The Argentinian government is unable to repay an outstanding $44 billion debt to the International Monetary Fund and is struggling to reach an agreement with the Washington-based creditor on the repayment of the controversial bailout plan granted to the last administration.
While Argentinian officials insist the Fund cuts the higher interest rates currently facing the country, and to allow a debt restructure, the IMF wants Argentina to drastically reduce its fiscal deficit over the next years and come up with a plan to repay the debt. Negotiations started more than a year ago and have reached a dead end as neither side is willing to compromise. Despite frequent meetings, little progress is made on key points and with next March’s deadline looming, Argentina could default to the international lender of last resort if no deal is made.
Just recently, Argentine president Alberto Fernandez heightened tensions. He declared that Argentina “was not going to kneel down”, reaffirming his promise to strike a deal favourable to the country and appealing to the broad Argentine distrust of the IMF. Nevertheless, the Fund appears reluctant to make exceptions for the South American giant, with officials pointing out how usual it is for the nation to disappoint creditors.
Right now Argentina faces a deep economic crisis caused by the previous unresolved macroeconomic issues that the bailout failed to solve, as well as the devastating effects of the pandemic. Hence, the Fernandez administration claims it needs a longer time frame to complete the repayment of the full debt and wants the instalment plan to be postponed in the short-term to avoid risking the economy’s ongoing recovery.
With a debt-to-GDP ratio already over 100%, Argentina is severely indebted with a number of lenders. Although negotiations with other creditors over debt restructure were successful, only talks with the IMF reached an impasse. Defaulting to the IMF would deny Argentina access to financial markets, as its credit rating degrades to junk and it gets expelled from the Fund. This would lead to an accelerated deterioration of the public finances and induce the country into an unprecedented crisis, a big statement considering its historical record of economic woes.
However, the bailout was controversial from its genesis. Back in 2018, former president Mauricio Macri requested assistance from the IMF after the South American nation was afflicted by a currency crisis, an investor run and double-digits inflation. A plan was drawn by the IMF and the Argentinian government committed to slash public spending, raise already elevated interest rates to curb ballooning inflation and allow its currency (the peso) to float freely. Thus, a big austerity plan was on track to reduce the fiscal deficit to zero by 2019, a specific IMF request. Thereby, Argentina received the biggest loan package ever granted by the Fund, amounting a whopping $57 billion.
The IMF had already disbursed $44 billion when it interrupted the payments because Macri’s government did not meet agreed inflation targets. While Macri and IMF officials accuse each other for the country’s spiralling inflation, the volatility of the peso after it was allowed to float remains an agreed key factor.
The currency devaluated significantly, pushing up inflation which has fluctuated above 35% and has reached dangerous highs ever since. Similarly, unemployment reached double-digits and the poverty rate continues to rise above 30%. Although many of these problems were deep rooted in the Argentinian economy, they were exacerbated by the unsuccessful programme.
Subsequently, Macri was replaced by Alberto Fernandez who was determined on discussing the restructure of the debt as soon as he took over. It was impossible to meet the next scheduled repayment due in March 2022. On top of that, his administration increased government spending to deal with the Covid-19 crisis and imposed one of the region’s most restrictive social distancing measures, further worsening the economic situation and the ability to repay the debt.
This latest issue of Argentina’s troublesome affair with the IMF brings back memories of the 20 previous bailouts, including one prior default in 2001. The Fund never seemed to be able to solve Argentina’s, almost intrinsic, economic instability which is a fact of life for generations of Argentinians. Yet, we find them both once again racing together against the clock to avoid another disastrous outcome.