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ECONOMY | 19-02-2020 18:27

IMF says Argentina's debt burden is 'unsustainable'

Review by International Monetary Fund mission team paves the way for the government to ask private bondholders to take on losses, as it prepares to renegotiate its obligations.

The International Monetary Fund has declared that Argentina's debt burden is "unsustainable," lending its tacit support to the Alberto Fernández administration and asking the country's private creditors to take a haircut.

The statement comes after an IMF technical mission team ended its one-week stay in Buenos Aires on Friday, during which they held a host of meetings with officials as debt restructuring began in earnest. The talks are crucial to Argentina's economic future, with the nation needing to restructure debt with other creditors in order to avoid default.

The statement paves the way for the government to ask private bondholders to take on losses as it prepares to renegotiate its obligations, something that has been trailed by some politicians and leading economists. A “meaningful contribution” will be necessary from private bondholders to restore the country’s debt sustainability, the IMF wrote in a statement.

The team, led by the IMF's Deputy Director of the Western Hemisphere Department Julie Kozack and Mission Chief for Argentina Luis Cubeddu, described their time in Argentina as "productive" and said they had learned the "contours" of the macroeconomic plans and policies being undertaken by the government of Alberto Fernández.

Fernandez is seeking to renegotiate billions of dollars in debt with private creditors, including a US$56-billion loan with the Washington-based organisation (of which US$44 billion has been received). The last time IMF officials commented on Argentina’s debt was in the fourth review of the credit line in July 2019, when they called it “sustainable, but not with a high probability.”

Argentina’s record IMF loan has been on hold since August after Fernández pulled off a shock upset of incumbent Mauricio Macri in the August 2019 PASO primary vote, sending markets reeling.

Unsustainable'

"IMF staff now assesses Argentina’s debt to be unsustainable," the Fund said in a statement. "Specifically, staff is of the view that the primary surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible."

Debt rose to nearly 90 percent of gross domestic public at the end of 2019, the Fund said.

The Fund then called on private bondholders to take a haircut. "Accordingly, a definitive debt operation — yielding a meaningful contribution from private creditors — is required to help restore debt sustainability with high probability. IMF staff emphasised the importance of continuing a collaborative process of engagement with private creditors to maximise their participation in the debt operation."

The team also offered its support for the government's attempts to tackle poverty and lead Argentina out of a dragging recession, which took hold in mid-2018.

"We share the authorities’ overall objective to restore growth and reduce poverty, while also achieving an improvement in the fiscal and external balances," read the IMF's statement, detailing the "difficult economic and social situation facing the country."

“IMF staff and the authorities will continue to engage closely, and further discussions are planned as the authorities advance in defining their economic plans and policies," the statement finished.

It also added that IMF Managing Director Kristalina Georgieva would meet again with Economy Minister Martin Guzmán to discuss "next steps" at next week's upcoming G20 Finance Ministers meeting in Riyadh, Saudi Arabia.

Guzmán warned investors last week they’ll probably be frustrated with negotiations, which he intends to wrap up by the end of March. The nation owes over US$38.7 billion to bondholders just this year, and payments peak in May.

– TIMES/BLOOMBERG

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