(CN) — Argentina and the International Monetary Fund (IMF) have agreed to a new deal that restructures the South American nation’s $44.5 billion debt, avoiding a crisis on a day that it was due to make a $730 million payment to the global lender.
The country woke up last Friday morning with the uncertainty of whether the government would default on its loan repayment before President Alberto Fernández addressed the country.
“I want to announce that the government of Argentina has reached an agreement with the International Monetary Fund,” President Fernández announced. “With this agreement, we can organize the present and build a future,” adding that “we had an unpayable debt” and now “we have a reasonable agreement.”
The debt restructuring deal still needs to be approved by the IMF’s board of directors as well as by the Argentine Congress, where the governing coalition lost its majority in mid-terms last November.
Argentina is passing through its fifth year of a deep economic crisis with the IMF’s presence invoking painful memories of its last major economic collapse two decades ago, which escalated into civil unrest, a state of siege and the presidential palace swallowing five presidents in two weeks.
The original loan, negotiated by former center-right president Mauricio Macri in 2018, was for $57 billion, the biggest loan package in IMF history. The country has so far received $44 billion. The current center-left government has continually criticized the loan. Speaking at the UN General Assembly in September last year, President Fernández said that “Argentina was subjected to a toxic and irresponsible indebtedness with the IMF” which was “unsustainable.”
The previous structure of Argentina’s $44 billion debt was to repay $19 billion this year, $20 billion in 2023, and $4 billion in 2024, with the aim to restore confidence, reduce the balance of payments and bring down inflation under a strategy to renew capital inflows.
Entering 2022, Argentina is facing yearly inflation of 50%, which has forced 44% of the population under the poverty line, and currently holds dwindling dollar reserves and mounting debt.
The reappearance of the IMF in Argentina has led to sustained protests by social movements and left-wing organizations. Yet criticism of the previous loan deal was not confined to the streets of the capital of Buenos Aires.
Back in December of 2021, the IMF’s Executive Board recognized its failures, admitting that “the program did not deliver on its objectives,” and had led to capital flight and shrinking market confidence.
Economy Minister Martín Guzmán, who was a key part of the IMF debt negotiations, unrolled the details of the new agreement later on Friday, which includes a gradual closing of the fiscal deficit from 2.5% this year to 1.9% in 2023 and 0.9% in 2024.
“The negotiations were really difficult,” said Guzmán. “We worked very hard politically and technically… It is the best agreement that could be reached.”
“The agreement was a positive development for Argentina, reducing political risks for investors and improving the economy’s prospects,” said Gabriel Brasil, a political risk analyst for Argentina and Uruguay at Control Risks. “Although the government is yet to present the concrete means by which it will achieve the deal’s goals (which will sustain some persistent uncertainty in the coming weeks), it will likely provide the country with increased financial stability, at least in the short-term.”
Brasil believes that the IMF has adopted a more empathic approach to Argentina’s situation compared to debt renegotiations in Latin America from previous decades, “probably because stakes were very high also for the fund,” he added.
The government also affirmed that it would not be forced into austerity by reducing public spending or privatizing public companies, despite the IMF stating that “a strategy to reduce energy subsidies” had been agreed.
“Fernández inevitably will have to expose himself to increased political costs as the task of reducing government spending, even if not abruptly,” added Brasil. “This will not be easy as the socioeconomic situation of Argentina remains dire. Energy subsidies are a historically contentious topic in Argentina, potentially directly affecting the approval ratings of incumbents as they have significant impacts across the economy.”
There is, however, a clear contrast between this debt restructuring deal and previous ones in Latin America. “The new agreement does not imply draconian cuts in fiscal spending,” said Brasil. “On the contrary, in many ways the new terms can be classified as friendly and fairly feasible politically, requiring the government to conduct a rather gradual adjustment to its finances as opposed to abrupt shocks. The president will try to sell this to electors as a major win, of course.”
The opposition has cautiously welcomed the IMF deal with caveats. A statement by the main center-right opposition coalition, Juntos por el Cambio, welcomed the “positive first understanding with the IMF” while it awaits further details of the agreement that will be evaluated in Congress.
Its tentative approval is also one of strategy. “The center-right opposition has significant incentives to endorse an IMF-backed deal,” said Brasil. “First, it helps stabilize the macroeconomic environment, which is a key agenda for its electors. Second, it exposes the government to increased political costs in the process, allowing the group to potentially capitalize on that in the next elections. As such, we don’t anticipate significant difficulties for the government to ratify the new deal in Congress.”
The main political barrier for the government is internal, with the deal deepening tensions within the governing center-left coalition. Former president Cristina Kirchner, who remains an influential figure in Argentine politics, is yet to publicly give her opinion, while her son Máximo resigned from the presidency of the coalition in the lower house, citing opposition to the strategy and results obtained in the IMF deal.
“For some, pointing out and proposing to correct the errors and abuses of the IMF that never harm the organization and its bureaucracy is irresponsible,” Máximo said in a statement. “For me, it is irrational and inhuman not to do it.”
Many on the left echo these sentiments, with Argentina’s relationship with the IMF a controversial topic. “In fact, hundreds of people had gathered in Buenos Aires the day before the agreement was announced,” added Brasil, “to protest precisely what they perceive as an interference by the IMF in Argentina’s economic policymaking.”
As the government carries out its gradual fiscal review over the next two years, social movements and left-wing groups are likely to return to the streets. “Issues such as a potential reduction in energy tariffs will likely be credible triggers for that,” added Brasil.
President Fernández now looks to contain the internal fallout of the new IMF deal, punctuated by the resignation of Máximo Kirchner, and convince the nation that the deal is the first step towards economic recovery.
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