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Why Javier Milei’s chainsaw economics won IMF’s approval when Trussonomics didn’t
Washington is embracing the President’s radical reforms – perhaps others should listen
![Argentina Javier Milei](/https/www.telegraph.co.uk/content/dam/business/2023/12/13/TELEMMGLPICT000359888404_17024912647270_trans_NvBQzQNjv4BqqVzuuqpFlyLIwiB6NTmJwfSVWeZ_vEN7c6bHu2jJnT8.jpeg?imwidth=680)
Few phrases have more power in economic policy than the simple words: “There is no money”.
A decade of British politics was shaped by the famous – or perhaps infamous – note bearing those words left by Labour’s Liam Byrne when he departed from the Treasury in 2010. David Cameron, who became prime minister at the same time, could point to the message every time the opposition criticised a Tory decision to tighten the purse strings.
Now, Argentina’s new economy minister is also pinning his policies on the same problem.
Luis Caputo warned this week that “there is no money left” as the new administration in Buenos Aires set out radical plans to tackle the nation’s deeply entrenched problems.
Spending is to be chopped by almost 3pc of GDP. Energy and transport subsidies are out. Half of the Government’s ministries will be shut down.
Most eye-catchingly, the peso will be devalued by 54pc, taking it closer to its black market value.
The troubled currency has already fallen by more than 50pc this year and the new devaluation will take the official rate to 800 pesos to the dollar.
Caputo is but the hatchet man for Javier Milei, the chainsaw-wielding, right-wing economist who swept into Argentina’s Presidential office last month on a promise of radical reform to cure the country’s economic ills.
Those problems are spectacular. Inflation is running above 140pc. GDP is set to shrink by around 2.5pc this year. Argentina defaulted on its debts yet again in 2020, adding to its failures to pay creditors in 2001 and 2014.
A permanent reliance on borrowing is at the root of the problems, he argued. Milei’s solution is to cut back hard.
While on the campaign trail, Milei was viewed as something of a crank. But in office, the establishment is now cheering his bold reforms.
Investors rushed into Argentinian bonds on Wednesday, pushing down the country’s borrowing costs. This is the type of positive spiral that Milei will need if his plan is to work – spending cuts pushing down market interest rates and so further saving the Government money.
Sergio Armella, economist at Goldman Sachs, said: “While further details on the measures announced by Mr Caputo are yet to be known, our first impression of the announcement is positive.”
“Fiscal profligacy is the root of Argentina’s macroeconomic problems and moving swiftly with the fiscal adjustment is most important.”
Perhaps most importantly, the Washington-based International Monetary Fund (IMF) is supportive. Kristalina Georgieva, the IMF’s managing director, immediately welcomed the “decisive measures”.
Georgieva’s tone is notably different to the IMF’s reaction to efforts to liberalise the economy in Britain.
The Fund made an extraordinary attempt to pressure Liz Truss and Kwasi Kwarteng into scrapping their mini-Budget last year, a package of tax cuts aimed at boosting growth. The IMF said Britain should “reevaluate the tax measures, especially those that benefit high-income earners”.
Britain’s deficit reduction attempts also attracted the ire of the IMF in 2013. Its chief economist said George Osborne, the then-Chancellor, was “playing with fire” with his plans to keep spending on a tight leash.
There are crucial differences between the British and Argentine experience. For one thing, the scale of the crisis being faced by the catastrophe-prone Latin American nation is of a different magnitude to any of the UK’s woes.
The interest rate backdrop is also now very different to 2013. Then, there were hopes that governments would be able to borrow at low interest rates for the long-term – something which we now know was a fantasy.
An additional difference that may rather focus minds in Washington is the fact that Argentina is the IMF’s biggest borrower. More than one-quarter of all the IMF’s outstanding loans have gone to Argentina.
The IMF has struggled to gain traction with past governments in Buenos Aires when it comes to reforming the economy. Hence, Milei’s chainsaw economics is appealing – he looks like a man the IMF can do business with. The institution would quite like to know there is at least a prospect of getting its money back one day.
In the IMF’s assessment: “These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime. Their decisive implementation will help stabilise the economy and set the basis for more sustainable and private-sector led growth.”
Milei hopes the sharp break with the past will amount to shock therapy in the service of liberalising the crisis-stricken economy. An inspiration is Milton Friedman, a Nobel Prize-winning economist so idolised by the President that he named one of his dogs after him.
Radical change on this scale has a mixed history. Friedman’s policies inspired much of the economic reform in Chile in the 1970s and 80s, which transformed the economy even as human rights suffered under the dictatorship of General Pinochet.
The term “shock therapy” has also been applied to the liberalisation of the Soviet and Eastern Bloc countries after the fall of the USSR. Nations such as Poland have prospered spectacularly, even as Russia tumbled into gangsterism.
Milei’s reforms are not guaranteed to work. Credit ratings agency Fitch has noted that his party is not in a strong position in parliament, making pushing through radical change difficult. It is also tough to remove capital controls without unleashing large flows of cash out of the country.
Fitch’s analysts still believe “a restructuring or other default event of some sort is more likely than not in the coming years”, not least because Argentina faces a wave of foreign-currency bond repayments in 2025.
Armella, at Goldman Sachs, agrees that the economic crisis may get worse before it gets better. A weaker currency will make imports more expensive and Mr Armella said inflation was “likely to accelerate in the coming months”.
It is a given that Argentina’s economy is extreme in almost every way.
But the welcome given by the IMF to Milei’s policy package could hold lessons for plenty of other countries.
Caputo says Argentina has an “addiction” to debt. While not yet in such dire straits, plenty of other countries have been dabbling with the same poison.
The IMF’s own Fiscal Monitor warns “for all countries, it is becoming hard to balance public finances” as “debts are generally elevated around the world, and borrowing costs are rising”.
Even in Britain, which has never defaulted, debt is a major issue.
On current trajectories, the Office for Budget Responsibility warns that the national debt is set to rise from almost 100pc of GDP now to more than twice the economy’s size in the 2060s.
By contrast, Argentina’s debts are around 90pc the size of their economy, though interest costs are far higher than in Britain.
Argentina has run a budget deficit for 113 of the past 123 years. But similarly, the UK has only run a surplus in 19 of the years since 1900. Chronic debt is a problem for us all, especially when interest rates have jumped from those historic lows seen after the financial crisis and during the pandemic.
Milei, the shaggy-haired Argentine outsider, may not be the small-state messenger the world economy expected, but his chainsaw-wielding warning that there is no money left resonates far and wide.
With the IMF embracing his messages, perhaps others should listen.