For all their turbulent relationship over the decades, the International Monetary Fund just gave Argentina the backing it needed to hit its bondholders with a significant haircut.
Argentina’s debt load is “unsustainable” and private creditors would need to make a “meaningful contribution” for the country to regain its footing, the IMF said in a statement on Wednesday, adding that no fiscal adjustment by itself would be sufficient to reverse the situation.
Bond prices reflected the aggressive language, with Argentina’s 2021 bonds falling 1.2 cent to a three-week low of 52 cents. Neither the IMF nor the government have indicated how big the haircut should be.
“The private bondholders’ fears have come true,” said Jimena Blanco, head of Latin America political research at consulting firm Verisk Maplecroft in Buenos Aires. “The Fund throws them under the bus to save its position. The haircut has to come from the private sector.”
Even if hardly surprising for a country that has lost more than a third of its international reserves since July and had installed draconian capital controls, the Fund’s declaration marks another chapter in Argentina’s long history of fiscal crises and debt mismanagement. The nation, which has defaulted eight times in its two centuries of independence, is trying to again reduce its liabilities as the economy heads for its third straight year of contraction in 2020.
The Fund, a perennial villain in Argentina after more than 20 financing agreements since 1958, this time has its incentives aligned with the country: a big haircut to private creditors would give the Washington-based organisation more space to recover the US$44 billion disbursed of the record US$56-billion loan approved to Argentina in 2018, which has been the subject of heavy criticism.
“The primary 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,” the Fund said in its statement.
IMF Managing Director Kristalina Georgieva told reporters in Rabat, Morroco Thursday that the time line is tight for Argentina to reach an agreement with creditors.
The Fund’s assessment came after a week of meetings with Argentine officials during its first technical mission in Buenos Aires under Alberto Fernández’s presidency.
The Peronist leader said in a tweet that he celebrated the IMF’s recognition of Argentina’s posture. “If all parties show the willingness to reach a deal, we can return to growth, honour our commitments and get Argentina back on its feet,” he wrote.
Fernández is seeking to renegotiate billions of dollars in debt with private creditors, including the loan with the Washington-based organisation, and said he expects to wrap up the talks by March 31, a deadline most analysts see as too ambitious.
“The fact that it is politically and economically impossible for Argentina to constitute a primary surplus is a complete and total break from the norm of the IMF’s relationships with other emerging market debtors going through a restructuring,” said Walter Stoeppelwerth, Chief Investment Officer at Portfolio Personal Inversiones in Buenos Aires. “In a game theory of three, you have two lined up looking to put the third player in check-mate.”
Argentina’s record IMF loan has been on hold since August after Fernández pulled off a shock upset of incumbent Mauricio Macri in a presidential primary vote, sending markets reeling. This is the first time IMF officials have formally commented on Argentina’s debt since the fourth review of the credit line in July, when they called it “sustainable, but not with a high probability.”
“IMF staff emphasised the importance of continuing a collaborative process of engagement with private creditors to maximise their participation in the debt operation,” according to the statement. Argentina’s debt rose to nearly 90 percent of gross domestic public at the end of 2019, 13 percentage points higher than the July projection, the Fund said.
For all the Fund’s suggestions, Economy Minister Martín Guzmán had already warned investors last week they’ll probably be frustrated with negotiations, without providing many details. His mentor, Nobel Prize-winning economist Joseph Stiglitz, said in an interview in Davos in January that bondholders should brace for ‘significant haircuts.’
Guzmán will meet with the IMF’s at the G20 Finance Ministers and Central Bank Governors Meeting that takes place in Riyadh, Saudi Arabia, on February. 22-23. He will also hold bilaterals at the event with US Treasury Secretary Steven Mnuchin and France’s Economy & Finance Minister Bruno Le Maire, according to a person with direct knowledge of the matter.