Argentina is in a familiar place, buried in debt, unloved in the financial markets and at the mercy of the International Monetary Fund — or is it the other way around? When a country owes $45 billion, the balance due on the IMF’s biggest rescue loan ever in 2018, it’s not so much in hock to its creditor as joined at the hip. What’s worse, after nine sovereign defaults, 21 previous IMF bailouts, and six straight decades of 200% annual inflation, never mind the pandemic that already has claimed nearly 57,000 lives, Argentina’s predicament surprises no one.
The IMF and Argentina are currently arguing over the terms of an Extended Debt Facility to resolve the country’s funding crisis, and what reforms it will undertake in return. The deep travails of the continent’s serial profligate and the high stakes for the IMF have fed a consensus that any deal will have to wait until after Argentina’s midterm elections in October. True, committing to a new IMF agreement and the fiscal retrenchment any deal would entail is unlikely to help President Alberto Fernandez at the polls, where his slim ruling Peronist majority — and hence the IMF’s payback — hangs in the balance. Yet here’s the rub: Shelving salutary reforms for partisan advantage until after the election may be the bigger peril, threatening not just to derail Argentina’s return to sustainable growth, but also to tar Fernandez and his allies for squandering an opportunity to set the country right.
Argentina’s debt debacles have many makers. After acknowledging yet another default last year, it reached an agreement with private lenders to reschedule $65 billion in overdue debt, itself part of unfinished business from the quarrelsome 2000s. Economy Minister Martin Guzman led last year’s talks and now is back in the trenches with the IMF, whose 2018 rescue loan now looks in need of rescue.
Leave it to Vice President Cristina Fernandez de Kirchner, who was the bane of bondholders when she was president (2007-2015), to turn the already conflicted tryst toxic. “We can’t pay because we don’t have the money to pay,” she said late last month, plumping for an unheard of 20-year repayment schedule. Stiffing lenders is a problematic habit that has won Argentina a captive place in the Siberia of capital markets. Blowing off the lender of last resort amid a global economic convulsion is even grander folly. The last thing Argentina or its biggest enabler needs is a default on top of a default.
That may not happen. With prices surging for Argentina’s soybeans and wheat, an export bonanza might just tide the economy through until a new pact is struck with the Fund. Since Argentina wants its cash but not the discomfiting bits — fiscal retrenchment, overhauling taxes, lifting price and exchange controls, ending profligate feel-good subsidies — that come bundled with it, the government is struggling to keep the voters close and lenders guessing.
So Argentina is talking tough while counting on the commodities second wave on top of the promise of up to $4 billion in I.M.F. special drawing rights to meet their payments this year. “They can conceivably pull it off,” said Carlos de Sousa, an emerging market debt analyst at Vontobel, a consultancy.
Yet even if that strategy works this year, muddling through is not a plan. The country will have to pony up $18 billion to the IMF next year, and another $19 billion in 2023, even as Central Bank reserves run dry. Argentina’s bigger risk is the opportunity cost of delaying a deal in a year when official lenders are stepping up to mitigate the pandemic and its devastating knock-on effects. “Argentina vilifies the IMF for sport. Meanwhile, its neighbors in the region are scooping up vital emergency loans,” Benjamin Gedan, who focuses on Argentina at the Wilson Center, told me. (All told, the region raised $65 billion in 2020 through sovereign bond issuance, 54% higher than in 2019.) Last May alone, Chile drew $24 billion and Colombia $11 billion from the Fund’s Flexible Credit Line.
More troublingly, the country is also missing out on a potential windfall from heat-seeking capital markets. “We have an overabundance of dollars in the international financial system and an ageing global population. Pension funds are desperately looking to produce some profits,” said former IMF executive director Hector Torres. “If you offer minimum security of repayment and predictability, you would have money coming in.”
But little of that is likely to land in Argentina without a national reset. “The country could benefit tremendously, but only if it gets it act together,” says Alberto Ramos, of Goldman Sachs.
That’s a challenge for an economy with herd immunity to salutary reforms. Argentina bottomed out in key areas of the World Economic Forum’s most recent World Competitiveness Report. Its record on public-private collaboration, crucial to building “markets of tomorrow,” is one of the world’s worst.
To his credit, Fernandez allowed Guzman to put forward cuts to populist public utility subsidies, streamline the pension system and cool the money presses that feed Argentina’s 40% inflation rate. But Fernandez de Kirchner scotched those market-soothing measures, essentially relegating Fernandez and Guzman as her Men Friday, says political scientist Bruno Binetti, a non-resident fellow with the Inter-American Dialogue. “Attracting investment and creating a conducive business climate are not even in the top ten government priorities,” Binetti told me. The latest Hail Mary to top up government coffers, a onetime wealth tax, has raised a paltry $66 million.
Putting off inevitable reforms in favor of magical thinking will do crisis-battered Argentines no favors, a view the IMF is quietly pushing. “We believe the Fund is drawing a line in the sand,” Bloomberg Economics’ Adriana Dupita writes. “While it’s open to gradualism, heterodox policies cannot be a part of any plan.” After a year of battling Covid-19, a record 42% of the country is poor, up from 26% in 2017. The economy that limped into the pandemic year likely plunged in 2020 by nearly 11%, a contraction similar to Peru’s and surpassed only by the debacle in Venezuela, an all but failed state.
Yet to Argentina’s current administration, the more compelling logic at work may be political rescue, not economic redemption. A victory at the polls will enable it to tighten its grip on the institutional levers of power, not least over the courts, where Fernandez de Kirchner is answering to multiple corruption charges.
That’s not the sort of recovery Argentina needs.
Bloomberg
