Vestigo Volatility Score: 80%
Argentina is set to restructure some 44.5 billion USD of debt. The debt was first acquired following negotiations made between the administration of former Argentinian President Mauricio Macri and the IMF in 2018. Now President Alberto Fernandez is pushing to restructure the liability after securing an initial agreement with the IMF on January 28. While there is mounting opposition to the deal, it is almost irrefutable that the country’s economic woes would be harsher without it. This is because without a deal, Argentina would default on its payment and would then face the very real consequences of a currency crisis. This would include even higher levels of inflation than the country is currently suffering.
While Argentina’s GDP turned positive in 2021 following years of decline, a default, the likely result of no deal, would again result in contraction. Officials will therefore try every means to push through the current IMF debt restructuring plan. While political support for the deal is currently uncertain, a looming March 22 IMF payment deadline and a 2023 presidential election on the horizon places impetus on protecting Argentina from default.
Constraints to Consider
- Without the passage of the IMF deal, Argentina will default on its payment. In the event of a default, lenders will shy from further investment, cutting Argentina from most credit and causing a currency crisis
- President Alberto Fernandez would likely face political ruin in the 2023 presidential election without an IMF deal, as the country’s economy would severely weaken
The possibility of default
Argentina has defaulted on its foreign debt twice since the year 2000, most recently in 2020. Historical precedent therefore suggests a default for an upcoming IMF payment due March 22 is a very real possibility. Nonetheless, there are major differences now compared to previous episodes of non-payment, driving greater impetus to secure the current debt’s restructure. First is the size of the current debt in question. The 44.5 billion USD is the greatest amount the IMF has loaned in its history. Second, Argentina’s economic woes, and the livelihoods of its people, have multiplied following two years of pandemic-induced hardship. A default would magnify socioeconomic needs and spell political ruin for the current government.
Political opposition to the IMF deal
President Alberto Fernandez agreed an initial deal with the IMF on January 28 following over a year of negotiations. The deal will now go to congress for approval and will require a simple majority. Although the President could skirt congressional approval, this route would cause him to lose both political and public approval.
Members of the President’s own coalition, the Peronists, have threatened to derail the agreement. Much of this resistance opposes the greater austerity measures that the IMF demands of Argentina in the years to come. The IMF is calling Argentina to better control its finances, including printing less money and ensuring the country’s deficit is reduced to 2.5 percent of GDP in 2022, and 1.9 percent in 2023. All of this would translate into less expenditure and less economic growth.
Opposition from within the Peronists increases the likelihood that the coalition fractures ahead of a 2023 presidential election, even if the current IMF deal secures the support it needs. Heading the opposition to the IMF deal is Maximo Kirchner, former president of the Peronists in the lower house of Congress, who resigned on January 31 in protest of the IMF agreement. Maximo Kirchner is one of many among a more left-wing bloc of the Peronist coalition who may abstain or vote against any upcoming congressional poll on the matter.
Population backlash
Protests have already followed the January IMF deal announcement, and further backlash by segments of the population is likely as discussions between legislators to successfully restructure the debt continue in the coming days and weeks. One sticking point is the deal would force the government to scale back energy subsidies to meet the IMF’s fiscal deficit demands. These subsidies comprise a large segment of Argentina’s deficit. Opponents argue that these energy subsidies provide reprieve in a country with continuous rising costs and current inflation levels above 50 percent.
The IMF deal does not replace the need for structural reform
The political impulses of every new administration that continuously seeks to renegotiate the conditions of the country’s debt, and continues to expend above Argentina’s means, will ensure continued high levels of inflation and minimal growth. The IMF itself later criticized the deal made with Argentina in 2018, a sign of the limited prospects of future socioeconomic stability and the political capacity of Argentina to adequately manage its finances. Even if Argentina successfully navigates the latest IMF deal, which would give a few years grace period before the country would be expected to pay back its debt, historical precedent and a constantly shifting economic strategy among the country’s political elite suggest further defaults are likely in the decades ahead.
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