ARGENTINA: Returning to the IMF is not for free

by Mariela Bembi and Pablo Nemiña

9 September 2009

In the past weeks, several voices were heard in favour of Argentina’s return to the IMF, allowing the institution to carry out the review of the economy known as Article IV. The last review was carried out in 2006 and, since then, it has been put off by the government. Those who support this review maintain that it would operate as a "seal of approval" for the economic administration, which would grant access to external finance from the IMF and private investors. It could be thought that in a context of external constraint and recession, this contribution would be useful for the implementation of counter-cyclical policies that may reduce the impact of the economic crisis. Nevertheless, the Fund’s operating rules and economic history certainly allow to pose question marks on this approach.

Strictly speaking, the review of the economy known as Article IV is a requirement that must be fulfilled annually by all countries. It has a simple dynamics: the Fund sends a technical mission, which after having monitored the main macroeconomic variables, publishes a report including a diagnosis of the corresponding country’s economy and policy recommendations.

Nevertheless, the Fund’s operating rules and economic history certainly allow to pose question marks on this approach. Any finance granted to the country by the institution will come inexorably tied to economic policy conditionality. Although the IMF has reduced its conditionality (the renowned structural reforms have been relatively softened), the most recent agreements signed with emerging countries show that quantitative goals (particularly those related to expenditure levels) continue to impose high demands. For instance, the approval of a reimbursement was recently delayed for Latvia until it agreed to a greater fiscal adjustment than the one that was being implemented. This contributes to reproduce the broadly criticised “double standard”, according to which it is accepted that developing countries moderate the impact of the crisis by means of an increase in public expenditure, while they are urged to strengthen fiscal adjustment to face these turbulences.

Apart from conditionalities, an issue until now excluded from public debate should be considered. One of the IMF’s requirements to grant financing is that the borrowing country should have its debts with private creditors in normal situations (lending into arrears policy). As it is known, Argentina has unpaid debt obligations with the Paris Club and private investors (holdouts) amounting to approximately 35 billion dollars. Thereby any possible agreement with the IMF would imply the obligation of restoring this situation to normal. Given the fact that Law 26017 (known as “Padlock Law”) forbids the state to reopen negotiations with holdout creditors who refused to accept the debt swap carried out in 2005, the only possibility of returning to the Fund implies beforehand the condition to change said law. In fact, one of the reasons for which the Néstor Kirchner administration suspended the agreement with the IMF following the debt swap was to avoid this pressure.

Restoring the defaulted debt to normal appears as a condition that would make access to voluntary external capital markets easier, since under the present conditions, those revenues obtained as a result of any international tender for public bonds could risk being seized by holdouts. For this reason, since 2003, Argentina has restricted debts taken at an external level to credits from international institutions and direct loans from the Venezuelan government (both being unseizable).

Even so, it could be considered that upon the risk of an intensified impact of the crisis, the benefits of increasing liquidity through the re-establishment of external loans would offset the cost of restoring the defaulted debt to normal. It is here that the economic history gains relevance. IMF financing would be tied to conditionality that would constrain the implementation of counter-cyclical policies, in particular, the use of public spending as an engine for economic reactivation. Budget pressures to allocate greater resources to payment of debts restored to normal are likely to increase.

The access to international private financing would intensify this process. Given that expenditure increases are seen by investors as a negative sign in terms of the debt sustainability of an emerging economy, the adjustment would appear as a “good sign” that would allow to reduce interest rates. Although the effect of a drop in expenditure could be offset by debt revenues in the short term, Argentina would be joining the dangerous and well-known cycle of funding current expenditures with debt.

It could be argued that most part of what was said here lies in the field of the uncertain, since the Article IV consultation does not compel to sign an agreement with the IMF. Although strictly speaking this is unquestionable, recent statements by some officers regarding the official will to return to international private financing open question marks as to whether a return to the IMF would be restricted to the implementation of Article IV. Reopening the debt swap with holdouts would make it easier to take on debts in international private markets. In this framework it would seem politically more bearable to present the reopening of negotiations with creditors as an external condition imposed by the IMF to have access to its credits. This responsibility would be shared by the government, which should progress in making an offer to the Paris Club, and Congress, which should previously approve an amendment to the law, allowing to reopen the swap to private creditors.

Certain considerations exceeding the discussions of a technical nature about the IMF verdict on the validity and reliability of Indec’s statistics (which are, certainly, not unimportant); and referring to political discussions regarding the orientation of the economic model are being apparently put at stake around negotiations on the implementation of Article IV consultation.

This article was first published by the argentinian newspaper, Página 12

Tanslated by IFI’s Latin American Monitor