Buenos Aires January 12 2022: As a March deadline looms for Argentina to restructure billions of dollars in debt with the IMF, the country is again at risk of being cut off by
international financial institutions and retreating into isolation as the leftwing Peronist government struggles to find support for a new deal.
Martín Guzmán, Argentina’s finance minister and chief IMF negotiator, told provincial governors in Buenos Aires last week that “there is no agreement” with the Washington-based lender yet, after 18 months of inconclusive talks.
Guzmán’s proposal presented to the governors would aim for a balanced budget by 2027, resisting IMF calls for faster cuts to spending and subsidies. He also proposed to keep using central bank money printing to fund the deficit for at least five more
years, which will fuel inflation.
Guzmán said the main point of disagreement with the fund had been on the so-called “fiscal path” — how far and how quickly to cut
spending in order to balance the budget. He did not provide details on how the budget would be balanced by 2027.
The presentation “confirms the reluctance from the Argentine authorities over the need to cut spending to reduce the deficit”, said Fernando Sedano, an economist at Morgan Stanley,
while illustrating the “sizeable gap” that needs to be bridged to “achieve objectives”.
While talks are ongoing with the IMF, the government must also find a way to convince a fractious new congress to approve its plan to restructure some $40bn owed to the international lender, as part of a record-breaking $57bn bailout in 2018.
Even getting influential opposition politicians to show up to discuss the issue has been difficult. Three provincial governors and the mayor of Buenos Aires turned down the government’s invitation last week to talk about debt refinancing, accusing President Alberto Fernández of calling the meeting as a photo opportunity with his finance minister.
Argentina is due to pay the IMF $2.8bn in late March, and analysts see no option but to secure a new deal with the lender because the government lacks the international reserves to make the payment. Net foreign exchange reserves have fallen below $6.9bn, according to Morgan Stanley, only $400m of which are liquid.
Most economists agree that falling into arrears with the fund would be disastrous. It would cut off the credit Argentina receives from other multilateral lenders and deal a serious blow to the IMF’s reputation as a responsible creditor.
With private investors already shunning Argentina after it defaulted briefly in 2020, any confrontation would also leave the country — a G20 member and major grain exporter, and which has been bailed out 21 times in six decades — an international financial pariah.
Guzmán, who has consistently argued that the deal financed capital flight and bailed out private creditors, assailed the IMF again on Wednesday, claiming the fund was more focused on restoring investor confidence than fixing the real economy.
“Of course, we’re working so that there’s more market confidence but the first thing above all is to improve the real economy’s situation,” he said.
Government bonds maturing in 2041 fell to just below 33 cents on the dollar in its worst one-week fall since September after Guzmán’s presentation suggested a deal by March was not imminent. A day later the central bank lifted the benchmark interest rate for the first time in a year by two percentage points to 40 per cent, which was widely interpreted as a gesture to the fund.
Even if the Fernández administration can iron out issues with the fund, any agreement must be ratified by congress, where the opposition made big gains in elections last year.
Finding consensus has been complex, not least because the Peronists have repeatedly attacked the opposition for signing the original IMF deal, and the bloc is reluctant to share the political costs of renegotiating it.
In one display of the divisions between the government and congress, lawmakers in the lower house rejected the government’s 2022 budget in December for failing to present realistic growth and inflation targets, following a 19-hour debate.
The Fernández administration must also contend with hardliners within its own ranks who are resisting its proposed cuts in spending and government subsidies. They believe the original IMF deal broke the fund’s rules — the IMF denies this — and that the lender should grant Argentina favourable treatment in any new deal.
Economists see a moment of reckoning approaching. For Alberto Ramos, chief Latin America economist at Goldman Sachs, there is now “a significant probability” of Argentina falling into arrears with the fund.
Lingering tensions within the Fernández administration over the appropriate fiscal stance suggest “very limited scope” for a structural fiscal adjustment and reforms that form the basis of a credible IMF programme, Ramos added.
“The [finance] minister does not know what he wants, what are his targets?” said Carlos Melconian, former head of the Bank of Argentina. With “so many coalitions” in congress, he added, the possibility of a united front and credible plan within the next two months have dried up.
The government’s presentation on Wednesday reflected more “the limitations set by its own internal front, than those posed by the authorities of the international organisation”, columnist and professor Carlos Pagni wrote in the newspaper La Nación.
Even though the government and IMF want to reach an agreement, there are still “meaningful disagreements in terms of economic projections”, according to Daniel Kerner at Eurasia Group, a political risk consultancy. IMF officials in December had called for an “appropriate” monetary policy, with commitments to trim spending, reduce the deficit and bring down inflation, which is topping 50 per cent a year.
Buenos Aires-based economist Fernando Marull pointed to small signs of progress in December. Argentina paid $1.9bn to the fund on December 21, on top of payments last year. “It would be very costly for the government, having met those payments, if their decision were to default,” he said.
As the mood between the Peronists and the opposition sours, the economy is suffering.
The central bank’s balance sheet has deteriorated markedly. Net reserves have fallen below $7bn and more than $1bn has left the private banking system in the past two months alone, official and market data show.
At least 70 per cent of the deficit in 2021 was financed through money printing, according to estimates, which the IMF demands the country reduce. “The government is running out of time and out of reserves,” Ignacio Labaqui, senior analyst at Medley Global Advisor in Buenos Aires said.
