An Argentinian haircut for the IMF
Published: 02:02 PM,Feb 19,2022 | EDITED : 06:02 PM,Feb 19,2022
Argentina is about to enter another dysfunctional stand-by agreement with the International Monetary Fund — its 22nd SBA since it joined the IMF in 1956. While the details have not yet been settled, we already know that it will be dysfunctional, because there will be no up-front restructuring of the country’s public debt.
Argentina’s public debt is unsustainable. Rather than wasting another two or three years before stumbling into the next disorderly — and economically and socially destructive — sovereign default, Argentinian debt should undergo an immediate, orderly restructuring.
The $40 billion that Argentina owes the IMF from its (failed) 21st SBA should be included in that 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 stress, should be suspended.
After all, the debt is on Argentina’s books because the IMF decided not to require a significant sovereign debt restructuring before agreeing to the 21st SBA. That agreement was initiated in June 2018, with the government of former Argentine president Mauricio Macri
By October 2018, the $50 billion lending facility had been increased to $57 billion, but by the following August, the SBA had been suspended, with $44.5 billion paid out — the largest disbursement in the IMF’s history. The inevitable sovereign default (Argentina’s ninth since independence) came in May 2020. In the absence of capital controls, the main “contribution” from IMF lending was that it enabled capital flight.
Because of its size, the 21st SBA had been subjected to the IMF’s revised Exceptional Access Framework, which requires that borrowers meet four “exceptional access criteria” (EACs).
The country must have large balance-of-payments needs, sustainable public debt, prospects for regaining access to private capital markets, and the institutional and political capacity and commitment to implement an IMF-supported programme.
It should have been clear that Argentina met only one of the EACs (large balance-of-payment needs) in 2018. But the IMF’s Executive Board approved the 21st SBA anyway.
With the stock of IMF lending remaining well above normal borrowing limits, the 22nd SBA should also be subject to the Exceptional Access Framework. Once again, EAC1 — exceptional balance-of-payment pressures — has clearly been met.
But the framework also requires EAC2 — that there be a “high probability” that the borrower’s public debt is sustainable in the medium-term.
If the debt is found to be unsustainable, exceptional access should be granted only 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 can be justified if financing from other sources improves debt sustainability and sufficiently enhances the safeguards for IMF resources.
In mid-2018, the IMF characterised Argentina’s public debt as sustainable but not with high probability, even though the debt was clearly unsustainable and ought to have been restructured as a precondition for IMF funding. Nor had Argentina satisfied EAC3. It had no prospect of gaining or regaining sufficient access to private capital markets in 2018, and it still doesn’t today.
That leaves EAC4. When Macri’s government applied for IMF support in May 2018, it had been in office for more than 2.5 years, and clearly lacked the institutional or political capacity to deliver the required macroeconomic adjustment and structural reforms, let alone implement the social-protection and gender policies that were included in the programme.
Similarly, the current government, under President Alberto Fernández, has been in office for two years and has shown no sign of being able to implement the necessary reforms.
Of all these issues, public-debt sustainability remains Argentina’s Achilles heel. General government gross debt went from 57 per cent of GDP in 2017 to 85.2 per cent when the 21st SBA was negotiated in 2018. It then rose to 88.7 per cent when the SBA was suspended in 2019, and to 102.8 per cent when the default came in 2020.
© Project Syndicate, 2022
Argentina’s public debt is unsustainable. Rather than wasting another two or three years before stumbling into the next disorderly — and economically and socially destructive — sovereign default, Argentinian debt should undergo an immediate, orderly restructuring.
The $40 billion that Argentina owes the IMF from its (failed) 21st SBA should be included in that 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 stress, should be suspended.
After all, the debt is on Argentina’s books because the IMF decided not to require a significant sovereign debt restructuring before agreeing to the 21st SBA. That agreement was initiated in June 2018, with the government of former Argentine president Mauricio Macri
By October 2018, the $50 billion lending facility had been increased to $57 billion, but by the following August, the SBA had been suspended, with $44.5 billion paid out — the largest disbursement in the IMF’s history. The inevitable sovereign default (Argentina’s ninth since independence) came in May 2020. In the absence of capital controls, the main “contribution” from IMF lending was that it enabled capital flight.
Because of its size, the 21st SBA had been subjected to the IMF’s revised Exceptional Access Framework, which requires that borrowers meet four “exceptional access criteria” (EACs).
The country must have large balance-of-payments needs, sustainable public debt, prospects for regaining access to private capital markets, and the institutional and political capacity and commitment to implement an IMF-supported programme.
It should have been clear that Argentina met only one of the EACs (large balance-of-payment needs) in 2018. But the IMF’s Executive Board approved the 21st SBA anyway.
With the stock of IMF lending remaining well above normal borrowing limits, the 22nd SBA should also be subject to the Exceptional Access Framework. Once again, EAC1 — exceptional balance-of-payment pressures — has clearly been met.
But the framework also requires EAC2 — that there be a “high probability” that the borrower’s public debt is sustainable in the medium-term.
If the debt is found to be unsustainable, exceptional access should be granted only 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 can be justified if financing from other sources improves debt sustainability and sufficiently enhances the safeguards for IMF resources.
In mid-2018, the IMF characterised Argentina’s public debt as sustainable but not with high probability, even though the debt was clearly unsustainable and ought to have been restructured as a precondition for IMF funding. Nor had Argentina satisfied EAC3. It had no prospect of gaining or regaining sufficient access to private capital markets in 2018, and it still doesn’t today.
That leaves EAC4. When Macri’s government applied for IMF support in May 2018, it had been in office for more than 2.5 years, and clearly lacked the institutional or political capacity to deliver the required macroeconomic adjustment and structural reforms, let alone implement the social-protection and gender policies that were included in the programme.
Similarly, the current government, under President Alberto Fernández, has been in office for two years and has shown no sign of being able to implement the necessary reforms.
Of all these issues, public-debt sustainability remains Argentina’s Achilles heel. General government gross debt went from 57 per cent of GDP in 2017 to 85.2 per cent when the 21st SBA was negotiated in 2018. It then rose to 88.7 per cent when the SBA was suspended in 2019, and to 102.8 per cent when the default came in 2020.
© Project Syndicate, 2022