Argentine policymakers are landing in Washington this week with its record-breaking $57bn IMF programme in grave difficulties. But it is Alberto Fernández — almost certain to be president after the October 26 elections — whose attitude to the fund will decide whether Argentina takes the easy or hard way to an inevitable fiscal squeeze.
Finance minister Hernán Lacunza and central bank governor Guido Sandleris will meet new IMF managing director Kristalina Georgieva tomorrow, but any creditors will remain mired deep in uncertainty until the new government is in place.
Doubts about the future of the IMF programme and economic policy under Fernández, who has former president Cristina Fernández as his vice-presidential candidate, triggered a sharp sell-off in the peso and sent Argentina’s debt levels soaring.
Incumbent Presid-ent Mauricio Macri increased welfare payments, cut certain taxes, implemented capital controls and announced a debt restructuring — dashing hopes of making fiscal targets. The IMF then suspended disbursements on Argentina’s programme.
“On day one, Fernández should engage with the Fund,” Graham Stock, head of EM sovereign research at BlueBay Asset Management, told GlobalMarkets. “Any future disbursements from the IMF will be conditional on a structural reform agenda that will allow Argentina to move from a stand-by agreement to an extended fund facility.”
If Argentina’s new government cannot come to an agreement on an economic programme, the government would find itself with no access to external financing and would thus be forced into the kind of fiscal adjustment that it has been resisting.
Therefore, whether the new government collaborates with the IMF and agrees to reforms, or takes a hardline stance with the fund, an adjustment is imminent.
“It would make sense to do it alongside the IMF because they unlock the door to external financing,” says Stock. “The IMF can afford to be patient because the alternative [of not agreeing on a new programme] is worse for the government than it is for the IMF.”
Monica de Bolle, a senior fellow at the Peterson Institute for International Economics and a former IMF staffer, said that “without the Fund, Argentina faces default very early in [Fernández’s] presidency”.
‘Quick’ process — no haircuts
As bondholders prepare for a restructuring, Fernández has proposed a “quick” process, without principal haircuts, similar to how Uruguay carried out a debt restructuring in 2003. But investors warn that this will not be an easy process.
“There is a lot of short-term debt to be addressed, so really it is a matter of what will be the nature of the restructuring,” says Ray Zucaro, chief investment officer at RVX Asset Management in Miami. “The idea of a Uruguay-style re-profiling of the debt is nice but the economy, debt stock and creditor base is far larger and more complicated than Uruguay was, and implementation will be complicated.”
Stock at BlueBay said a re-profiling would be possible but warned that the market needed to be “very careful when talking about a Uruguay-style restructuring”. “Fernández’s camp is using this term but is only referring to one side of the equation: the re-profiling of maturities,” he said.
Uruguay’s restructuring was paired with a “very important fiscal adjustment” that Fernández does not appear willing to discuss ahead of elections, he said. “Post-programme, the discussion will absolutely have to move to structural reforms.”
But the mess has left some market participants seriously questioning the IMF programme, which was first put in place in June 2018 to counter a run on the peso, lack of access to foreign capital and a surge in inflation. “From the Fund’s perspective, it is a complete failure of the intended policy and reform effort,” said de Bolle. “It was always going to be a really risky programme, with a very, very high chance of failure.”