The general rule of debt bailouts is—first, help the lenders

The current Argentina debt turmoil has created fears of global financial instability [1]. This note compares the present Argentina debt crisis to that which hit Mexico in 1994-96, highlighting some contrasts in the role of the US administration and the IMF in the resulting bailouts.

Mexico

Mexico is a partial exception to the general rule of bailouts—first, help the lender—a variance that can be explained in part by the national interests of its main partner.

The Mexican government at the time of 1994-96 bailout was owned by the PRI—the incongruously named “Partido revolutionario institutional“—that ran Mexico as its private domain from 1928-2000 in what Mario Vargas Llosa called the “perfect dictatorship”. In the PRI tradition, outgoing President Carlos Salinas de Gortari (who ruled from 1988-1994, following the still-extant rule of one six year Presidential term) was to designate his party’s candidate for the 1994 elections by “el dedazo“, that efficient custom by which the Mexican President / PRI leader would appoint a successor, saving the costs and general annoyance of primary elections within the ruling party.

Other PRI traditions were expanded public borrowing and a stronger peso in the year before the elections. The Salinas de Gortari government respected these traditions throughout 1994 and was encouraged by the World Bank and the IMF to do so. The Bank had been supporting the Presidential candidacy of then-Minister of Finance (Secretario de Hacienda y de Credito Publico) Pedro Aspe who was, conveniently, already the signatory on the Bank’s largest account in the early 1990s. The Bank and, I believe, the Fund as well, went so far as to suppress internal information about the rise of the peso in 1994 ^[2]. The Bank’s understanding of the problem remained poor into 1995. The then-Bank VP for Latin America, Javed Burki, continued the tradition of his predecessor, Shahid Hussain, of denying the reality of Mexico’s macro problems and reportedly attributed them to some “25-year-old bond traders in New York”. ^[3]

The Mexican currency began to wobble in the month before Ernesto Zedillo’s investiture as President on 1 December 1994. The peso was 3.4/US$ on Zedillo’s first day and rose to 5.7 on 27 December following a devaluation on 20 December. The Bank and the Fund ran to assist the new Mexican government, not because they accepted any responsibility for what became known as the “tequila effect”, but because the Clinton administration told them to help. The Bank restructured its portfolio in Mexico to allow some modest financing to the rescue package (in which Mexico was most heavily assisted by the IMF and the US Treasury). The Bank’s help to Mexico came at the cost of cancelling some of its development portfolio to accommodate the need for quick-disbursing budget support. The Fund, always the more responsive in obeying US diktats, initially considered a loan of US$7 billion to Mexico but, after receiving some helpful advice from the US Treasury over the final weekend of January 1995, generously allocated US$17.8 billion (35.6% of the total of US$50 billion) on 1 February 1995.

The Mexico bailout was ultimately successful, at least in terms of restoring greater stability to the peso, reviving economic growth and in achieving positive real domestic interest rates[4], because the rescue package had components to restore the national economy and to reduce existing high interest rates. However, given that the long-standing editorial practice of “The Apricot Tree of Tangiers” is never to tell fairy tales, especially about the motivations of the global institutions and their owners, I must remind readers of another aspect of the success of the Mexican operation. The wiki on the tequila crisis reports Larry Summers’ account of an early 1994 meeting with President Clinton in which Summers notes that Robert Rubin said little about the situation before leaving the details to others. One possible reason that Rubin said little in that meeting was the interests of his former employer. Goldman-Sachs, where Rubin had been chairman before joining the Clinton Administration in 1993, seems to have held little Mexican debt before the 1994-96 crisis. However, Goldman-Sachs was a co-lead manager of new long-term bonds issued by Mexico in 1996 as part of its “return to international capital markets”, a term of art which is the general benchmark of bailout success. That benchmark is not always strictly aligned to the real economy of the borrower, as Argentina and other countries have often shown. The Goldman-Sachs role in issuing the new bonds created a conflict of interest with Rubin’s job in the USG which should have been avoided, but one sees how such considerations can be excluded when looking at the bigger picture, at least from some perspectives.

