A collapse in Argentina’s peso currency this week and soaring borrowing costs have fuelled investors’ concern that Latin America’s third-largest economy is heading for another debt restructuring.
The International Monetary Fund’s next review of the country’s $57 billion lending program on Sept. 15 should provide a sign of whether Argentina’s lender of last resort now thinks the same.
Business-friendly incumbent President Mauricio Macri’s severe loss in Sunday’s primary election to his left-leaning Peronist rival Alberto Fernandez, two months before the presidential vote, prompted market jitters about a possible lurch back toward the interventionist policies that Macri had vowed to end.
“The IMF probably will request a restructuring. The question is when,” said Edward Glossop, Latin America economist for Capital Economics. “Given what the market has done this week, it’s hard to argue that Argentina’s debt is still sustainable.”
Restructurings are a traumatic subject for voters who remember the country’s 2001/2002 default, which punctuated an economic meltdown that tossed millions of middle-class Argentines into poverty. Subsequent mini-defaults kept the country locked out of global capital markets for years.
Against this backdrop, the peso lost 21 per cent of its value against the greenback in the first days of the week before finding support in the neighbourhood of 57 per dollar – making it significantly harder for Argentina, with its economy mired in recession, to pay its dollar debts.
In its previous review of Argentina in July, the IMF warned there were “elevated” risks to the program, with peso weakness and political uncertainty likely to feed on each other.
A spokesman for the IMF declined to comment for this story.
Macri took office in 2015 promising to bring an end to the cyclical crises that over the last 100 years turned one of the world’s strongest economies into a serial defaulter.
But he overestimated his ability to attract the foreign direct investment needed for sustainable economic growth and underestimated the effect his plan for cutting public utility subsidies would have on inflation, now roaring at 55 per cent.
Anger at the painful austerity measures was a driving factor in Macri’s drubbing in Sunday’s primary by Fernandez, who has teamed up with former free-spending populist President Cristina Fernandez de Kirchner as his running mate.
Argentina’s primary election is unusual. With major parties already having selected their candidates before the ballot, it functioned as a massive opinion poll on the Oct. 27 presidential election. Investors swiftly reassessed that a restructuring was far more likely and the markets started tumbling Monday morning.
Macri loosened his fiscal stance this week, promising to lower workers’ income taxes and levies on the sale of basic foods, increase welfare subsidies and other spending likely to pressure his deficit cutting effort under the IMF deal.
“A crunch point could be Sept. 15, when the next IMF loan tranche - about $5.4 billion – is due to be disbursed. The Fund could request a restructuring as a condition of this,” Glossop said.
In 2001, the IMF’s refusal to disburse funds to Argentina helped trigger the country’s default.
Despite the fact that Macri has blown out Argentina’s IMF-agreed fiscal targets, the IMF could surprise the market by granting additional relief funds.
“In general the Fund acts to avoid defaults. So if the IMF could put in an extra $5 billion or $10 billion it would not be much money, but it would help avoid a painful default,” said Gabriel Rubinstein, a Buenos Aires-based economics consultant.
Shamaila Khan, who manages portfolios exposed to Argentina as director of emerging market debt at AllianceBernstein in New York, said Argentine bonds were trading at 40 to 50 cents on the dollar. “The market is telling us that there is an extremely high probability of restructuring but not a very high recovery rate,” she said.
However, Khan added, “the risk reward looks attractive” because the market has factored in such a grim scenario.
Fernandez said this week that his plans, should he become Argentina’s leader, would not include restructuring debt.
Macri prided himself on getting the country out of default early in his term when he negotiated a settlement with holders who had not participated in Argentina’s earlier restructurings.
His government declined to comment for this story.
Claudio Loser, who headed the IMF’s Eastern Hemisphere department from 1994 to 2002, said the IMF would likely consider a postponement of Argentine bond maturities to give the country some financial breathing room.
“Whether they suggest the restructuring publicly, or in a closed session, I don’t know,” said Loser, now an economist with the Centennial Group consultancy in Washington.
Another crunch point could come in the second quarter of next year, when official data shows Argentina is scheduled to make $20 billion in debt repayments, up sharply from $5.6 billion in the first quarter.
Loser said that if there is a restructuring, it would likely focus on those payments bunched up in the April-June period.
“Before the second quarter arrives, there could be a postponement of those bond maturities,” he said.