Amid the latest review of Argentina’s IMF programme, should the Fund simply walk away? We think the arguments are finely balanced. The IMF may not want to rock the boat in an election period and publicly, has said that it continues to stand with Argentina. But it also needs to uphold its own principles.
The Fund should call a halt (which would essentially suspend the programme given the election cycle) and at least now, with the soon to be under new leadership, it has the ideal chance to pivot (or re-set its stance) on Argentina. But it probably won’t.
Timing of the IMF review
The fifth review of Argentina’s SBA is scheduled this month (it was scheduled for on or after 15 September, according to the timetable presented in the fourth review in July), and comes after a tumultuous few weeks, which has seen announcements of debt re-profiling and the imposition of capital controls. Approval would lead to a disbursement of US$5.3bn.
However, another delay looks likely, given the delay to the fourth review, and more importantly, the situation now on the ground. As to how long remains to be seen. We know the Fund has moved quickly before in Argentina, but the current situation is challenging. After the IMF visit at the end of August, and further discussions since then, we still need to see a staff level agreement (SLA), and then allow time to schedule a board meeting. A few more weeks looks likely.
Whether this process can happen quickly enough for approval and disbursal before the presidential election on 27 October is not clear, and the closer we get to the election, the chances would seem to dim. Moreover, if the process means the board meeting can only take place after 27 October, even if SLA occurs before then, it would seem strange to continue with the existing programme when a new government has been elected (even if it hasn’t taken office).
The other difficulty for the Fund, if Alberto Fernandez does win, will be the policy vacuum between the election in October (and second round in November if that proves necessary), and his inauguration on 10 December. This could lead to further economic deterioration, unless – recognising this – an agreement between the government and opposition can be reached to ensure a cooperative transition, or even bring forward the inauguration date.
Arguments for and against disbursing
There are strong arguments to approve the review, despite the political situation, providing structural benchmarks have been met, or can be appropriately waived, and policy intent remains firm. Financially, the Fund may find it difficult to walk away with so much money at risk – US$44bn disbursed so far out of the US$56bn programme (about three-quarters of the total amount); the Fund’s single largest exposure. The Fund may argue that providing a bit more money now maximises the chances of getting the rest back. And US$5bn may be a (not so) small price to pay to bring the country back from the brink. Politically, the Fund may also feel that withholding the next disbursement during an election cycle opens it up to criticism and possible accusations of interference; the Fund already suffers from a poor reputation in Argentina anyway.
However, there are also plenty of arguments for the Fund to take a harder line. Given the fragile debt situation, and uncertainty about the intentions of a likely incoming Fernandez government, who has already said he wants to renegotiate the programme (both repayments and modalities), the Fund could be forgiven for not wanting to throw (more) good money after bad.
Argentina – under Mauricio Macri and likely under Fernandez – is already trying to change the payments terms of its IMF debt, so why lend more money – particularly if an agreement on those new terms hasn’t yet been reached? Perhaps it is better to delay the review – until after a new government arrives – and discuss the new government’s priorities from a fresh stand point. If that involves either revisiting the existing programme – which now has less than two years to go (and with only US$12bn remaining, including the US$5bn under the current review) – or terminating it and working on a new programme, so be it. That’s not dissimilar to the situation in Ukraine, where an incoming government is doing the same thing after the Fund essentially halted Ukraine’s IMF programme because of policy slippage and reversals ahead of an election (see here). Of course, the Fund walked away from Greece too, but there, the EU institutions were able to step in as the lender of last resort (and the debt was so much more unsustainable). Argentina has no such benefactor.
Moreover, we think there are other crucial considerations for continued disbursements under the existing Exceptional Access programme. First, as much as the backward elements of the programme review are important (and some will have been met, with a June test-date), we think it is the forward looking elements that are more important now. This means gaining political assurances on the programme from the leading opposition candidate (as well as other stakeholders) and commitment to sound policies. This seems unlikely, or that any assurance can be seen as strong enough. Second, the IMF programme and DSA have already determined Argentina’s public debt is sustainable, but not with a high probability. Given the move in the currency since then, and other associated macro impacts, it seems likely that that probability is now much lower (tacitly admitted by the authorities’ own plans for a re-profiling). That would make it difficult to agree to another disbursement, under the IMF’s own lending rules, unless there was an extraordinary policy effort that this government cannot commit too.
Impact on financing
Failure to disburse would, however, leave a big hole in the government’s financing plans (for 2019 and possibly 2020). This could be addressed by tighter fiscal policy (which is difficult to do now), domestic issuance (which could prove costly, but it is easier to lean on domestic banks than foreign creditors), drawing down reserves (but that reduces buffers and room for FX intervention in future – it also means the successor inherits lower reserves, which could push Fernandez to the Fund out of necessity), and other alternative or short-term borrowing sources (eg bilaterals or friendly countries). It seems unlikely, however, that the government can resort to printing money, given restrictions on base money growth in the IMF programme.
