Restructuring Argentina’s debt will require IMF support
The writer is a senior fellow at the Centre for International Governance Innovation and a former IMF executive director
The IMF is like a hospital emergency room. Countries abhor the fund’s demands to adjust their economic policies in return for loans, so they only walk in when an accident makes them lose access to private capital. The IMF imposes conditionality because its interest rates are fixed and cannot reflect the borrower’s risk — it is lending the taxpayers’ money of member countries.
The “injured” country is requested to reduce spending and raise taxes. When fiscal changes cannot re-establish debt sustainability, it is also asked to restructure its debt. Unfortunately, Argentina escaped this rule.
An early reprofiling of Argentina’s public debt would have spared the fund an embarrassing situation. Argentina met all the fiscal and financial conditionality. But the biggest IMF programme in history did not deliver its two most important objectives: curbing inflation and recovering access to private capital markets.
In June 2018, Mauricio Macri’s government and the fund pretended that Argentina needed only “precautionary” financial support. Less than two months later, the IMF had to increase the lending from $50bn to $57bn and front-load disbursements.
As a result, Argentina’s new government is saddled with “senior” debt — the IMF has preferred creditor status. The cost of the fund’s generous front-loaded financing ($44bn has already disbursed), is an unpayable concentration of debt that can neither be restructured nor defaulted on. Just to repay the fund would cost Argentina about 25 per cent of income from exports in 2022and 2023.
While a dose of IMF support is deemed to have a catalytic effect, too much of it crowds out private financing. Even if Argentina’s economy restarts growth after two years of recession, it will not have enough dollars for the fund and private creditors.
These risks registered at the time but were ignored. Mr Macri was the US’s darling and IMF managing director Christine Lagarde needed US President Donald Trump’s backing for a capital increase (in the end she did not get it).
Not surprisingly, Argentina is now on the brink of a fresh default. Alberto Fernández, the new president, still needs to warm up relations with Mr Trump. Mr Fernández is anything but ideological, but his pragmatism is curtailed by dependence on the political support of his deputy, Cristina Fernández de Kirchner. With US presidential elections ahead, Mr Trump will need to ensure Latino community support. Don’t be surprised if he hardens US policy towards Venezuela even more. Ending Nicolás Maduro’s dictatorship before the election could come in handy. Repercussions will be felt at the IMF.
Beyond politics, Argentina has published a road map for debt-restructuring negotiations. Creditors will receive the offer on March 15 and agreement is aimed for by March 31. That will be difficult. Horse-trading could extend discussions way beyond the end of the month. However, Mr Fernández has ruled out borrowing more of the IMF dollars remaining from the agreement signed by Mr Macri and it is unlikely that Argentina and the fund could agree a new programme before the country exhausts its dwindling reserves.
Default may happen during the debt-restructuring negotiations and the fund cannot provide financing when debt is “unsustainable” (debt in default clearly meets that criteria). However, the IMF can continue to lend during arrears where the member is making “a good-faith effort” to reach agreement with private creditors.
Granted, the IMF’s assessment of “good faith” can be open political manipulation. But today the fund is much less subject to the influence of private creditors. In 2015, the IMF withheld its financial assistance to Ukraine, forcing Kyiv to impose a haircut on private creditors. This primarily affected Franklin Templeton, an investment fund based in California, which accepted a bond write-off. The fund did not yield to the protests from Templeton and a $40bn support programme was secured.
But there is a more subtle and dangerous risk to Argentina. Private creditors argue that a “friendly” debt-restructuring — one without a major haircut and without interrupting payments during the negotiations — would be rewarded by the financial community with fresh financing at affordable interest rates. Argentina should mistrust these siren songs and secure IMF support before engaging in “good faith” negotiations with private creditors.
Deals always reflect the relative power of those sitting at the table. If Argentina starts with no reserves and no IMF backing, it may end up negotiating with a pack of wolves.