Anywhere else, news that a cratering economy, a collapsing currency and evaporating international reserves had pushed sovereign debt to “unsustainable” levels would be occasion for national dread. Yet the International Monetary Fund’s woeful bill of health on Feb. 19 brought relief and even something close to exaltation to the governing halls of Argentina.
“I celebrate the IMF for recognising the Argentine position regarding debt,” President Alberto Fernández said on Twitter late Wednesday, shortly after the Fund concluded a weeklong visit. “If all parties are willing to agree, we can return to growth, honour our commitments and put Argentina on its feet again.”
It’s going to be a long way up. Argentina desperately needed the IMF’s imprimatur before it could strike a pact with private creditors. Yet while the Fernández government read the Washington-based lender’s bulletin as vindication of the Argentine demand that private creditors take a hit on their loans, the way forward is far less certain. Neither the IMF – which is on the hook to Argentina for US$44 billion or 47 percent of its entire credit exposure – nor the minimum 75 percent or so of bondholders required to sign off on any agreement will be bullied easily into a bad deal any more than they will be moved by Pope Francis’s prayers. That’s the cue for the country’s ruling Peronists to swap the balcony for the negotiating table. Will they?
Ever since he swept Argentina’s presidential primaries last August, virtually ensuring his electoral victory, Alberto Fernández has been the topic of fierce speculation. Would a famously behind-the-scenes politician serve as merely the mouthpiece for his willful deputy, the former president Cristina Fernández de Kirchner? Or would he outflank the Peronist flamethrowers and work up a pragmatic plan to spare the nation another ruinous default?
Half a year on, we’re no wiser, though the signs out of Buenos Aires are hardly auspicious. The ruling Front for All electoral alliance remains a coalition of rivals. The resulting mixed messaging from Fernandez’s inner circle is confusing investors and lenders, and stoking popular demands that his administration will be hard pressed to meet.
In January, Buenos Aires governor and alpha Peronist Axel Kicillof issued creditors an ultimatum: Take a late payment on US$250 million in provincial debt or face a “disorderly” situation. His mentor Fernandez de Kirchner upped the ante, warning – on a trip to Cuba, no less – that the International Monetary Fund wouldn’t get even “half a cent” back until the country grew again and only if it agreed to a big haircut on Argentine debt. Both petards may have been no more than ill wind off the pampas (neither the provincial bondholders nor the IMF blinked), but the malodorousness was hard to miss.
Reprieve – not a pass
The IMF has given Argentina a reprieve but not a pass. Fernandez must convince chary creditors to come to terms with a nation storied for serial default. His self-imposed timeline for closing a deal: March 31.
Yet the government’s economic agenda offers few clues and thin hopes. On the campaign trail, Fernandez pledged to find an amicable solution to the country’s debt imbroglio: Argentina owes around US$312 billion, worth 91 percent of gross domestic product. He also promised to spare his compatriots any more pain and scolded the IMF for deepening the country’s woes. Fernández then doubled down on that message during a recent diplomatic tour, on which he sought the blessings of European heads of state and Pope Francis ahead of the country’s debt negotiations.
He left the details to Economy Minister Martín Guzmán, a young (he’s 37) respected academic with no hands-on experience. Like his mentor, the Nobel laureate Joseph Stiglitz, Guzmán is no fan of laissez faire economics. At the same time, he has been hailed as a moderate and a rare pragmatist in a palace packed with nationalist hardliners.
Optimists took heart from Fernandez’s first policy initiative, the December economic emergency law, which included measures to rein in the primary fiscal deficit to 0.4 percent of GDP in 2020 by raising taxes on farm exports, tourism, personal goods, buying dollars and reducing spending by selectively freezing prices and capping pension increases. Yet the government’s subsequent loose money policies could erase even those modest savings, and fuel what Oxford Economics calls the highest rate of monetary expansion in 16 years.
Nor was Guzmán’s debut in Congress reassuring. In a hearing before lawmakers, he warned bondholders to brace for “frustration” over the coming “deep debt restructuring,” and forecast reaching fiscal balance only in 2023. “We’re not going to allow foreign investment funds to set the guidelines on macroeconomic policy,” he said. Argentina’s dollar bonds slumped.
The populist pitch was likely a nod to the domestic audience, which is bracing for a third straight year of recession, with one of every three Argentines already living in poverty.
“The government position may reflect the paranoia of a leader in a region on fire,” Benjamin Gedan, director of the Argentina Project at the Wilson Center in Washington, told me. “Austerity was a trigger for social unrest across Latin America over the last year, and after four years of worsening poverty and a deep recession, Argentina has every ingredient for explosion. Adjustment is a toxic word.”
Alternatively, standing tough with creditors may have been Guzman’s strategic opening move in an eventual compromise on debt. But if that’s so, the government’s leverage is limited in a marketplace already inured to Argentine bluster. (When Buenos Aires’s creditors refused to budge on provincial debt, Kicillof paid them in full.) “The message from Buenos Aires was that Argentina will do anything to avoid default,” said Gedan.
“The Fernández government is not wrong to say that under current conditions the debt is unpayable, and to ask creditors to sit down to discuss better terms,” said Adriana Dupita, of Bloomberg Economics. “But first you need to have the right diagnosis of the problem and a plan, and I don’t see one.”
Dupita is not alone. Just to repay the IMF, the country’s priority creditor, Argentina will have to spend out the equivalent of a quarter of all export revenues projected for 2022 and 2023, financial analysts Nouriel Roubini and Alessandro Magnoli Bocchi wrote this week. Since that’s out of the question, the only recourse is for Argentina to persuade the Fund to reschedule its debt.
Yet in lieu of a “sensible plan,” a new loan arrangement with an easier repayment schedule is unlikely, they concluded. “Given the current lack of a clear and comprehensive strategy by the government, a formal default on the foreign law debt appears to be quite likely at this stage,” Roubini and Bocchi wrote.
Before Argentina can come up with a solid economic plan, it needs a credible political pact. That takes a government which speaks with one voice, mutes the palace incendiaries and treats debt and economic recovery not as a passion play but as part of a national business plan.
“Argentines need to have a discussion of what type of country they want: a state-led industrial policy? A country open to global trade?” said Nicolas Saldias, an Argentina expert at the Wilson Center. “That requires cutting across partisan lines and getting the opposition on board to come to an understanding about economic basics.”
Now that would be something to celebrate.