Argentina is set to strike another dysfunctional stand-by arrangement with the International Monetary Fund – its 22nd SBA since joining the IMF in 1956. Although the details have yet to be worked out, we already know that it will be dysfunctional, as there will be no initial restructuring of the country’s public debt.
Argentina’s public debt is unsustainable. Rather than waste another two or three years before falling into the next disorderly – and economically and socially destructive – sovereign default, Argentina’s debt should undergo an immediate and orderly restructuring.
The $40 billion that Argentina owes the IMF for its (failed) 21st SBA should be included in this process. And the IMF’s preferred creditor status, which gives it (and other multilateral development banks) priority over other lenders for repayment when a borrower experiences financial difficulties, should be suspended.
After all, the debt is on Argentina’s books because the IMF decided not to require a major sovereign debt restructuring before accepting the 21st SBA. This agreement was initiated in June 2018, with the government of former Argentinian President Mauricio Macri.
In October 2018, the $50 billion loan facility was increased to $57 billion, but the following August the SBA was suspended, with $44.5 billion disbursed – the largest disbursement in history of the IMF. The inevitable sovereign default (the ninth since Argentina’s independence) occurred in May 2020.
In the absence of capital controls, the main “contribution” of IMF loans has been to allow capital flight. Due to its size, the 21st SBA had been subject to the IMF’s revised Exceptional Access Framework, which requires borrowers to meet four “Exceptional Access Criteria” (EACs).
The country must have large balance of payments needs, sustainable public debt, prospects of regaining access to private capital markets, and the institutional and political capacity and commitment to implement a sustained program by the IMF. It should have been clear that Argentina only met one of the EACs (major balance of payments needs) in 2018. But the IMF Executive Board approved the 21st SBA anyway.
With the stock of IMF loans remaining well above normal borrowing limits, the 22nd SBA is also expected to be subject to the exceptional access framework. Once again, EAC1 – exceptional pressures on the balance of payments – has clearly been satisfied. But the framework also requires EAC2 – that there is a “high probability” that the borrower’s public debt will be sustainable over the medium term.
If debt proves unsustainable, exceptional access should only be granted if financing from other sources is sufficient to restore debt sustainability with a high probability.
If the debt is considered sustainable but not with a high probability, exceptional access may be justified if financing from other sources improves debt sustainability and sufficiently strengthens IMF resource safeguards.
In mid-2018, the IMF rated Argentina’s public debt as sustainable but not with high probability, even though the debt was clearly unsustainable and should have been restructured as a precondition for IMF financing.
Argentina had also failed EAC3. It had no prospect of gaining or regaining sufficient access to private capital markets in 2018, and it still does not today. This leaves EAC4.
When the Macri government requested IMF assistance in May 2018, it had been in office for more than two and a half years and clearly lacked the institutional or political capacity to implement the necessary macroeconomic adjustment and structural reforms, let alone the implementation of social protection and gender equality policies. who were part of the program.
Likewise, the current government, led by President Alberto Fernández, has been in place for two years and has shown no signs of being able to implement the necessary reforms. Of all these issues, public debt sustainability remains Argentina’s Achilles’ heel.
Gross public debt fell from 57% of GDP in 2017 to 85.2% during the negotiation of the 21st SBA in 2018. It then fell to 88.7% during the suspension of the SBA in 2019, and to 102, 8% when default occurred in 2020. The debt ratio is now estimated to have reached 107% at the end of 2021 – a much worse starting point for the 22nd SBA than for the calamitous 21st SBA.
Additionally, the federal primary budget deficit (which excludes interest payments) was 3.8% of GDP in 2017, and the 2021 figure was only slightly better, at 3%. There is no reason to be optimistic about foreign and domestic drivers of economic growth over the next few years.
The external financial environment is set to deteriorate as the US Federal Reserve and other major central banks raise policy rates and reduce and reverse balance sheet expansion.
The slowdown in global growth will weigh on commodity prices and export earnings. Monetary financing by Argentina’s central bank is expected to fall from 4.6% of GDP in 2021 to 1% of GDP in 2022, and to “near zero” in 2024.
The idea that the markets will fill the resulting funding gap seems outlandish. Real central bank interest rates are expected to turn positive in 2022, in line with policies to fight inflation (which is currently above 50% in Argentina) and support the external value of the currency (the value of the peso on the parallel foreign exchange market is half the official rate). But it is also likely to have a negative impact on GDP growth. Argentina’s debt burden is therefore unsustainable.
Instead of allowing the proposed 22nd SBA to proceed, Argentina should be required to implement a sweeping public debt restructuring that would reduce gross public debt from over 100% of GDP to no more than 60%. And the IMF should be subject to the same haircut as other creditors.
The IMF should pay the price for its flagrant failures in assessing the EAC in 2018. Fortunately, errors of this magnitude are rare. The only comparable misjudgment was the Fund’s $30 billion loan to the Greek government in 2010 (the largest IMF loan ever at the time), when it was clear that Greece was headed for a sovereign default, which occurred in 2012. The IMF hid behind its preferred creditor status and avoided a haircut on this occasion. You don’t have to do it this time.
Par Willem H. Buiter
Assistant Professor of International and Public Affairs at Columbia University