Argentine lawyers are cautiously optimistic about whether the government's multi-billion debt restructuring with the International Monetary Fund (IMF) will help the country bounce back from years of inflation and recent economic setbacks, and expect fierce political debate before the debt package can be approved by Congress.
Argentina, Latin America’s third-largest economy, struck a deal last week to restructure US$45 million worth of debt with the IMF after the two sides’ senior officials reached a middle ground to extend the financial terms of the original loan deal.
Before it can take effect, the plan must be approved by both houses of the Argentine Congress. The government sent the debt agreement to Congress on 5 March. The House of Representatives (lower house) is expected to vote today.
Diego Serrano Redonnet, partner at Pérez Alati, Grondona, Benites & Arntsen (PAGBAM), says the plan is necessary for Argentina not to default with IMF, a scenario that would be extremely harmful to the local economy still recovering from the impact of the pandemic. “In my view, this IMF agreement is good for Argentina as it requires our country to take some steps towards strengthening its macroeconomic stability and achieving sustainable growth,” says Serrano.
However, some are more critical. “This is a typical case of too little, too late,” says Marcelo Etchebarne, managing partner of DLA Piper (Argentina), who believes that no miraculous improvement would come from the deal until Argentina shows it can get its act together. “The sacrifices Argentine needs to make now are far greater than the ones that would have been required if the IMF restructuring would have been done at the beginning of the pandemic,” he says.
Thousands of people marched through the streets of Buenos Aires on Thursday to protest the IMF deal, some clashing with the police.
If the plan is approved in its current format, the South American country will not have to start making payments to the fund until 2026 and complete them by 2034.
The deal sets out targets for a new economic plan that favours economic growth by slowly lowering inflation, moving towards positive interest rates and refilling foreign currency reserves. It is also expected to help Argentina gradually reduce its primary fiscal deficit from 2.5% of GDP this year to 0.9% by 2024.
Argentina first received the US$57 billion loan in 2018 – the largest in IMF’s history – which was approved by former president Mauricio Macri. In a separate debt restructuring, the country restructured US$65 billion worth of debt with bondholders in 2020.
Argentina is currently working towards a tight deadline and the IMF plan needs to quickly pass through Congress so that the government does not miss a billion-dollar payment to the IMF due later this month. If the new payment plan is not approved, the country must repay US$19 billion dollars to the organisation this year, with a US$2.8 billion instalment set for 22 March, which several financial analysts say would not be possible.
However, securing a simple majority in Congress to pass the IMF agreement is proving to be a challenge for President Alberto Fernández. In the November mid-term elections, his coalition Frente de Todos lost its majority in the Senate (upper house), while it also lost seats in the House of Representatives. He is also facing deep polarisation within his own group. On 31 January, the leader of the Frente de Todos coalition and congressman Máximo Kirchner resigned from his position in protest of the IMF deal, exposing a rift within the law-making coalition and potentially jeopardising the deal.
“The government is between a rock and a hard place as it has lost the support of many lawmakers that criticise the IMF agreement,” says Serrano. “It’s possible that they will need to amend the text of the bill sent to Congress to accommodate the concerns of the opposition,” he adds.
The new debt plan is tightly linked to Argentina’s economic performance within the next few years. In 2021, inflation topped 50% and is expected to be equally high this year. In addition, bonds were down an average of 1.2% last week as a result of Russia’s invasion of Ukraine with fears that the country will not be able to meet IMF’s economic targets.
Agriculture is one of the pillars of Argentina’s economy, which heavily relies on regular shipments of fertilisers. Russia, the world’s main supplier of fertilisers, accounts for 7% of Argentina’s total import of the product. Disruption in that supply chain, caused by European and US sanctions towards Russia, could result in losses of between US$3.3 billion and US$4.5 billion due to reduced exports of wheat and corn, according to local non-profit organisation, the Rosario Board of Trade (BCR).
In addition, the IMF agreement is set to have a strong effect on energy prices, which are heavily subsidised in Argentina. According to presidential spokeswoman Gabriela Cerruti, some consumers will experience a rise in electricity and gas prices by 150% under the terms of the new deal, which may halt some lawmakers from approving it.
Etchebarne believes that the IMF agreement by itself will not solve Argentina’s problems and will not create market confidence. “Most market analysts believe this plan will not be complied with in the long run, which will magnify all of Argentina’s financial and economic problems including inflation, devaluation and the increase of poverty to unprecedented levels,” he comments.
Despite early signs of a partial economic recovery in Argentina with the IMF predicting 2.5% GDP growth in 2022, poverty remains rampant with over 40% of nationals struggling to make ends meet. Extreme poverty is also rising, with more than 10% of the population classified as destitute and lacking the means to provide for themselves.
Argentina has been experiencing a recession since 2018 – except for the economic bounce back in 2021 experienced by most countries – and was strongly affected by restrictions on people’s movement, as well as disruptions in the stream of goods and services caused by the pandemic. “There is no doubt that a default with the IMF would create concerns about the sustainability of the post-pandemic growth of the Argentine economy,” says Serrano. “If approved, the IMF agreement will help Argentina achieve sustainable growth and re-enter the international capital markets,” he adds.
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Article published in Latin Lawyer
