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Argentina’s plan to climb out of its debt sinkhole

. Feb 05, 2020
Argentina plan to climb from its debt Anti-IMF protest in Buenos Aires. Photo: Patricio Murphy/Shutterstock

Few letters make Latin Americans cringe more than I-M-F: the International Monetary Fund. Though it operates as a life raft for countries in massive debt that have lost access to private capital, IMF loans come with many strings attached, with borrowing countries forced into measures to reduce spending and increase revenue—in other words, austerity and raised taxes. Sometimes, as was the case of Argentina, this equation does not balance itself out.

Argentina’s loan from the IMF—the biggest ever recorded by the organization at USD 57 billion—failed to deliver on two key goals: curbing inflation and regaining access to private capital. Facing payments of more than USD 40 billion in 2020, Argentina is on the cusp of default and seemingly has no other option besides debt reprofiling.

</p> <p>According to the United Nations Economic Commission to Latin America and the Caribbean (CEPAL), Argentina tops the debt ranking in the region. Until 2018, the most recent data, the country’s debt-to-GDP ratio reached 77.4 percent. And that figure doesn&#8217;t even include this year&#8217;s installments to the IMF—if it did, Argentina&#8217;s debt would take up a stunning 97.7 percent of its GDP.</p> <h2>Light at the end of the tunnel?</h2> <p>After <a href="https://brazilian.report/latin-america/2019/10/28/argentina-elections-alberto-fernandez-populist/">winning the presidential race</a> in October, the newly-inaugurated head of state Alberto Fernández said his U.S. counterpart Donald Trump assured him that the White House “instructed the IMF to work with [Argentina] to resolve the [debt] problem.” However, for any plan to get Argentina out of its debt hole to prosper, &#8220;the country needs to present a detailed plan,&#8221; says <a href="https://twitter.com/benjamingedan/status/1224347352821092352">Benjamin Gedan</a>, senior advisor at The Wilson Center&#8217;s Latin American Program.</p> <p>That plan may begin to take shape after lawmakers recently approved the president&#8217;s plan for a massive debt restructuring of bonds issued in foreign currency that must be negotiated with creditors. In February, Argentina&#8217;s Economy Minister Martín Guzmán will meet with IMF head Kristalina Georgieva—and Mr. Fernández will visit five European countries in search of political support for his bid.</p> <h2>What Argentina&#8217;s debt-renegotiation bill states</h2> <p>Generally speaking, the legislation pushed through Argentina&#8217;s Congress last month gives more autonomy to the government to renegotiate terms and conditions for short-term payments of internal and external debt. According to Argentinian economist Gustavo Grinspun, the new law still leaves doubts about its effects, but it is an important step “towards a legal ordering for the debt structuring exercise.”</p> <p>The plan also allows the Economy Ministry to extend its jurisdiction to negotiate deadlines for debt repayment. The government asks Congress to authorize it to act more bluntly on the refinancing plan. The bill, which consists of seven articles, also calls for restructured bonds to remain under foreign legislation, as provided for in the original contracts.</p> <p>“Well-established and precise legal structure can substitute a lack of transparency in the application of debt containment measures,” Mr. Grinspun told <strong>The Brazilian Report</strong>. But despite an important legal framework, the expert believes the bill is contradictory, as it is a local measure for a foreign issue.&nbsp;</p> <p>“It’s an Argentinian law, approved by the national legislature and, therefore, does not apply directly to foreign creditors, but to the Argentinian state as a debtor. A law that applies nationally, but attempts to follow foreign standards, with external debt as the main objective,” he adds.</p> <p>Mr. Fernández once said that Argentina will honor its debt, but that it needs more time to deal with it.</p> <h2>What could complicate Argentina</h2> <p>Axel Kicillof, governor of the province of Buenos Aires—the richest and most-populated in Argentina—has surrendered to his creditors. After pushing negotiations over delaying payments to their limit by simply threatening to default on their commitments—which would cut off any source of foreign financing for some time—Mr. Kicillof caved and will now repay the province&#8217;s debts.</p> <p>He is set to make a USD 277-million payment on a 2021 bond, adding that the province would use recently received resources from the local market to make the principal and interest payments on February 5, the end of a 10-day grace period.</p> <p>The move avoids a default that would trigger unpredictable consequences but could be negative for the federal government.&nbsp;</p> <p>Creditors learned that putting their foot down can deliver results.

 
Lucas Berti

Lucas Berti covers international affairs—specializing Latin American politics and markets. He has been published by Opera Mundi, Revista VIP, and The Intercept Brasil, among others.

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