As the March deadline looms for Argentina to restructure billions of dollars in IMF debt, the country again risks being cut off by international financial institutions and withdrawing into isolation as the Left Peronist government is trying to find support for a new deal.
Martín Guzmán, Argentina’s finance minister and IMF chief negotiator, told provincial governors in Buenos Aires last week that “there was no deal yet” with the Washington-based lender, after 18 months of inconclusive talks.
Guzmán’s proposal presented to governors would aim for a balanced budget by 2027, resisting IMF calls for faster cuts in spending and subsidies. He also proposed to continue using central bank money printing to finance the deficit for at least five years, which will fuel inflation.
Guzmán said the main point of contention with the fund had been on the so-called “budget 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 of the Argentine authorities on the need to cut spending to reduce the deficit,” said Fernando Sedano, economist at Morgan Stanley, while illustrating the “large gap” that must be closed to “meet the targets. “.
While talks are underway with the IMF, the government must also find a way to convince a cranky new congress to approve its restructuring plan of some $ 40 billion owed to the international lender, as part of a plan to record rescue of $ 57 billion in 2018.
It was even difficult to bring in influential opposition politicians to discuss the issue. Three provincial governors and the mayor of Buenos Aires declined the government’s invitation to talk about debt refinancing last week, accusing President Alberto Fernández of calling the meeting as a photo op with his finance minister.
Argentina is due to pay the IMF $ 2.8 billion at the end of March, and analysts see no choice but to strike a new deal with the lender because the government does not have the international reserves to make the payment. Net foreign exchange reserves fell below $ 6.9 billion, according to Morgan Stanley, of which only $ 400 million is liquid.
Most economists agree that the arrears with the fund would be disastrous. This would cut off the credit Argentina receives from other multilateral lenders and seriously undermine the IMF’s reputation as a responsible creditor.
While private investors are already avoiding Argentina after a brief default in 2020, any confrontation would also leave the country – a G20 member and a major grain exporter, and which has been bailed out 21 times in six decades – an international financial outcast. .
Guzmán, who has always argued that the deal finances capital flight and bail out private creditors, attacked the IMF again on Wednesday, saying the fund was more focused on restoring investor confidence than fixing it. real economy.
“Of course, we are working so that there is more confidence in the markets, but the first thing above all is to improve the situation of the real economy,” he said.
Government bonds maturing in 2041 fell to just under 33 cents on the dollar in their worst drop in a week since September after Guzmán’s presentation suggested that a deal by March would fail. was not imminent. A day later, the central bank raised the benchmark interest rate for the first time in a year by two percentage points to 40 percent, which has been widely interpreted as a gesture to the fund.
Even though the Fernández administration can iron out problems with the fund, any deal must be ratified by Congress, where the opposition made big gains in last year’s elections.
Finding consensus has been complex, not least because the Peronists have repeatedly attacked the opposition for signing the initial agreement with the IMF, and the bloc is reluctant to share the political costs of its renegotiation.
In a demonstration of divisions between 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 7 pm debate.
The Fernández administration also faces hard-line supporters within its own ranks who are resisting its proposals to cut government spending and subsidies. They believe the original deal with the IMF broke the fund’s rules – the IMF denies it – and that the lender should give Argentina favorable treatment in any new deal.
Economists see the time for the accounts approaching. For Alberto Ramos, chief economist for Latin America at Goldman Sachs, there is now “a significant probability” that Argentina is in arrears with the fund.
Persistent tensions within the Fernández administration over the appropriate fiscal stance suggest “very limited scope” for structural fiscal adjustment and reforms that form the basis of a credible IMF program, Ramos added.
“The [finance] the minister does not know what he wants, what are his targets? said Carlos Melconian, former director of the Bank of Argentina. With “so many coalitions” in Congress, he added, the possibility of a united front and a credible plan in the next two months has dried up.
The government’s presentation on Wednesday reflected more “the limits imposed by its own internal front, than those set by the authorities of the international organization,” wrote columnist and professor Carlos Pagni in the newspaper La Nación.
Even though the government and the IMF want to reach an agreement, there are still “significant disagreements in terms of economic projections,” according to Daniel Kerner of Eurasia Group, a political risk consultancy. IMF officials called in December for an “appropriate” monetary policy, with commitments to reduce spending, the deficit and inflation, which exceeds 50% per year.
Buenos Aires-based economist Fernando Marull pointed out small signs of progress in December. Argentina contributed $ 1.9 billion to the fund on December 21, in addition to payments from last year. “It would be very costly for the government, having made these payments, if its decision were to default,” he said.
As the mood between the Peronists and the opposition turns sour, the economy suffers.
The central bank’s balance sheet deteriorated markedly. Net reserves have fallen below $ 7 billion and more than $ 1 billion have left the private banking system in the past two months alone, according to official and market data.
At least 70% of the deficit in 2021 was financed by money printing, according to estimates, which the IMF is asking the country to reduce. “The government is running out of time and reserves,” said Ignacio Labaqui, senior analyst at Medley Global Advisor in Buenos Aires.