Thread by @Brad_Setser

President Macri was elected on a program of ending Argentina's capital controls and getting Argentina out of default (on its international bonds). So there is a deep irony that Argentina will have come full circle by the end of his term ...

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ft.com/content/295d9c…

There will be much written on the errors made by Macri (and likely the IMF). But the most obvious one was a simple error of debt management. Borrowing too much in foreign currency early on ....

External bonded debt doubled in a very short period of time.

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That's the classic error made my pro-market reformers in Argentina.

They are tempted to borrow abroad because of Argentina's low level of domestic savings & small banking system. Yet Argentina cannot support a high level of external fx debt b/c of its small export sector

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Argentina now has no choice but to adjust (and part of adjusting is limiting access to fx and thus limiting capital flight). The initial IMF program was generous -- it fully made up for the fall off in bond financing over the last year.

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This is another way of showing the initial generousity of the IMF program - net reserves have been falling by $25-30b a year to cover a similar amount of private outflows (using a broad definition of net reserves that counts all borrowed reserves)

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Argentina needs a period where it runs a sustained current account surplus -- which implies a weak exchange rate, and that in turn has consequences for public debt sustainability

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But I also think that it is important that the IMF be willing to support Argentina through an orderly restructuring -- something it didn't do in 2002-03 (The Fund exhausted its willingness to lend in 00-01 trying to avoid a default and a move off convertibility)

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At end of the day, a country with a limited export base can support a high level of external debt (in fx) only if that debt has a low interest rate and a long maturity (so little need to refinance). A reprofiling at this stage will likely need to be aggressive -

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& I wonder if the IMF will conclude that Argentina needs to restructure the full stock when it sits down with the next government - jumping from "sustainable, but not with a high probability" to "unsustainable, so any further IMF lending needs to be matched by debt reduction"