The IMF and Fernández are finding common ground

27th February 2020

By Fermín Koop

The IMF and Fernández are finding common ground

Argentina’s new Peronist government might have relied on an anti-IMF message at times during its campaign, but the country and the International Monetary Fund have been moving fast on their conversations as of late. Despite some strong criticism of the Fund from the VP earlier this month, President Alberto Fernández’s administration is happy with the way talks have moved forward over the last few days, with the Fund backing Argentina’s restructuring plans publicly and even finding common ground between Argentina and the IMF’s main stakeholder: The US Department of the Treasury.

</p> <p>The IMF agreed with what has been Fernández team&#8217;s long-held view that the country’s USD 311 billion debt is &#8220;unsustainable&#8221;, and that a “meaningful contribution” by private creditors will be needed for that situation to improve. But the Peronist camp also had to cede some ground, as the government also accepted new IMF inspections on its economy, something that was strongly rejected by the Kirchnerite administrations during its decade in power.</p> <p>Behind the discussions is also the possibility of a new type of debt agreement between Argentina and the IMF, with longer repayment periods for its near-USD 50 billion loan than the current agreement states. But such a deal could come with more strings attached, including demands to adapt Fernández administration&#8217;s economic program to put it closer in line with the Fund&#8217;s vision.</p> <p>It is that <a href="">huge debt with the Fund</a> that partly explains its attitude towards Argentina: calling for a contribution from private bondholders is also a way of making room for Argentina to eventually start repaying the Fund.</p> <p>“Argentina&#8217;s exposure to the IMF is high; both Argentina and the IMF will wish to smooth the repayment path before large amounts start falling due later in 2021,” said Mark Sobel, US Chair to the OMFIF think-tank and non-resident senior adviser at CSIS think-tank.</p> <h2>Unsustainable debt</h2> <p>Following a full week visit to Argentina, the IMF said the country’s debt load is unsustainable and asked private creditors to help restore debt sustainability – a seal of approval to the government’s plan to make creditors accept some losses in a renegotiation of its liabilities.</p> <p>“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 a statement that also echoed Economy Minister Martín Guzmán&#8217;s presentation before Congress two weeks ago, where he spoke against austerity.</p> <p>The IMF said Argentina&#8217;s ability to service its debts had deteriorated sharply compared with mid-2019 when it categorized the country&#8217;s situation as &#8220;sustainable, but not with a high probability.&#8221; Fernández welcomed the statement and said an agreement could lead the country to grow again and honor its commitments.</p> <p>“The IMF is passing the responsibility to the private creditors and saying nothing about how it hopes to get repayment for its loan with Argentina,” Luis Secco, economist, said. In his view, the statement does not do much to reduce the level of uncertainty regarding Argentine debt, despite the government&#8217;s celebrations. “Now, it will be up to creditors to judge by themselves if Argentina’s debt is sustainable or not.”</p> <h2>Article IV consultations</h2> <p>Shortly after those supportive IMF statements, Guzmán met with IMF Managing Director Kristalina Georgieva on the sidelines of a G20 finance officials meeting, and agreed that Argentina will initiate formal consultations with the Fund that could lay the groundwork for a new program.</p> <p>Georgieva commended the efforts of the Argentine government to put in place policies aimed at stabilizing the economy, reducing poverty and dealing with its debt. “I welcomed the Argentine authorities’ commitment to continue to deepen our engagement including through an Article IV Consultation and steps toward a Fund-supported program in the future,” she said.</p> <p>The consultations, also known as Article IV talks, would allow the IMF to inspect Argentina’s accounts before a new agreement is signed. This would give an assurance to bondholders as they head into restructuring talks that Argentina is under IMF supervision.</p> <p>The IMF’s inspections are usually brief and purely bureaucratic for countries that do not have problems or credits from the Fund but become more exhaustive and conflicting when the government in question has already a debt program in place, as in the case of Argentina.</p> <p>Between 2007 and 2015, the administrations of Néstor and Cristina Kirchner had refused this type of review, claiming the Fund shouldn’t interfere in the affairs of Argentina. Since 2018, the reviews were unnecessary as the loan given to the Macri administration included as a condition a quarterly check-up.</p> <p>“The current government appears cautious about engaging the IMF, given Argentine politics and as it wishes to develop a home-grown medium-term plan.  It thus is starting with an Article IV review,” Sobel, who served at the U.S. Department of the Treasury, said.</p> <h2>Meeting Mnuchin</h2> <p>Guzmán also met with the United States Secretary of the Treasury, Steven Mnuchin. While not many details came out of the meeting, Guzman said there were “coincidences” between the two, while Mnuchin said they discussed “the plans of Argentina to implement economic policies.”</p> <p>After the meeting, Mnuchin <a href="">said</a> that “the conversations that (Argentina) is having with the IMF are preliminary but are moving in the right direction.” The meeting could be seen as the natural continuation of Fernández&#8217;s <a href="">tour through Europe</a> to secure the support of other key IMF stakeholders.</p> <p>Guzman also met with France Finance Minister Bruno Le Maire, head of the Paris Club, an informal group of creditors of Argentina. Guzmán hopes to postpone payments from the organism and reduce the interest rate, now at 9 percent. To do so, Argentina needed to accept the IMF consultations as a prerequisite.</p> <h2>A new kind of deal</h2> <p>Right after attending the G20 summit, Guzmán took a flight to Washington DC, where he attended another meeting with IMF representatives, this time with the head of mission for Argentina, Luis Cubeddu, and the deputy director for the western hemisphere, Julie Kozack.</p> <p>The meeting laid out the plans for the IMF formal consultations as well as discussing what the new type of loan agreement could look like. All signs point to an Extended Fund Facility (EEF) agreement, which usually have longer repayment periods that can go from four to ten years.</p> <p>Nevertheless, committing to that sort of deal would also mean a stronger focus of the IMF on structural reforms to address institutional or economic weaknesses, in addition to policies that maintain macroeconomic stability in Argentina. It also implies more reviews and program performance assessments. So Argentina moving to an EEF is still far from a sure bet.</p> <p>“An EFF must promote stabilization of the economy.  That would entail running a sustainable fiscal policy; bringing inflation under control; maintaining external balance and normalized relations with creditors. But an EFF also involves a longer engagement period with the Fund and also a strong focus on structural adjustment aimed at boosting potential growth,” Sobel said.</p> <p>

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Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.