Argentina conforms more to the rule of “First, help the lenders”

The current Argentine debt crisis began in 2018 when the country sought IMF help for the first time in 15 years. The authorities’ inability to solve their fiscal/monetary problems has, again, created a role for the US Treasury, something that has a long history, as Gregory Makoff’s “Default” has shown. Treasury assistance in 2025 now seeks to accommodate four interests in Argentina, which must be carefully managed so that none of the beneficiaries of US support gets unhappy. Among the four are two long stakes in the peso: Milei, who wants a stronger currency (i.e., a cheaper dollar) for the legislative elections of 26 October and for the ongoing IMF program; and US investors holding Argentine bonds who want a stronger peso. US support to those long the peso might not last more than a few months, but it doesn’t need to, given Milei’s short-term perspective and the calendar of the Fund program.

The other two stakes in Argentina are the shorts: US traders shorting the peso who need clarity on the timing of the next fall of the peso (February 2026, after the Christmas excursions of la clase cheta, and after the 2nd Fund Review); and vulture funds who want to buy Argentine debt cheaply on the secondary market and profit from the inevitable restructuring and issuance of new bonds. Note that while the spread between wholesale and retail quotes of the peso-dollar rate seems reasonably narrow in the weeks of 13 October and 20 October, that spread has been higher in the past and should be watched as a signal of the behavior of Argentine insiders and their foreign partners [5]. So, while the US is trying to help the shorts, the latter must endure a delay of a few months to defend Milei and to allow the longs to get out.

Another important difference between Argentina and Mexico constrains US actions in 2025. As I wrote above, the IMF put up about 35.6% of the 1995 Mexico rescue (i.e., $17.8 B of $50 B). The IMF cannot commit more now given that Argentina already owes the Fund some US$50 billion, putting the country farthest over quota of any Fund member; admittedly, with Bessent at Treasury and the Georgieva/Katz couple as MD/DMD of the IMF, one must not be overconfident in the rationality and transparency of the Fund. Because the IMF has already committed its assistance to Argentina, which it had not done for Mexico in December 1994-January 1995, it has less capacity to follow Treasury’s diktats without inviting criticism from the patrons of other embarrassed members (Egypt and Pakistan perhaps).

A final reason why Argentina differs from Mexico is that the US is barely pretending that its support to the peso is helping the local economy. The reason here is that a recession and higher unemployment in Argentina do not really harm the US economy. After all, concern for the suffering of its citizens does not seem to be a preoccupation of the Milei family government, or indeed of their jittery predecessors, so why should it be for the US ?

The IMF is still spinning the usual fairy tales (e.g., the March 1994 visit for former DMD Gita Gopinath to Argentina and her Panglossian remarks about how the Fund program was supporting the real economy, or Georgieva wearing that tasteless chainsaw pin), but such talk is not credible. Why no one should believe such talk is the subject of a future post on the recent history of the Fund in Argentina.

[1] Judd Legum’s Substack has been sharp on what the US administration is doing in Argentina (https://substack.com/@juddlegum/note/c-164762337)

^[2] The real effective exchange rate (REER) of the peso rose about 10% from January 1994 to November 1994.

[3] I worked in the World Bank’s agriculture and rural development department for Mexico from 1989-94, frequently with staff of the national development bank known as NAFINSA, who were generally of the Aspe faction. The importance of the dedazo throughout the Mexican party state in 1993 was so great that several NAFINSA people declared themselves to be “definitivamente chingados“ on the day when the dedazo pointed toward Luis Donaldo Colosio and away from Pedro Aspe.

[4] Mexico has made some economic progress after the 1994-96 crisis: a real annual rate of per capita income growth of roughly 1.3%, a decline in the ratio of top 20 % incomes to those of the bottom 20%, a lower rate of poverty, and better access to electricity, clean water, and modern sanitation. While Mexico has, again, had positive real domestic interest rates from 1995-2020, Argentina has rarely done so in the same period and it also remains to be seen if its growth and public finances will recover sustainably (sorry for that awful word) from the present crisis.

[5] The Mexican peso/US$ rate was 5.5 on the first trading day of 1995 (Wednesday 3 January). It rose from 5.86 on Friday 27 January to 6.5 on Monday 30 January, the day before the Fund approved its $17.8 billion loan to Mexico. The Mexican currency traded between 5.51-5.97 in February 1995 before rising to 6.06 on Friday 3 March and leaping to 7.97 on Thursday 9 March before retreating. These erratic movements might suggest that some people knew when to buy dollars in early March 1995, knowledge possibly related to negotiations over the buy-back prices of the old Mexican debt.