Argentina’s EFF deal with the IMF the lesser of two
evils

The IMF has confirmed that the debt laden country has agreed to refinance its near $50 billion debt with the DC based financial institution.

CAPITAL MARKETS: The Republic of Argentina has agreed on an Extended Fund Facility (EFF) deal with the International Monetary Fund (IMF) to refinance the approximately $44.5 billion debt that the South American country owes the institution. While it may come as a relief to the country who has struggled with crippling debts for some time and sits on the verge of default, sources have told IFLR that certain conditions imposed by the agency to avoid the worst are likely to have long-lasting ramifications.

The debt, incurred under former President Mauricio Macri, is the latest in a string of twenty-two IMF loans to the financially struggling country over the last few decades.

Lee Buchheit, sovereign debt expert who worked on several of Argentina’s previous restructuring deals, told IFLR that the deal is an important step in the right direction but comes with its own set of problems.
The IMF finds itself in a classic Scylla and Charybdis situation needing to choose between the lesser of two evils,” he said. “Refinancing Argentine exposure through a conditionality-lite new program could be seen as inconsistent with the Fund’s core policy that programs should address the underlying causes of the member country’s fiscal problems.”

Allowing its largest-ever loan to slip into default is more than just an embarrassment for the IMF; it could erode political support for future capital increases,” he added.

THE DEAL

Signed in the late hours of Sunday night, despite protestors in the streets of Buenos Aires earlier in the month, the deal heralds a new era for both Argentina and the IMF, for whom the debt has been a constant burden. For Argentina, the almost unassailable debt has caused havoc to its potential for fiscal rebalancing and for the IMF the outstanding loan takes up more than half of its balance sheet.

The head of fixed income at a corporate finance company in Buenos Aires agreed that the deal was kicking the can down the road for both Argentina and the IMF.

The deal fails to focus on establishing macroeconomic equilibrium as a priority, it prioritizes avoiding unnecessary defaults, which would not be good for either party,” he said.

The program avoids the downside risk that alternatively not engaging in basic macro adjustments would entail. Argentina has very close to zero liquid international reserves, but the agreement does not necessarily provide an exchange rate and monetary framework to meaningfully reduce inflation expectations, it does not provide a reform agenda to improve growth expectations,” he continued.

What it does do is buy time to allow Argentina to gradually reduce some of its fiscal excesses, and in that process will also make an effort to reduce the proportion of reliance on monetary financing of that deficit.”

Details of the agreement were initially reached in January, as Argentine president Alberto Fernández looked to avoid a currency meltdown and save the country’s faltering economy. Following years of economic turmoil, things had been looking like they were set to improve prior to the Covid-19 pandemic but took a significant turn for the worse under the stress of such an unprecedented event.

The deal will see the country work to shrink its primary fiscal deficit, with president Fernández suggesting the shift will take the deficit from 2.5% to 0.9% without the need for austerity measures.

The statement released today suggested that the deal would be supported by a 30-month EFF Arrangement. “The EFF, with requested access of SDR 31.914 billion (equivalent to $45 billion or 1000 percent of quota), aims to provide Argentina with balance of payments and budget support to address the country’s most pressing economic challenges and to enhance the prospects of all Argentines by implementing measures designed to promote growth and protect essential social programs,” it read.

Another source agreed that the deal only goes so far. Although this agreement prevents Argentina from going into default in March and, therefore, entering into a deep crisis, it does not solve Argentina’s underlying problems, said Aldo Abram, economist and director at the Fundación Libertad y Progreso. “It only gives the government time to do it; but expectations that they will do it are low. This will become clear when, after the signing of the agreement, a moderate drop in country risk is observed.”

According to Abram, this shouldn’t be surprising; since the government itself has said that they do not believe that these problems exist and, therefore, there is no need to advance in structural reforms. The prices of the bonds that, in 2020, were delivered to creditors in exchange for those that went into default, will continue to reflect that with a similar haircut in the next three or four years.

Unfortunately, the chances of this happening are high, if Argentina does not cure the terminal illnesses that its economy has, not only is sustained growth impossible, but we should expect another crisis,” he said.

The agreement is still subject to approval by the IMF’s executive board, which has been briefed informally on the elements of the proposed program.

DEJÁ VU ALL OVER AGAIN

Back in May 2020, the Argentine Republic was mere days away from defaulting on its almost inconceivably large sovereign debt for a ninth time, when negotiations between the country and existing creditors appeared no closer to conclusion.

During a webcast at the time, economic minister Martin Guzman said: “There is a big chance that the deadline is extended so we can eventually make the amendments that are necessary in order to achieve a sustainable deal with our creditors”. With just days until the deadline for default, it was a close call, and this time has been no different.

The country missed its payment on April 22 2020, setting a deadline of May 22 to complete negotiations with creditors before the end of the grace period, or else default. An offer was made of a further three-year grace period on payments and an undisclosed haircut, but most were sceptical, and there was not enough acceptance of the exchange offer to allow for a deal.

Talking to IFLR at the time, Buchheit, said that the situation needed to change signicantly before any progress could be made. In 2020, the government of then newly-elected president Alberto Fernández promised that an updated deal to restructure the country’s $100 billion debt would be on the table by the end of March – of which around $70 billion is owed to foreign debtors. While the offer was made, an agreement between the government and creditors was not reached.

The economy has completely made it worse,” Gabriel Torres, lead sovereign analyst for Argentina at Moody’s, who downgraded the country from CAA2 to CA and changed its outlook to negative at the beginning of April 2020.

They are now under more financial stress than even before, just as they need it,” he added. “We were not expecting the economy to grow. 2018 and 2019 were very bad years. But you could – if not for the pandemic – have expected some kind of growth that would have put it in a better position to offer something more. But this adds yet one more burden to the already burdened economy.”

As this latest deal with the IMF looks set to close, Argentina will be hopeful that it can finally look ahead to a brighter future.

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