An Argentinian haircut for the IMF

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 program. 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 program. 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% of GDP in 2017 to 85.2% when the 21st SBA was negotiated in 2018. It then rose to 88.7% when the SBA was suspended in 2019, and to 102.8% when the default came in 2020. The debt ratio is now estimated to have reached 107% at the end of 2021 – a significantly worse starting point for the 22nd SBA than for the calamitous 21st SBA. Moreover, the federal primary budget deficit (which excludes interest payments) was 3.8% of GDP in 2017, and the 2021 figure was only slightly better, at 3%.

There are no grounds for optimism about the foreign and domestic drivers of economic growth in the next few years. The external financial environment is set to worsen as the US Federal Reserve and other major central banks raise their policy rates and taper and reverse their balance-sheet expansions. Slower global growth will weigh on commodity prices and export receipts.

Monetary financing by Argentina's central bank is supposed to fall from 4.6% of GDP in 2021 to 1% of GDP in 2022, and to "near zero" in 2024. The notion that markets will fill the resulting funding gap seems far-fetched. Central-bank real interest rates are set to become positive in 2022, consistent with policies to combat inflation (which is currently above 50% in Argentina) and to support the external value of the currency (the value of the peso on the parallel foreign exchange market is half the official rate). But it is also likely to have a negative impact on GDP growth.

Argentina's debt burden is therefore unsustainable. Instead of allowing the proposed 22nd SBA to proceed, Argentina should be required to implement a radical public debt restructuring that reduces gross general government debt from over 100% of GDP to no more than 60%. And the IMF should be subject to the same haircut as the other creditors.

The IMF should pay the price for its egregious EAC assessment failures in 2018. Fortunately, blunders of that magnitude are uncommon. The only comparable misjudgment was the Fund's $30 billion loan to the Greek government in 2010 (the largest-ever IMF loan at the time), when it was plain as a pikestaff that Greece was headed for a sovereign default, which came in 2012. The IMF hid behind its preferred creditor status and avoided a haircut on that occasion. It must not do so this time.

Willem H. Buiter is an adjunct professor of international and public affairs at Columbia University.

Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement.