There are multiple problems with this interpretation made by the IMF staff regarding debt sustainability. First, the staff’s interpretation did not reflect that the Argentine peso notes had been subscribed by speculative foreign investment funds and hedge funds that were exploiting carry trade opportunities in a context of a policy of high interest rates. This interpretation amounts to a positive assessment of carry trade, a behaviour that it is well known that may be destabilizing for countries’ exchange rate dynamics, and that in part explains why the IMF has been endorsing the adoption of macro-prudential capital account regulations(capital flows management, in the IMF language) over the last two decades. 9 Second, the assessment that there was access to credit markets was made in a context in which the country had already been cut off from international credit markets. The interpretation of the IMF staff assumed that being able to roll-over a very small fraction of its USD-debt with residents, written under local law, rolled over into new debts in local currency, meant that the prospects of repaying the IMF when the debts came due were good. There are important differences between USD debt written under local law and the standard foreign debt, and the amount rolled over was a miniscule fraction of the debt that was owed in USD. Success in rolling over a small amount of the former was no real indication of Argentine’s ability to roll over the latter. To our knowledge, this interpretation by the IMF staff, justifying that the country would be able to repay the IMF on time because it had access to some domestic financing while the program was in place, has no precedent. Most importantly, Argentina couldn’t repay the loan when it came due, and still can’t. The country couldn’t then, and can’t now, find foreign private creditors to lend it money at reasonable interest rates(at rates that reflect markets’ judgment of sustainability) to repay the IMF. Ex post, clearly the IMF was wrong. However, looking back, it is hard to construct a scenario in which the country could have paid the money back. The DSA should have said not that“the debt was sustainable but not with high probability” but instead that there was a small probability that the debt was sustainable – and it should have recommended not lending under those circumstances, as the rules indicate. It might seem a massive failure in analysis; but our discussion above explained why, given the political nature of the loan and the inconsistency in the rules and practices, such a failure was itself almost inevitable. As this paper goes to press, the IMF Independent Evaluation Office is producing an assessment of the IMF implementation of its exceptional access policy, which will have to judge whether the IMF staff’s interpretation of the criteria for exceptional access in the case of Argentina was sound. 8.3 Considering local vs. foreign currency debts in the IMF DSA The IMF DSA includes constraints that define debt sustainability. The typical constraints refer to thresholds for the debt to GDP ratio, the gross financing needs(GFN) to GDP – with the intention of limiting rollover risks – and the ratio of foreign exchange debt service to GDP or to exports. When those thresholds are exceeded, debt is deemed likely to not be sustainable. Under the IMF“market access framework”, defined above, it has become common practice(urged by holders of foreign currency debt) to pool local and foreign currency debt together for debt sustainability assessments. This methodology is affecting incentives in debt negotiations: holders of foreign currency debt push for domestic currency debt to be the variable of adjustment – even though the sustainability of domestic currency vs foreign currency debt must be assessed under theoretical frameworks that capture marked differences across those disparate kinds of assets(Guzman and Stiglitz, 2023). 9 The academic literature on macroeconomic externalities that sheds light on the optimality of the adoption of capital account regulations precedes the IMF’s adoption of such a stance[see Stiglitz(2000), Korinek(2010, 2011), Farhi and Werning(2014), Erten, Korinek, and Ocampo(2021), Stiglitz and Ostry(2022), Ostry(2023)]. Series: Debt Sustainability Assessments& Their Role in the International Financial Architecture 11