A challenging week for the administration of Argentine president Alberto Fernandez and his foreign debt strategy. IMF negotiators land in Buenos Aires this Wednesday for their first mission since Fernandez took office in December. Before agreeing to any changes in the terms, negotiators will want to see Fernandez’s blueprint for tackling more than US$ 320 billion in total debt and for rescuing an economy that’s forecast to shrink for a third straight year.
Talks with the IMF, to which Argentina owes US$ 44 billion, will be key for an even bigger negotiation with bondholders to avoid a default. If the Fund declares the country’s debt unsustainable, as Fernandez has repeatedly called it, it could give him more leverage to impose steeper debt losses on other creditors.
“If you talk to private creditors, many of them see the IMF as their worst enemy,” said Jimena Blanco, head of Latin America political research at consulting firm Verisk Maplecroft in Buenos Aires. “The IMF could complicate a negotiation for bondholders in the end by agreeing that under the current terms Argentina would be unable to meet is debt commitments.”
Beyond billions of dollars in debt, a lot is on the line for both sides.
Fernandez pledged to voters that he’d turn around an economy that is suffering with 54% inflation and high unemployment. The IMF, a perennial villain in Argentina after more than 20 financing agreements since 1958, is hoping to recover some negotiating ground with its largest borrower after the record US$ 56 billion loan approved in 2018 did little to improve the economy -- or its reputation in the country.
Two months into office, Fernandez has shelved any announcement of a comprehensible economic plan and resorted instead to an array of tax hikes, price freezes and pay raises to appease voters. His only major declaration on debt talks was that he wants to wrap them up by March 31, a deadline that will be hard to meet.
“It’s not true that we don’t have a plan, we just don’t announce it because we are in the middle of a negotiation and saying it would be showing our cards,” the president said earlier this month at an event in Paris. “We are playing poker and not with kids.”
One card the government did show was what it’s asking of the IMF: “more time” to pay the capital amortization of its latest loan that comes due between 2021 and 2023, according to Economy Minister Martin Guzman. Otherwise, it will take “too long” for the country to make interest payments to private creditors, he said.
Although Fernandez lambasted the Fund on the campaign trail, saying it was partly responsible for Argentina’s crisis, relations have thawed since he assumed power. Both sides have started speaking positively about each other more recently and, just last week, IMF Managing Director Kristalina Georgieva said she had a “very productive” meeting with with Guzman in Rome.
It’s unclear how much tolerance the Fund will have for some of the heterodox policies in place in Argentina these days, including strict capital controls and negative real interest rates after five cuts to stimulate growth despite inflation risks.
“The gap between the mindsets of the government and the IMF is not that far apart in terms of fiscal policy, the main problem is monetary policy,” said Diego Pereira, an economist at JPMorgan who covers South American nations.
Even if both parties reach an agreement, it needs to be seen if the country will roll over its IMF debt into a new version of the same deal, known as a stand-by arrangement, or a longer-term program that requires more reforms, called an extended fund facility program.
Fernandez faces no good options renegotiating Argentina’s debt with creditors. If he proposes a small or negligible haircut, Argentina’s debt remains unsustainable and the government gets little breathing room to grow the economy even if bondholders would celebrate.