This is the second half of an article on Argentina and the IMF. The first half can be read here.Â
When a sovereign nation loses access to external markets, it can in general only spend the revenue it earns. In essence, it must be in primary balance. To the extent it makes payments to creditors, it must run a primary surplus to generate requisite resources.
Typically, a country facing stress turns to the International Monetary Fund. With market access lost, the Fund provides new money in return for an adjustment programme. The programme fills a financing gap. The IMF’s money creates breathing space, easing the adjustment path. To fill the gap, the IMF will also insist the country normalise relations with creditors to restore growth and sustainability and reinvigorate investment.
In doing so, it sets the ‘fiscal envelope’. It agrees with authorities on the primary balance and debt-to-GDP path and perhaps a ceiling on the amount of annual debt service as a share of GDP.
Based on those parameters, authorities and creditors squabble over but do strike a restructuring deal.
Buenos Aires’ new team, somewhat understandably, is not keen to run a primary surplus given the recession. Statements suggest the country might consider running one starting in 2023.
Monetary policy’s orientation is uncertain. Exchange rate stability is desired given feedback loops. But monetary policy is being relaxed and it isn’t clear that real interest rates are positive, or that lower rates are compatible with exchange rate stability over the longer haul, despite capital controls. As noted, the Peronists are well positioned to work with unions on income policies for disinflation.
Further, the Peronists have a longstanding dislike of the IMF. They blame it for Argentina’s collapse in the early 2000s and for lending Macri $44bn, which they now see themselves saddled with. Cristina Fernández de Kirchner believes the IMF should take a haircut on its exposure. Her proposal flies in the face of the IMF’s internationally recognised role as a preferred creditor, and the IMF will rightly never accept it.
One idea in Buenos Aires might be to seek a programme later, as large IMF repayments start coming due in late 2021 through 2023, and use such a programme to refinance and improve the profile of IMF repayments.
On debt, Argentine thinking seems to point to securing several years’ grace, helping avoid the need for near-term primary surplus, as part of a debt restructuring. Argentina had suggested that it wanted a reprofiling, but now national authorities and the IMF together state that debt is unsustainable and haircuts are essential. A programme, which heavily refinances the IMF’s exposure, would also smooth the external financing outlook.
But if creditors offer up grace and take a haircut, will they want an IMF programme now to provide greater certainty that Argentina will make good on what it agrees to pay? Would they be satisfied with a future commitment to such a programme? This is all supposed to be sorted out by 31 March.
And there are more complicated wrinkles too. Given ‘Kirchner’ bonds with first generation collective action clauses that lend themselves to holdout litigation, and ‘Macri’ bonds, with more robust second-generation clauses, any restructuring will be complex. Achieving creditor cohesion and avoiding a disorderly default may prove challenging.
The IMF is willing to work with the new government. The dialogue is starting, but the new government is taking a measured approach. It appears that as a next step the IMF and Argentina will soon hold an Article IV review, which would include a debt sustainability analysis and focus on a programme in the ‘future’. Given a new IMF managing director and that the Fund will want Argentina to repay, the country has good leverage over it.
An orthodox outcome of an IMF programme with a debt deal appears unlikely in the light of the latest statements out of Washington and Buenos Aires to pursue an Article IV, and it might be difficult for Argentina given domestic politics.
Some countries in the past have ignored the IMF and creditors, stuffed banks with government bonds, raided pension funds, and turned on the monetary spigot. This has not worked well. There is no reason to think Argentina is headed in this direction.
Argentina always stretches our imaginations. Perhaps it could strike a deal in the near term with creditors, securing breathing room on the fiscal side, and do so on the basis of an Article IV with a DSA, and a commitment to reach a programme down the road. Providing this analysis if the future economic course is not set would challenge the creativity of the IMF’s best minds.
Such a scenario is not inconsistent with Argentina muddling along, caught between politics and economic realities that further grind down the economy’s potential, as has happened for a century.
Argentina’s politics are difficult. But economic heterodoxy has not worked well. Buenos Aires needs to adopt more orthodox macroeconomic policies based on a culture of fiscal restraint, deal with its debt issues, tackle inertia, liberalise the economy, provide proper social protections, and move forward. It needs to take responsibility for itself.
Given history, one cannot be filled with optimism. But one cannot stop trying.
Mark Sobel is US Chairman of OMFIF.