Argentina and the International Monetary Fund (IMF) agree on a very generous debt restructuring. Obviously, the IMF does not want to be pilloried as the cause of another debt crisis. But the agreement is not yet dry.
Argentina’s Economics Minister Martin Guzman provides information about the new agreement with the IMF.
The closer Friday got, when Argentina had to repay 700 million dollars to the International Monetary Fund (IMF) last week, the more nervous the financial markets and investors reacted. Argentina’s sovereign risk shot up to 1900 basis points; the country had to offer investors almost 20 percentage points more interest than US bonds offered yields. And the Argentine peso continued to depreciate daily on the black market.
Argentina gets new money for an old loan
But then came the surprise at the last second: the IMF and Argentina agreed that the current loan agreement with Argentina from 2018 should be replaced by a new one. It is about the largest loan that the IMF has ever paid to a state: Argentina received $45 billion when the country ran into payment difficulties three years ago.
With the new agreement, Argentina should always receive exactly the amount of additional credit over a period of ten years that it would have to repay to the IMF. This is equivalent to a debt restructuring in which the repayment is simply postponed to the future.
In order to make the debt restructuring plan palatable to Argentina’s less insightful current government – which is happily running budget deficits and letting foreign currency reserves melt down to just $2.4 billion by the end of 2021 – the troubled Pampaland is to receive an additional $4.5 billion in credit. This corresponds to the amount that the government had already repaid to the IMF in the past two years. As a sign of goodwill and to avoid an immediate default, the government paid the amortization to the IMF that was due on Friday.
Will Argentina keep the deal this time?
The new agreement stipulates that Argentina must reduce its primary deficit from currently around three percent of gross domestic product (GDP) to 2.5 percent this year and gradually reduce it to 0.9 percent of GDP by 2024. At the same time, the Argentine central bank should commit itself to financing the state deficit with less money: instead of around 3.7 percent of GDP as is currently the case, it should only be allowed to expand the money supply by one percent this year. It is envisaged that by 2024 it will have to completely stop funding the government with newly created money.
Monetary financing has caused Argentina’s inflation to soar to over 50 percent. The central bank should also ensure that the country’s dollar reserves no longer fall below five billion dollars. Every three months, the IMF will check whether Argentina is sticking to the agreements and tie the loan payments to them.
The conditions for Argentina turned out to be surprisingly generous . For example, the IMF has dispensed with inflation targets and is not demanding any previously defined spending cuts. According to Finance Minister Guzman, the IMF has also waived the usual conditions for reforms this time.
Argentina’s government does not have to save
It seems as if Washington has been persuaded by Argentina’s demand that the economy first has to grow in order to be able to reduce the budget deficit through increasing tax revenues. The investment bank JP Morgan calls this budget restructuring without any savings measures “passive” restructuring of the household. It could allow the current government to postpone serious reforms to the next legislature from 2024 onwards.
Nevertheless, investors do not yet seem really convinced that a breakthrough will be achieved with the agreement and that Argentina’s insolvency can be avoided permanently. This is reflected in the reactions on the financial markets: The country risk improved only minimally after the agreement was announced. The peso also gained little strength.
Cristina Kirchner is likely to torpedo the agreement
The biggest obstacle are the investors in the government itself: Vice President Cristina Kirchner is likely to want to torpedo the agreement with the IMF. Kirchner sees the IMF loan as a political loan to the previous government of Mauricio Macri. Therefore, she rejects any commitments or payments to the fund. The two-time ex-president is the strong woman behind the politically rather weak Fernández. With its harsh, populist course towards the IMF, it not only has the support of the majority of the Peronists, but also a considerable part of Argentine society.
The IMF is also in a weak position in the negotiations: shortly before the end of the year, an internal commission of inquiry came to the conclusion that the loan was a wrong decision. Among other things, the IMF self-critically noted that the 2018 agreement “was characterized by a degree of deference by the Fund to the Argentine government and a reluctance to question assumptions and policy choices.”
Or to put it another way: the IMF relied too much on the extraordinarily reform-minded government of conservative-liberal President Mauricio Macri. The mega loan of $57 billion promised at the time was intended to calm the financial markets in 2018 and ensure a sustained inflow of capital from investors. But the reformer Macri lost the 2019 election, and the Peronist-populist President Fernández immediately stopped the IMF loan. Private international investors have largely withdrawn from Argentina due to the severe economic and political crisis.
Argentina sees itself in the eternal victim role
Both Kirchner and President Fernández are now using the fund’s self-criticism to portray themselves as eternal victims and to shirk responsibility. Therefore, it will only be decided in the next few weeks whether the agreement that has now been announced between Argentina and the IMF will actually come about. Argentina still needs Congressional approval. The ruling Peronists no longer have the majority there.
On March 21, Argentina’s next $2.8 billion in interest and principal payments will fall due. Argentina can hardly lift themselves. By then, the agreement with the fund should be in place. Otherwise Argentina would trigger the tenth default in its history. Such a move would be fatal for Argentina: Then all the other remaining bilateral or multilateral lenders – like the World Bank – would stop their loans.