Sunday, August 7, 2022

ECONOMY | 22-02-2020 09:05

‘Unsustainable’: IMF hints at haircut – and puts ball in Fernández’s court

Peronist president faces rush to self-imposed March 31 deadline, as Fund officials offer government tacit approval.

Following a week of “very productive” consultations and data-gathering, an International Monetary Fund (IMF) team concluded its mission in Buenos Aires with a statement on Wednesday that declared Argentina’s foreign debt load was “unsustainable.”

With that hitherto taboo word – “unsustainable” – the Fund’s representatives largely upheld the approach of the Alberto Fernández administration in a single stroke. The officials, however, fell short of deploying another taboo word: “Haircut.”

(There was a call for “a meaningful contribution from private creditors” – about the most explicit the IMF could bring itself to be.)

The president had plenty to celebrate and wasted little time in doing so – “They accused us of being irresponsible populists but everybody woke up this morning to find the IMF saying that we were right,” he declared on Thursday.

Yet the IMF seal of approval for the government’s stance – that Argentina cannot pay its debts without its economy growing first – also leaves the ball bouncing in its court. Now the Fernández government faces no obstacles to going out to renegotiate with private creditors.


Tension is mounting for these renegotiations, given the uncertainty over being able to obtain any haircuts in the short term. Bondholders did not take kindly to the call for a “meaningful contribution” on Thursday morning, with Argentine sovereign bonds falling as the hangover kicked in.

The IMF statement concluded that “a definitive debt operation is required,” without specifying anything in terms of haircuts, lower interest rates or extended deadlines.

Between irate and uncompromising creditors and major debt repayments due as from late March, Fernández finds himself between a rock and a hard place, with default by no means ruled out.

Some experts were positive, underlining that the Frente de Todos leader has the IMF on his side, as far as the debt being “unsustainable” goes.

“I think we have a good opportunity to negotiate something reasonable because avoiding default is in the interest of the IMF,” veteran economist Héctor Torres, a former Argentine representative to the multilateral monetary agency, told a local radio station.

Along similar lines, economist Aldo Abram of the free-market think tank Libertad y Progreso, said: “The IMF will seal a deal if no irrational or absurd proposals are made because they have all the incentive to do so.”


One unexpected voice in favour of the IMF U-turn was Luis Caputo, a Finance minister and Central Bank governor during the Mauricio Macri administration and the cousin of Macri’s best friend, Nicolás Caputo.

Fernández announced last year that he was not interested in collecting the remaining tranches of the US$57 billion from the IMF standby agreed with Macri in 2018 (of which US$44 billion has already been delivered).

In an interview Thursday, Caputo criticised Macri’s 2018 agreement with the IMF for “aggravating the recession”and celebrated the IMF’s redefinition of the debt as “unsustainable.”

He went even further too, praising President Fernández and the new IMF Managing Director Kristalina Georgieva. Back in 2018 the IMF sharply criticised Caputo, then Central Bank governor, for squandering reserves and reportedly obliged Macri to ditch him.

Pessimism wasn’t hard to find either. According to Matías Rajnerman, chief economist of Ecolatina consultancy firm, the IMF report was good news for the government – but bad news for the economy.

“The IMF is obviously an authorised voice on financial markets and if it says that the debt is not sustainable, that might make the position of private creditors more flexible,” Rajnerman told AFP.

Most experts agreed that the IMF’s mission team had been quite firm in its position, though others warned that the agency’s Board of Directors had in the past pushed back on team statements.

The Fund’s posture “eliminates any doubts as to private creditors having to absorb major cuts,” read a report from the Capital Economics consultancy firm, forecasting “prolonged tussles” with bondholders reluctant to give ground.

Most analysts also considered the government’s March 31 deadline to be too ambitious.


The general consensus among analysts of major capital sacrifices lying in store makes the words of Joseph Stiglitz, the 2001 Nobel Economics Prize winner and the mentor of Economy Minister Martín Guzmán, prophetic when he spoke of “significant haircuts” at the World Economic Forum in Davos back in January.

Argentina’s debt totals US$311.25 billion, equivalent to over 90 percent of Gross Domestic Product, according to AFP. Of this sum, private bondholders account for US$121.98 billion (35.9 percent of GDP) of the debt to be rescheduled, and multilateral organisations for US$72.68 billion (21.4 percent of GDP). These figures may be compared with the then record default of Argentina on US$93 billion in late 2001.

Ex-IMF official Claudio Loser said he found it impossible to quantify what type of haircut would be offered for now, though he speculated that it could be in the region of 30 percent of capital.

Loser also underlined that the IMF’s stance will be meaningless without hammering out a new programme with Argentina. “If not, the creditors will have nowhere to go because there is no clear plan,” he said.

“I guess some people were hoping that the IMF would not insist on the private sector taking a haircut on board,” commented Andrew Stanners, the investments director for Aberdeen Standard Investments from London. “The sustainability of the debt will always be a key criterion for any renewal or extension of the programme.”

Time is running out for Argentina as it has US$34.3 billion of debt due at the end of March (although only US$4.3 billion of these come under foreign jurisdiction). To meet these liabilities the Central Bank has foreign currency reserves of around US$44.7 billion.

Nevertheless, the real urgency for the government, in terms of defining a settlement with the bondholders will only begin next year, according to Capital Economics, since over 80 percent of this year’s commitments fall under local legislation and may be unilaterally “reprofiled” by Congress.

Finally, Guzmán will be meeting up again with Georgieva this weekend at the summit for G-20 finance ministers and central bank governors in Riyadh, Saudi Arabia.

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