash. Three senators sent a letter to the IMF warning that disbursing a loan under irregular conditions would violate the IMF’s own ‘exceptional access criteria,’ which requires broad political support and institutional capacity for programmes.

They warned that such a loan would be illegitimate. Argentina’s finance minister admitted that the decree was issued to overcome a lack of majority support for it, not to address a genuine emergency. And the government stated that it sought the loan not for budget support, but to increase forex reserves for discretionary use.

The decree itself states that part of the new loan will be used to roll over around $14 billion of IMF debt coming due between September 2026 and March 2029. The programme is worth $20 billion but the government may seek $15 billion during year one. Why would it need this if IMF repayments do not resume till 2026 and if the net rise in IMF debt is expected to be $6 billion? For fund exchange-rate interventions? [The country has said it will ease capital controls and let the peso partially float.]

By going along with this scheme, the IMF reinforces the perception that it is politically motivated and makes it even harder for Argentina to roll over its external debt to private creditors. If a country owes a large sum to the IMF, other lenders are deterred from extending credit, since they would lag the IMF in repayment priority.

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The new loan has global implications. The IMF could end up even more entangled in Argentina’s domestic politics. Does the Fund really want to be seen as campaigning for the current government in the next presidential election? It should go without saying that this may hurt its global credibility.

Nor would the damage stop there. A politically motivated loan would add default risk to the IMF’s portfolio, reducing its ability to respond to crises elsewhere and jeopardizing its ability to fulfil its core mission of assisting countries facing balance-of-payments distress.

For Argentina, the future seems clear: at some point, it will become apparent that its new IMF loan will not fix its current-account dynamics, and even less so if the loan again sees capital flight ensue. Exchange-rate pressures will be even larger than if the IMF had not stepped in, and this will prove costly to the people of Argentina and to the IMF itself. ©2025/Project Syndicate

The author is a former minister of economy of Argentina and professor at the School of International and Public Affairs at Columbia University.