Argentina

March 20, 2020

This document summarizes the main points of the IMF staff’s technical note on Argentina’s public debt sustainability.

Nature and scope of the note:

At the request of the Argentine authorities, IMF staff prepared a technical note to provide its view on the envelope of debt relief that could underpin a debt restructuring consistent with restoring debt sustainability with high probability. In doing so , the note 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. Alternative financing scenarios for meeting near-to-medium term obligations to official creditors are presented, with different implications on the debt relief needed to deliver sustainability.

The views expressed in the technical note are those of IMF staff and do not necessarily represent those of the IMF’s Executive Board.

Restoring Argentina’s debt sustainability

Argentina’s public debt, which stood at near 90 percent of GDP at end-2019, is unsustainable. As such, 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.

In staff’s view, the needed debt relief should bring Argentina’s 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. While this is below the debt-carrying capacity of some other emerging markets, Argentina has an especially low and narrow export base as well as a very shallow domestic financial system. Indeed, given Argentina’s limited capacity to generate foreign exchange and its current low level of reserves, staff sees a need to keep FX debt service at around 3 percent of GDP over the medium-to-long term. In addition to satisfying the above GFN and FX debt service targets, a debt operation should also stabilize the debt/GDP ratio with a high likelihood, such that by 2030, there is a meaningful buffer relative to debt levels from which past Argentine debt crises began.

Staff’s “feasible” macro-framework:

Staff’s feasible macroeconomic scenario is anchored around the authorities’ broad policy announcements, given that the precise content of their policy agenda is not yet elaborated. The feasible framework, which is 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 a gradual but realistic fiscal consolidation over the medium term. Specifically, 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.

Debt Relief under financing scenarios:

The required minimum FX cash-flow debt relief depends on the assumed macroeconomic framework as well as the financing terms on which Argentina can meet its obligations to official creditors during 2021-24. To reflect the uncertainty about these financing terms, staff considered three scenarios. As a general principle, the more onerous the terms of new financing (the higher the interest rate and the shorter the maturities), the higher the debt relief needed to meet the medium-to-long-term GFN and debt targets discussed earlier. Depending on the assumed scenario, the FX cash-flow debt relief needed ranges between US$55 to US$85 billion over the next decade. The lower end of this cash-flow debt relief is associated with a scenario that assumes more advantageous funding conditions to meet payments due to the Fund and other official creditors.

Staff analysis shows that there are many combinations of debt restructuring parameters, including face value haircuts, maturity extensions, grace periods, and interest rate cuts, that could deliver the requisite minimum cash-flow debt relief while also ensuring that the debt-to-GDP ratio falls with high likelihood. Choosing these debt restructuring parameters is an issue for the authorities and their private creditors. That said, any restructuring will need to recognize that there is virtually no scope for FX debt service payments to private creditors over the near-to-medium term. Furthermore, the final calibration of the debt restructuring parameters would, of course, also need to ensure that GFNs remain at manageable levels and the debt-to-GDP ratio remains stable beyond 2030.

Risks

Staff ’s analysis is subject to considerable downside risks. The key near-term risk relates to a stronger-than-projected negative impact of the coronavirus pandemic, which could more adversely affect the global economy and Argentina than currently assumed. In addition, staff’s framework hinges critically on the steadfast implementation of the assumed policy agenda. Lastly, there are operational risks associated with the debt restructuring process that 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.