The surprising thing to us yet about the IMF's statement on Argentina last night is not that they called for a debt restructuring ("a definitive debt operation — yielding a meaningful contribution from private creditors"), but that they have said so now, so publicly and explicitly, and relatively early in the process. The Fund is stating the obvious to some extent (although we suspect its conclusion may be met with resistance by some investors), and given market prices outside the front-end of the US$ curve in the low 40s, the market had been fearing as much anyway. And of course the government has already called for restructuring, although still refusing to give any specific details on what it might look like other than its own very ambitious timetable. Otherwise, the IMF's statement following the conclusion of its recent staff mission doesn't say a lot that is new (but it does address the elephant in the room).
Nonetheless, it seems unusual to us for the Fund to call so explicitly for restructuring so far in advance (or outside) of programme discussions. Typically, the IMF's stance is shrouded in secrecy during programme discussions, for fear of destabilising markets or provoking contagion (although those days seem to have gone), only becoming explicit upon its approval and later revealed in programme documentation. However, getting it out there now at least avoids the market continually second-guessing what the IMF think. And the IMF team should be given credit for clearly undertaking a lot of analysis in such a short space of time.
Still, there is some way to go before turning this statement of intent into the modalities of a debt restructuring – and the devil will be in the detail, as well as the policy assumptions. Public debt is reported by the IMF at 90% of GDP at end-2019 (see Argentina in 8 charts: Charting our view towards debt restructuring), and the Fund now assess Argentina's debt to be unsustainable (we don't think this finding is a surprise either; as we have said before here and here, when public debt was previously assessed to be sustainable but not with high probability, it doesn't take much to make it unsustainable). And the corollary of this is, if debt is unsustainable, the only way the Fund can agree to a programme (if one is wanted) is with some burden sharing through a debt operation, including private sector involvement (PSI).
While we don't think 90% debt/GDP shouts insolvency, the IMF specifically state that the primary surplus needed to restore sustainability is not economically or politically feasible – a point we have also made before, although that depends on how serious the government really is. Yet, without knowing the policy assumptions and macro forecasts that underpin the IMF's new DSA, what the IMF think is a sustainable debt burden in Argentina, and its assessment of financing needs and sources, and associated financing gaps, it is difficult to know what kind of debt treatment (PSI operation) will be needed to restore debt sustainability. In other words, how much debt relief is required, what form it can take, and the amount of burden sharing needed across other creditors. For example, is deferring bonded debt service for three years, saving US$23bn, enough of "a meaningful contribution"? If so, that could still be consistent with a liquidity style maturity extension and positive recovery values.
Moreover, it is still not clear from the IMF's statement whether or not the authorities actually want a Fund programme and therefore, whether such a debt operation will be done inside or outside of one – the statement only refers to continuing discussions, not that a formal request has been made. If Argentina doesn't want a programme, the IMF's statement of the fact is somewhat costless to them, although it does set the stage for creditor-debtor negotiations over a possibly deeper restructuring than markets had hoped for (despite what current prices imply). And we think this could be a lengthy process, one in which the IMF would actually have very little say (except that it too, wants to be repaid).
If, on the other hand, Argentina does want a programme, the IMF's assessment that debt is unsustainable may suggest that a restructuring is a prior action (a la Ukraine or as was the case in Jamaica's domestic debt exchanges). This has implications over how long this will take and the final outcome. We think bondholders would prefer the IMF to be involved rather than not – both as an independent arbiter and also to impose policy discipline – even if this is to the detriment of recovery values (although lower exit yields in the context of a strong programme can provide some compensation for higher nominal debt reduction, for instance). And there are precedents whereby bondholders in other recent sovereign restructurings have sought approval of an IMF programme (or at least visibility on its modalities) as a key condition for creditor-debtor negotiations to begin (eg Belize, Mozambique), although bondholders haven't always got their way.
Argentina could still be the trade of the year, as even (say) a 20-30% nominal haircut and near-term cashflow relief from coupon reduction could deliver recovery values north of current prices (depending also on exit yields assumptions, and if done in the context of a credible IMF programme with strong political ownership by the authorities). Or it could be a default that lasts another decade. We're beginning to fear the latter.