Argentina rules out fresh funds from IMF

Argentina rules out fresh funds from IMF

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Argentina’s negotiations with the International Monetary Fund (IMF) on a new financial aid program will focus on refinancing the existing $44 billion in loans it still owes without taking additional funding, Economy Minister Martín Guzmán said on Thursday.

"The objective is to refinance the loans," he said in a video interview with the newspaper Ámbito Financiero.

When asked if the cash-strapped country could ask for an injection of fresh funds, he suggested that it wasn’t likely.

"You have to be very careful when you take debt in dollars," Guzmán said. "This is something that we already know."

Argentina defaulted on more than $500 million in foreign-law bonds earlier this year during negotiations with private creditors to restructure $66 billion in debt, a deal that was reached in August after months of tense talks.

Yet a subsequent devaluation of the local currency against the dollar — the official exchange rate has slipped 28% to 80.63 pesos per dollar from 63 pesos at the start of the year — has made paying any foreign currency debt that much harder. Debtors needs more pesos to cover the same payment, and the more debt in foreign currencies that Argentina has, the harder it is to “maintain,” Guzmán said.

"We want to be prudent, we want to be responsible," Guzmán added. "That is why we don’t want to have to enter into a process of going deeper into debt in dollars."

Instead, the focus will be on borrowing in pesos, helping to limit the impact of exchange rate volatility, he added.

Still, analysts have warned about a decline in Argentina’s international reserves. They now sit below $42 billion from a most recent high of $77.5 billion in April 2019. Net reserves at less than $8 billion is diminishing the central bank's firepower to prop up the peso and lend to the government. That means it will have to look for new sources of funding to finance what the government expects to be a 4.5% primary fiscal deficit in 2021, down from 8% in 2020.

SWAPS?

Guzmán appears to want to rule out borrowing in foreign currencies at all. "Argentina is not in conditions today to... it is not prudent, not healthy, to take on debt in dollars," he said.

To be sure, the official said that the proposed 2021 budget takes into account this limitation for borrowing in foreign currencies.

He mentioned as possible sources of financing the local market in pesos, multilateral lenders and potentially a currency swap with China.

"A swap is a possibility," he said, but added that it is not in the cards yet. "We are moving forward today with other instruments."

Another focus, he added, will be to increase international reserves through dollar inflows from exports, helping to build a "cushion of dollars."

To do this, he said that a new program with the IMF will be vital for rebuilding the economy, now in its third year of crisis. The program, he said, will take time to negotiate because it must be designed to help Argentina not only recover from the crisis in the short term, but to be able to sustain the recuperation.

"Argentina needs to get back up and continue standing," he said.

Argentina's economic crisis has worsened this year with the COVID-19 pandemic. Most economists are forecasting a drop of more than 12% in 2020 as a lockdown depresses economic activity, worse than the 10.9% decline in the 2001-02 crisis, when Argentina defaulted on $100 billion of debt amid bloody social protests.

In the years after that default, which at the time was the biggest in history, the political party now in power blamed the IMF program for the crisis, saying it was too stringent. Argentina went on to pay off its debt with the IMF and sever ties until former President Mauricio Macri, of a different political party, entered into the $57 billion program in 2018, from which the country has drawn $44 billion.