What Happened
In a Feb. 19 public statement, the International Monetary Fund (IMF) said Argentina's debt was unsustainable, and that the primary surplus required to reduce its public debt was neither "economically nor politically feasible." In its June 2019 review of Argentina's aid program, the IMF noted a primary fiscal surplus of 3.5 percent was needed to stabilize the country's debt as a percentage of gross domestic product (GDP). The IMF also projected a gross external financing requirement of more than $90 billion for Argentina in 2020. But a closer reading of the IMF's quantitative projections behind those previous assessments revealed that a heroic fiscal adjustment should have been undertaken to substantially mitigate Argentina's debt, which the IMF said has since "deteriorated decidedly." As a result, the IMF called on private bondholders to enter “collaborative” negotiations with the Argentine government to restructure its debt.
Why It Matters
By recognizing the country's economic reality, the IMF is setting the stage for what could eventually be a large-scale debt restructuring, provided Argentina also takes actions to stem the fiscal deficits driving its debt problem. Creditors have likely been preparing for major losses in their Argentine investments, given that the country's debt was already priced at distress levels in secondary markets. But the IMF's new sobering assessment announcement has likely put Argentina's bondholders on official notice that a full-scale reorganization of debt is coming — and with it, a substantial cut to their investments.
The Argentine government will likely weaponize the IMF's new assessment to justify a significant restructuring of its debt and make unreasonable demands of its foreign creditors. Earlier this week, Vice President Cristina Fernandez de Kirchner called on the IMF to write-off part of its outstanding $45 billion in loans to the country. The IMF, however, promptly rejected this proposal. Convincing creditors that recognizing losses is a worthwhile endeavor would require a credible and comprehensive economic program that shows Argentina is on a realistic path to debt sustainability. Without that assurance, the country's foreign creditors are thus unlikely to accept such a restructuring. Unlike in a domestic bankruptcy proceeding, the IMF cannot order a "standstill," nor can it force terms on creditors.
Moreover, the IMF statement didn't discuss the amount of fiscal retrenchment that such an adjustment would require from Argentina. As such, it remains to be seen just how much of the burden will fall on creditors, which could further stymie the process. The IMF statement could also embolden holdouts among bondholders that refuse to participate in a debt exchange and demand full payment, as with holdouts from the 2005 bond swap, precluding a critical mass of acceptance under collective action clauses in bond contracts.
Background
Argentina has defaulted on its external debt payments eight times in its history. Still, after defaulting in 2002, engaging in a controversial bond exchange in 2005, and not paying recalcitrant creditors until 2016, Argentina again borrowed heavily in global financial markets. As a result, Buenos Aires again began to struggle to make payments in 2018, prompting the IMF to support a lending program. In accordance with the IMF program, Argentina's previous government began to implement a small degree of fiscal discipline. But the unpopular cuts to public spending ultimately resulted in the election of a populist government in late 2019.
