Argentina’s honeymoon with the IMF about to face reality

Argentina will not pay its debts again

Argentina will not pay its debts again.

Argentina’s honeymoon with the International Monetary Fund (IMF) is about to be put to the test, as the country seeks to update a $ 57 billion deal reached two years ago that failed to prevent a recession and the ninth sovereign default. .

The IMF, often the target of angry protests in the streets of Buenos Aires, has sought to soften its tone with Argentina as the center-left Peronist government has restructured more than $ 100 billion with private creditors this year.

Now it is the IMF money that is on the table. Argentina seeks to defer some $ 45 billion in payments over the next few years as it heads for a 12% economic contraction in 2020 and battles a currency crisis with recently updated capital controls.

“It will be much more difficult with the IMF. They will want to make sure they are prioritized and not defaulted,” said Damien Buchet, manager of emerging markets funds at Finisterre Capital. “The IMF will want much more serious guarantees in terms of debt sustainability and ability to pay than bondholders.”

Argentine officials say they only want to refinance the $ 45 billion they already received under the 2018 program. But Economy Minister Martín Guzmán has said he wants to avoid reimbursements to the IMF until 2024, a difficult requirement.

“The IMF erroneously supported Argentina in its bitter negotiations with investors to close a deal without a coherent economic plan,” said Ted Pincus, managing director of Mangart Capital Advisors. “The new exchange rate measures Argentina introduced will make an agreement more difficult.”

With the country in the grip of the pandemic, austerity could pose a major threat to President Alberto Fernández ahead of the 2021 midterm elections, as poverty rises and small businesses sink.

Many still believe that the IMF unleashed the country’s last great crisis in 2001-02, when a default and the devaluation of the currency pushed millions of Argentines into poverty.

“I don’t think (Argentina) can afford to see itself as taking orders from the IMF,” said Eric Baurmeister, senior portfolio manager and head of the Emerging Markets Debt team at Morgan Stanley (NYSE: MS) Investment Management. “What happens behind closed doors can be a different story.”


Julie Kozack, deputy director of the IMF’s Western Hemisphere department, said the body initially sought to resolve Argentina’s priorities and the government’s plans to strengthen macroeconomic stability, boost growth and job creation, and reduce poverty and unemployment. .

He did not elaborate, but many feel that Argentina’s economic situation will be harder to reverse than expected, with foreign reserves dwindling and capital controls to halt the decline hurting businesses.

“The government said it would never touch and probably the IMF will insist on labor and pension legislation,” said Claudio Loser, former IMF director for the Western Hemisphere, adding that he hopes the parties will come with different opinions.

“The Government is going to say that it cannot do anything (…) The Fund, I imagine, will say that now we must understand that Argentina is in a horrible crisis due to the combination of COVID and the debt problem. Then it will say that they have to put things in order so that they do not have problems again in two years. The central part of the negotiation will be there, “he said.

The government’s 2021 budget bill, presented to Congress this week, includes ambitious projections of 5.5% growth and a primary fiscal deficit of 4.5% of GDP, which will be financed in part with transfers from the central bank.

“Fernández has to find a difficult balance between a tough stance in the negotiations to please his voters and convince the IMF that his administration can go far enough with reforms,” ​​said Fabiana Fedeli, Robeco’s director of emerging markets.

“Unfortunately, we have yet to see signs that Argentina is willing and able to take the difficult steps necessary to support macroeconomic stability. Unless lasting reforms are undertaken, a 10th default is possible,” he said.

Fernandez, who was voted into an anti-austerity mandate late last year, has gained some political capital by sealing restructuring deals with Wall Street and making the IMF more in agreement.

In February, IMF Director Kristalina Georgieva and Guzmán sat smiling side by side as Pope Francis spoke at a conference at the Vatican.

The IMF has practically agreed to a $ 6.5 billion one-off access program with Ecuador, much more generous and with fewer conditions than expected, which some say could bode well for Argentina.

More important, perhaps, is that the IMF could use a positive deal after criticism about the size and speed of the 2018 program and past practices in Argentina, including from Fernández, who blames the previous administration for leaving the country. loaded with debt.

“It is not the same IMF as in 2001. A lot has been learned since then. Now it is more flexible regarding some heterodox policies,” said Gabriel Zelpo, director of the Buenos Aires-based financial consultancy Seido. “But it is still the IMF.”

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