Summary of Staff’s Technical Note on Argentina’s Public Debt Sustainability

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Prepared at the request of the Argentine authorities to provide staff’s view on the envelope of debt relief that could underpin a debt restructuring consistent with restoring debt sustainability with high probability.
Presents staff’s view on: (i) a “feasible” medium-term macroeconomic framework based on the authorities’ broad policy announcements; and (ii) Argentina’s debt-carrying capacity, defined as the “manageable” levels of gross financing needs (GFNs) and debt service in foreign currency debt (FX) that it can afford in the medium-to-long run.
Presents alternative financing scenarios for meeting near-to-medium term obligations to official creditors, with different implications on the debt relief needed to deliver sustainability.
Views are those of IMF staff and do not necessarily represent those of the IMF’s Executive Board.

Argentina’s public debt stood at near 90 percent of GDP at end-2019 and is assessed as unsustainable.
The primary surplus needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically or politically feasible.
Restoring public debt sustainability with high probability will require a decisive debt operation with a meaningful contribution from private creditors that brings debt and GFNs down to levels consistent with Argentina’s debt-carrying capacity.
Staff’s target for GFNs: bring GFNs down to an average of around 5 percent of GDP, and not exceeding 6 percent of GDP in any year, over the medium-to-long term.
Staff’s target for FX debt service: keep FX debt service at around 3 percent of GDP over the medium-to-long term, given Argentina’s limited capacity to generate foreign exchange and current low level of reserves.
A debt operation should also stabilize the debt/GDP ratio with a high likelihood so that by 2030 there is a meaningful buffer relative to debt levels from which past Argentine debt crises began.

Anchored around the authorities’ broad policy announcements, given precise policy content is not yet elaborated.
Based on data and policy announcements as of March 15, 2020.
Envisages a moderate economic recovery, conditional on the adverse effects of the coronavirus pandemic dissipating towards the end of this year, alongside a gradual disinflation process, and gradual but realistic fiscal consolidation over the medium term.
After some fiscal expansion to deal with the effects of the pandemic, the framework envisages reaching a primary fiscal surplus of 0.8 percent of GDP by 2023, increasing to about 1.3 percent over the longer term, including to support trade surpluses and improve international reserve coverage.
Staff is of the view that a set of policies can be fully developed and implemented to achieve this scenario.

The required minimum FX cash-flow debt relief depends on the assumed macroeconomic framework and the financing terms on which Argentina can meet its obligations to official creditors during 2021-24.
To reflect uncertainty about these financing terms, staff considered three scenarios.
General principle: the more onerous the terms of new financing (higher interest rate and shorter maturities), the higher the debt relief needed to meet the medium-to-long-term GFN and debt targets.
Estimated FX cash-flow debt relief needed: ranges between US$55 to US$85 billion over the next decade.
The lower end (US$55 billion) is associated with a scenario that assumes more advantageous funding conditions to meet payments due to the Fund and other official creditors.
Staff shows many combinations of restructuring parameters (face value haircuts, maturity extensions, grace periods, interest rate cuts) could deliver the requisite minimum cash-flow debt relief while ensuring the debt-to-GDP ratio falls with high likelihood.
Any restructuring will need to recognize virtually no scope for FX debt service payments to private creditors over the near-to-medium term.
Final calibration of restructuring parameters must ensure GFNs remain manageable and the debt-to-GDP ratio remains stable beyond 2030.

Staff’s analysis is subject to considerable downside risks.
Key near-term risk: a stronger-than-projected negative impact of the coronavirus pandemic, which could more adversely affect the global economy and Argentina than currently assumed.
The framework hinges critically on the steadfast implementation of the assumed policy agenda.
Operational risks associated with the debt restructuring process may impede reaching a restructuring deal consistent with high creditor participation.
Significant materialization of these risks would require a reassessment of Argentina’s macroeconomic situation, policies, and possibly debt-bearing capacity.