IMF, Argentina re-engage in crucial test of resolve

Concluding a weeklong visit to Argentina to collect data and meet economic officials, the International Monetary Fund staff mission issued a statement Wednesday evening notable for what it says and what it doesn’t. It marks the beginning of yet another round of more formal consultations and highlights one of the most complex, if not the most complex, country cases to face both a new government, headed by President Alberto Fernández, and a new managing director, Kristalina Georgieva.

Here are seven things to know at the beginning of what is likely to be a protracted, loud and knotty process:

1. While understandably limited in details, the statement will attract attention for its explicit public reference to the country’s debt being unsustainable and the need for a “definitive debt operation” undertaken in “a collaborative process of engagement with private creditors to maximise their participation.” This requires reducing Argentina’s debt burden in a manner that avoids lengthy legal battles while paving the way for the country and its companies to access better terms on capital markets to support high inclusive growth.

2.This finding of excessive indebtedness is a 180-degree turn for the IMF, which only a year ago was lending Argentina large amounts of money, and to creditors who initially couldn’t buy enough of the country’s bonds, including a heavily oversubscribed 100-year issue in 2017. But it doesn’t come as much of a surprise to those in the marketplace who have undertaken proper analyses. Already, Argentine bond prices reflect expectations that the government would be unable to meet the contractual interest and principal payments as specified at issuance. This statement could well deepen such expectations.

3.The IMF staff notes that while highly destructive financial pressures have eased somewhat, Argentina’s difficult circumstances have meant that the authorities “introduced capital flow management measures, imposed maturity extensions on certain debts, and resorted to Central Bank financing of the fiscal deficit.” These are all policies that don’t sit well with the Fund, especially if it is to provide technical and financial support to the country.

4.Transitioning all this into a comprehensive policy package that delivers high inclusive growth and financial stability, reestablishes cost-effective capital market access, and secures stakeholder buy-in is far from easy. Already, the statement acknowledges that “the primary [fiscal] surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible.” As such, there is urgent need to avoid previous mistakes of imposing excessive austerity on the population and failing to protect the most vulnerable segments – mistakes that were compounded by a series of over-optimistic, if not outright unrealistic, growth assumptions built in the programme design.

5.The glaring omission from this statement, again for understandable reasons at this stage, is any insight on how the IMF will handle its own large financial exposure to Argentina. The country owes the Fund some US$44 billion in what are de facto super-senior loans. A default event would risk severely disrupt other financial flows to the country.

6.While the IMF has been able to find ways in the past to elegantly refinance itself through the provision of new loans, it has never agreed to an explicit rescheduling of its own claims on a member country. This partial approach works, though not without challenges, in cases where the debt servicing burden is small in absolute or relative terms. It gets a lot more complicated when the magnitudes are large, which is definitely the case here.

7.A final notable omission relates to sequencing. Both Argentina, in the design of a homegrown reform policy package, and the IMF, via the provision of financial support at significantly less onerous levels than in the marketplace, have signalled hesitation about going first in “contributing” to and anchoring a sustainable solution. Private creditors will be neither able nor willing to do so, especially if the objective is to meet the Fund’s test of a collaborative and orderly process. What’s required is a simultaneous approach that involves mutually reinforcing assurances, prior actions and fair burden sharing, along with other public creditors.

All this translates into a monumental challenge requiring that Argentina’s government, the IMF and other stakeholders work together to solve the urgent economic and financial predicament in a timely and comprehensive manner. The international monetary system is already challenged by fragile growth, de-globalisation, climate change, technological dislocations, financial instability risks, and the lack of cooperation and trust among major economies. The resolution, or lack of it, shown in this case could create important precedents.