Some of the financing shortfall could also be met by savings from the government’s plans for a debt re-profiling involving a maturity extension. But there must be concerns over whether such a plan can be implemented, how quickly, and how much it can save, especially if the “cost” of maturity extension results in higher interest payments to retain PV neutrality in order to get the swap done – a situation seen in other refinancings, such as Belize in 2004-05, or exchanges, such as Argentina’s own megaswap in 2001 before its eventual default. It may be easier – but still challenging – to implement the domestic leg of the swap (through coercion and changing domestic law), but agreement with foreign creditors may be harder. It seems unlikely to us that sufficient bondholders will agree to an extension under this government when a new government is just around the corner, without visibility on an updated DSA or financing needs, and the incoming government’s policies.
The re-profiling plan may be part of the Macri government’s efforts to keep the IMF onside and allow this disbursement (or cater for life without it). But the IMF may not think it is enough, on its own, and if they make it a prior action, we could be waiting a while – by which time, the next government may have arrived.
What happens next?
Of course, if the IMF can approve the review before the election, that would buy Argentina a bit more breathing space and may help to calm market sentiment, at least until we have more visibility on what an incoming Fernandez government will do.
If the disbursement is delayed, and the programme is essentially suspended, what happens next? We highlight two considerations at this stage.
First, will a new Fernandez government want a new IMF programme? It might (and statements so far suggest it does – although that could change when it sees what the IMF demands in return), and depending on its policy objectives, the IMF may agree to a softening of some conditions. More importantly, Fernandez may not have much choice but to turn to the IMF. Without the Fund, there are few other options available to Buenos Aires and its room for manoeuvre would seem even more limited than it is now. Moreover, the global backdrop is different today to the one that the Kirchners took over in 2003 following the 2001 default. The global economy is slowing, commodity prices won’t provide the windfall they did before, and Venezuela cannot help. Autarky will lead to a deeper crisis (weaker growth, higher inflation, deeper FX shortages, and more pressure on the parallel rate and reserves, etc). And this time around, arguably, Argentina cannot afford isolation (and to be in an extended period of default) if it wants to develop Vaca Muerta, as Fernandez has said he wants to (although Mozambique has been able to continue developing its own LNG projects whilst in default). The absence of the IMF would also put other IFI financing at risk. There’s always China though.
However, ideologically and practically, IMF engagement could test the cohesion of a Fernandez government, setting moderates (including Fernandez) against populists (headed by Cristina Fernández de Kirchner – CFK) in their marriage of convenience, which could lead to governance problems further down the line.
Second, we think the halting (or failure) of the existing IMF programme make it now very likely that, in any new programme, the Fund will demand a bigger contribution from private creditors (private sector involvement or PSI) in terms of debt restructuring, beyond the government’s limited re-profiling plan. There are precedents for this, when other big IMF programmes (in terms of quota) have failed (Table 1). The IMF may then seek a commitment to PSI as a prior action to a new programme, as it did subsequently with Greece (2012) and Ukraine (2015). That is, unless Fernandez’s government can present a credible macroeconomic framework that can produce a sustainable debt burden (although statements so far suggest his programme is incoherent and not fully defined). This seems unlikely, and the scale of the necessary fiscal adjustment to restore debt sustainability would seem to be even bigger now than it was under Macri’s programme, which may not be politically feasible. We think public debt will have risen above 100% of GDP, given the FX move and a weaker growth outlook (based on stress tests in the IMF’s DSA) – although a positive confidence shock that leads to a real exchange rate appreciation would have a positive impact on the debt burden.
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Moreover, given the structure of the debt, we think any debt treatment may even need to consider official sector involvement (OSI) too. We estimate about half the public external debt is owed to the IMF and foreign bondholders. The IMF in particular may need to re-phase its own maturities, given the heavy debt service schedule over 2022-2023.
And if the new government doesn’t want an IMF programme, that would seem to make a (deeper) debt restructuring even more likely. The issue will then be whether it is feasible for the authorities to conclude a debt restructuring (including on some US$60bn of foreign bonds, so quite a lot) outside an IMF programme. This might be possible, and has happened before, but it still seems unlikely in this case. We’ve seen bondholders in some recent restructurings (Belize 2016 and Mozambique 2016) insist on an IMF programme as a condition for negotiations, both to provide policy discipline and to provide a DSA (ie to assess financing needs and how much relief is necessary). We’d expect the same in Argentina. However, in both those cases, their restructurings were completed (or are being completed in the case of Mozambique) without formal IMF programmes in place. Yet, they were on smaller bond stocks and creditor coordination issues may be much more complicated in Argentina.
But we also recognise the existence of CACs in Argentina’s bonds make it much harder now for the authorities to force a 'take it or leave it' offer on poor terms on bondholders, as it happened in 2005.
In any case, a bond default/restructuring would seem inevitable under a Fernandez government, either because the IMF pull the plug or demand it, or the government announces a moratorium (like Barbados) or it finds it just doesn’t have the ability to pay (or would rather divert the debt service to domestic residents). There is a path towards recovery based on orthodox policy adjustment, but it seems difficult to think that a Fernandez government (with CFK in it) would choose it, although moderates in his economic team could surprise us still.
Prices of Argentina US$ bonds