Argentina Asks for New IMF Plan to Replace $57 Billion Deal

(Bloomberg) -- Argentina’s government formally requested negotiations to begin with the International Monetary Fund on a new program to replace a record $57 billion agreement from 2018 which failed to lift its crisis-prone economy.

Officials called for the beginning of consultations ahead of a program that will address $44 billion in payments owed to the multilateral lender as part of its previous arrangement that was never fully disbursed, according to a letter sent to IMF Managing Director Kristalina Georgieva and posted on Twitter on Wednesday. The government praised the IMF for a “constructive relationship” so far and said it wants the new program to avoid the pitfalls of the past one.

The negotiations will mark another chapter in a difficult relationship. The new agreement will be the country’s 22nd with the IMF, and has often marked the prelude to deeper economic crisis. The Fund is historically villainized in Argentina and the most recent deal only fueled the fire.

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“It is essential that an accurate assessment of Argentina’s challenges be made, and we look forward to exchanging views with your staff on these issues,” according to the letter, signed by Economy Minister Martin Guzman and Central Bank Chief Miguel Pesce.

The move also comes as Argentina nears the final stage on a $65 billion debt restructuring with private bondholders after more than six months of negotiations. Creditors have until August 28 to accept an offer valued at an average 55 cents on the dollar. That deal paves the way for the government to kick off talks with the IMF.

“This is a welcome step in the right direction, but it’s only the beginning of a negotiation that could prove to be challenging and long to finalize,” said Pilar Tavella, economist for Argentina at Barclays Plc. “The government will seek to limit conditions on economic policy in the midst of this year’s deep recession.”

The government aims to reach an agreement before April, so that it has enough time to renegotiate a $2 billion payment owed to the Paris Club that cannot be addressed without an existing IMF plan, Bloomberg News reported earlier this month.

In a statement Wednesday, Georgieva acknowledged that the IMF had received the government request and said she spoke to Fernandez about “the need to reinvigorate the economy” among other topics.

“We look forward to deepening our dialogue on how we can best support the government’s efforts to manage the impact of the pandemic, jumpstart growth and job creation, and reduce poverty and unemployment,” while stabilizing the economy, she said.

Economic Plan

Argentina’s upcoming IMF talks will likely require that President Alberto Fernandez outline an economic plan explicitly. The economy is under pressure amid 43% annual inflation, the third straight year of recession and double-digit unemployment. With no access to credit, the government has printed money during the pandemic to finance stimulus measures, raising concerns that inflation will heat up again.

A key topic of the IMF’s discussions on Argentina will likely center around currency and capital controls implemented by previous administration and maintained by Fernandez. Argentines can only exchange pesos for $200 a month and must pay a 30% tax on that and any other foreign currency purchases. The unofficial exchange rate, now at 137 pesos per dollar, far exceeds the spot rate of 74 per dollar.

The government’s fiscal plans will also be part of the discussion. The fiscal deficit totaled more than $3.4 billion in every month in the second quarter, up from just $62 million in January. The Fernandez administration campaigned against austerity measures and faces mid-term elections next year.

“We are determined to restart the process of pursuing a consistent fiscal path once the effects of the pandemic disappear, by reducing the primary fiscal deficit in a way that is both compatible with public debt sustainability and economic recovery,” the policy makers wrote in the letter, which added the government would be transparent with negotiators.

Heavy History

Facing a peso rout in 2018, Mauricio Macri’s pro-market government received a record bailout from the IMF. As part of the $57 billion loan -- of which $44 billion was disbursed -- the government cut public spending. Disbursements scheduled for late 2019 were canceled amid political and economic uncertainty.

The three-year deal, known as a stand-by agreement, concentrated capital payments between 2021 and 2023. The new program will seek to address the upcoming payments, according to the letter. Defaulting on payments is not allowed under IMF guidelines.

Beyond the latest program, the IMF’s history in Argentina is deeply complicated. In 2001, the Fund decided not to continue disbursing money to Argentina, and soon after the government defaulted on $95 billion in debt. And in 2013, the IMF sanctioned the government under Cristina Fernandez de Kirchner’s government for publishing inaccurate economic data. Fernandez de Kirchner, now vice president, floated the idea of not paying the IMF earlier this year.

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