Therefore, in the event that the renegotiations of this do not reach a good conclusion, “it is probable that there will be a default to the IMF.”
Also in line with the post-program evaluation carried out by the IMF itself, the specialist pointed out its objectives, such as “reestablishing market confidence, placing Argentina’s public debt on a firm downward path and establishing more realistic inflation targets, while protecting the most vulnerable in society. And he stated: “However, none of those goals were met.” .
What happened to the goals of the 2018 deal?
The author listed each of the goals and described how they were not achieved:
- The market confidence it deteriorated rapidly (in fact, the program should have been increased already by the time of the First Review).
- The financing needs they rose rapidly as the highly dollarized public debt followed a high trajectory due to continued weakness in the exchange rate, and was finally restructured in mid-2020.
- The inflation systematically exceeded the “most realistic” objectives while compromising exchange rate stability.
- The central bank (BCRA) was forced to monetize the increasing deficit to cover the cost of executing this policy (a hidden deficit not included in the design of the program).
- The most vulnerable of society suffered the most, as exchange rate weakness and inflation eroded nominal incomes and savings, extending the poverty despite stated intentions to the contrary.
and maintains that “The breach of these objectives was highly foreseeable and represents a programming failure on the part of the IMF” .
What does an ultra vires act mean?
In international law, Patricio explains that the ultra vires act is based on the premise that international organizations have “limited legal capacity”, unlike other international subjects such as States.
It should be clarified that, for example, NGOs or transnational companies are not constituted as subjects but as actors, since they must be established in a specific country.
In the case of international organizations such as the IMF, their functions and powers will be limited to those transferred to them by their member states in their basic constituent instruments.
Thus, “When international organizations act beyond their legal capacity, they are considered to act ultra vires. It follows that any act that exceeds the powers of international organizations -determined in their constituent treaties- is invalid and null” .
The author cites jurisprudence in this regard, and clarifies that “ultra vires acts are conceived as those that violate the fundamental norms and principles enshrined in the constitutive treaty and normally cannot be invalid, while the violation of procedural norms do not constitute, in principle, , a cause of annulment of the act”.
What are the IMF principles violated in the agreement?
After specifying the cases in which the declaration of an ultra vires act is valid, Patricio highlighted the principles of the IMF, such as the promotion of exchange rate stability to avoid devaluations, and highlighted sections V and VI of Article 1 of the Articles of Agreement of the IMF :
- v) Instill confidence in member countries by placing at their disposal temporarily and with adequate guarantees general resources of the Fund, thus receiving the opportunity to correct imbalances in their balance of payments without resorting to measures harmful to national or international prosperity.
- vi) According to the above, shorten the duration and lessen the degree of imbalance of the balance of payments of the member countries.
For this reason, it understood that “if the imbalance in the balance of payments is not temporary or the appropriate safeguards are not adopted, the provision of general resources to a member would only lengthen the duration and increase the degree of imbalance”.
At the same time that “In a scenario of aggravated imbalance, the conditionalities required to ensure that the Fund recovers its general resources are likely to consist of pernicious measures of national or international prosperity “.
In short, it points out that the general resources of the Fund should only be used to finance capital transfers when they are intended for temporary assistance to the balance of payments, and that the support is intended to shorten the duration and reduce the degree of imbalance, all of which it didn’t happen
just like that “the resources will not be used to face a significant or continuous capital outflow, according to the letter of paragraph 1 of Article VI, in which case the support would only worsen the duration and magnitude of the imbalance” . At the same time, it highlights the “obligation” of the IMF to guarantee these conditions.
How were those principles violated?
The author explains the violation of these constitutive principles of the IMF, and states: “We maintain that they were not fulfilled and that, consequently, the approval of the Stand By Agreement constituted an ultra vires act by the Fund” .
Sustainability is based on two central arguments:
- The Fund did not guarantee adequate safeguards for the provision of its general resources, because the quantitative objectives of the program “were impossible to meet”;
- the fundamental norms of the agreement were violated “in a way too clean to give rise to reasonable doubt”.
Regarding the second point, it states that “it was reasonably foreseeable” that the design of the program would lead to imbalances in the balance of payments “prolonging even more over time and even more severe by chance”, since the Fund did not request as was due, adequate capital flow management requirements.
That is to say, the Fund “had adequately assessed the risk that its general resources would be used to finance significant or continuing capital outflows, as was actually the case”, but did not act accordingly.
What would it mean if the agreement is invalid?
After a detailed description of the types of nullity with which the Stand By agreement could be characterized, Patricio maintains:
- L The parties are entitled to recover the sums advanced as part of the foreign exchange purchase agreement void by way of restitution, that is, the IMF is entitled to recover the US dollars and the Argentine Republic, the Argentine pesos advanced as part of the Agreement.
- The parties are entitled to recover any increase in wealth that the counterparty has benefited from as a result of the invalid agreement. Therefore, the benefit obtained by the IMF through the collection of an interest rate, surcharges, commitment commissions and service charges in the transaction is unjustified and, therefore, must be returned to the Argentine Republic.
Consequently, the parties will not be able to negotiate on the basis of the principle of equity an extended time horizon for the settlement of the purchase of some 42,000 million dollars that are still pending. It should be noted that this financial obligation will be governed by international law of unjust enrichment and not by IMF law, which means that during this period there will be no underlying program between the Argentine Republic and the IMF .
What could happen in this case?
The rigorous analysis carried out by the specialist in international law together with an interdisciplinary group from the university in the United Kingdom, concludes that “Argentina should return the capital to the IMF, which, in turn, should return to Argentina the rates charged for the loan, the surcharges, commitment fee and transaction service charges.
“Taking into account Argentina’s inability to return the remainder of the purchase (some US$42 billion) immediately, we maintain that the parties will negotiate, based on the principle of equity, an extended time horizon for the liquidation that facilitates the external adjustment without compromising national prosperity” , express.
Also, note that in the event that the dispute does not find a solution in the political arena, the main card currently being played by the national Government, the international Court of Justice would be the area where the Stand By Agreement should be evaluated, through an advisory opinion.
The proposal to bring the agreement to the CIJ was already formulated by sectors within the front of all , which continued with the steps for a technical understanding of a new renegotiation and found the traditional conditions that the organization has already implemented throughout Argentine history. Is it time for “a big deal”?