The IMF has called for a major debt restructuring in Argentina in which private creditors would take a significant hit, after deeming the country's debt to be unsustainable.
In a statement issued on Wednesday following a week of "very productive" talks with government officials in Buenos Aires, the fund said Argentina's debt had "deteriorated decidedly" since its last assessment in July.
The country's sovereign bonds fell after the announcement, having gyrated violently in recent weeks with every turn in the government's strategy to untangle its onerous debt. A bond maturing in 2021 fell as much as 1 cent to 53 cents on the dollar.
The fund argued that the actions needed for the government to balance the budget and bring down debt to manageable levels were "not economically nor politically feasible.
Accordingly, a definitive debt operation — yielding a meaningful contribution from private creditors — is required to help restore debt sustainability with high probability."
The statement called for "collaborative" negotiations with private creditors to ensure their approval of a debt restructuring, but many investors already fear that Argentina may be headed towards a messy default this year.
Earlier this week the IMF's managing director Kristalina Georgieva told Bloomberg that it expected to get paid back in full on its own emergency lending to Argentina. The fund has lent Argentina US$44 billion ($68.9b) out of a record-setting US$57b bailout plan extended to the country during a currency crisis in 2018.
"This is a bad statement for bondholders, no question," said one emerging markets investor. Another international investor predicted: "Things are about to get exciting in Argentina."
IMF officials noted that since their last formal analysis of Argentina's debt, the peso had depreciated by more than 40 per cent, spreads on sovereign bonds had widened by about 1,100 basis points, international reserves had fallen by about US$20b, and real gross domestic product contracted more than expected. That caused gross public debt to rise to almost 90 per cent of GDP at the end of 2019, 13 percentage points higher than expected.
The introduction of exchange controls, the unilateral extension of maturities on some bonds and the central bank's resumption of financing the fiscal deficit have further complicated the scenario, according to the IMF.
The fund's previous analysis was conducted shortly before a primary election which foreshadowed the Peronist party's return to power in presidential elections in October.
Last week Argentina's economy minister Martin Guzmán told congress that a "deep debt restructuring" would be required and that the country would not reduce its primary fiscal deficit this year, most likely only reaching a balanced budget by 2023.
Georgieva is due to meet Guzmán for the second time this month at the upcoming G20 finance ministers' meeting in Riyadh on Thursday to discuss the next steps in the multilateral lender's role in Argentina. They both attended a conference at the Vatican earlier this month.
Written by: Benedict Mander and Colby Smith
© Financial Times