IMF to Test Argentina’s New Leader

Santiago Pérez and Ryan Dube. Wall Street Journal. October 28, 2019

After defeating his political rival in Argentina’s presidential election, President-elect Alberto Fernández now faces another adversary and longtime nemesis of the nationalist Peronist movement: the International Monetary Fund.

Mr. Fernández, a veteran Peronist, on Sunday defeated pro-business President Mauricio Macri on a wave of discontent brought on by government austerity, economic stagnation and inflation running at 53%.

Mr. Fernández, a 60-year-old law school professor, inherits a government on the brink of insolvency, saddled with more than $100 billion in foreign debt, and fast-dwindling dollar reserves. To stave off default, Mr. Macri’s government secured a $57 billion IMF bailout in 2018, the largest ever by the fund, adding substantially to the country’s obligations.

The money is conditioned on austerity measures aimed at putting Argentine finances on solid footing—measures that Mr. Fernández campaigned against. The IMF recently suspended a $5 billion installment as Argentina’s political uncertainty and economic turmoil intensified.

As Mr. Fernández prepares to take office in December, he might have to choose between fulfilling campaign promises to stimulate growth and consumption—if he could find the money—or imposing the painful adjustment measures demanded by the IMF in exchange for dollar loans to help cover a budget deficit and meet coming debt payments.

“Populism without money is impossible,” said Benjamin Gedan, an Argentina expert at the Wilson Center, a Washington policy group. “Fernández has raised enormous expectations that he will in short order restart economic growth and improve the lives of suffering Argentines. He’ll attempt to do so with absolutely no resources or access to external financing.”

Concerns about the return to power of the free-spending Peronists have shaken Argentine markets recently. On Monday, the Argentine stock market fell 3.6%, while Argentine bonds plumbed recent lows.

On Sunday night, the central bank sharply tightened capital controls, restricting dollar purchases to a monthly $200 per person. The central bank has used more than $22 billion in foreign currency reserves since August as Argentines bought dollars to protect their savings. It is on track to end the year with just $8 billion in net reserves, according to estimates from Argentine consulting firm Quantum Finanzas.

Before the vote, Moody’s Investors Service predicted the economy will contract 3.9% this year and 2.5% in 2020. GDP shrank 1.7% in 2018.

“The times that are coming won’t be easy,” Mr. Fernández said late Sunday in his victory speech to supporters. “We’ll cooperate in the transition because the only thing that worries us is the suffering of Argentines.”

IMF Managing Director Kristalina Georgieva congratulated Mr. Fernández on his election win. “We look forward to engaging with his administration to tackle Argentina’s economic challenges and promote inclusive and sustainable growth that benefits all Argentines,” she said on Twitter on Monday.

The multilateral organization is one of the favorite villains for Peronists, who have routinely steered Argentina’s economy into financial peril by overspending and then blamed the IMF for the painful adjustment that usually follows when the country must borrow money to pay its debts.

Argentina has had nearly 30 aid packages from the IMF and has defaulted on its debt eight times, including $100 billion in 2001, which at the time was the largest sovereign default on record.

A national survey conducted last year by local pollster Poliarquia and the Wilson Center showed that 56% of Argentines have a negative view of the fund. Only 18% of Mr. Macri’s opponents saw it in a positive light. During the election campaign, the capital Buenos Aires was dotted with posters denouncing the IMF’s meddling in Argentina’s domestic affairs.

“At home, IMF is like an insult. My dad used to say that they were loan sharks,” said Liliana Montes, a hairdresser in Buenos Aires from a long line of Peronist supporters. “We should stand firm.”

The incoming president has said his government won’t default on debt, but will seek to stretch out payments as neighboring Uruguay did in 2003. He will try to extend the repayment schedule with both the IMF and private bondholders, who are also likely to see a reduction in interest payments.

“We know there is going to be a restructuring, there has to be one. Today, it is more of an issue of how the process is going to be done rather than if it will happen or not,” said Damián Zuzek, chief investment officer at SBS Fondos, a Buenos-Aires based investment fund. “The earlier they do it, the better.”

When it comes to the IMF, however, Mr. Fernández will likely also try to negotiate more wiggle room on austerity measures, such as government spending cuts, revenue-raising initiatives and a restrictive monetary policy—all policies that have long been rejected by the Peronist movement.

“We should expect very tough negotiations between the IMF and Argentina,” said Arturo Porzecanski, an American University economist who closely tracks Argentina.

At a recent meeting with IMF staff, Mr. Fernández adopted the hostile tactics of former President Cristina Kirchner, who was Mr. Fernández’s vice-presidential running-mate.

“What I want them to understand in the IMF is that they are guilty of this situation,” he said in an interview in late August.

Economists see little risk of a regional spillover from Argentina’s debt crisis, but the stakes are high for the IMF. Mr. Porzecanski estimates that the $44 billion already disbursed to Argentina account for almost half of the IMF’s total outstanding loans.

“As the saying goes: if you owe $50,000 to your bank, you have a problem. If you owe $1 million, your bank has a problem,” Mr. Porzecanski said.

Private bondholders will also demand a strong commitment to spending discipline given the Peronists’ reputation for profligacy, hostility toward foreign creditors and past expropriations of companies, particularly under Mrs. Kirchner.

“Investors won’t be ready to accept any kind of restructuring if the IMF isn’t present,” said Stuart Culverhouse, head of sovereign and fixed-income research at Tellimner, a London financial bank. “Without policy discipline, no one would trust the government.”

A big question for many is how influential Mrs. Kirchner and her Peronist faction will be in key policy decisions with the more moderate Mr. Fernández.

Any further IMF help is likely to come with conditions, including an overhaul of Argentina’s labor market and vast pension system, according to people familiar with the situation.

Sergio Massa, a Peronist leader and key member of Mr. Fernández’s coalition, said labor reform isn’t on the agenda.

“Reform decisions are taken by countries,” he told an audience at the headquarters of the Wilson Center in Washington earlier this month. “Views based on Power Point presentations have failed,” he said referring to the IMF’s technocrats.

Past Peronist governments have played hardball with the IMF. The late President Néstor Kirchner was ready to default on IMF loans twice between 2003 and 2004 because of disagreements over goals and policy conditions, Mr. Fernández said in his book “Politically Incorrect,” a memoir of his work as Mr. Kirchner’s chief of staff.

Mr. Kirchner “always believed that it was necessary to confront the IMF and make it responsible for having supported an economic model that sparked the explosion of December 2001 in Argentina,” Mr. Fernández wrote.