IMF Agreement: Aspects Related to the Sovereign Debt

The Executive announced on March 3 that the Republic of Argentina had reached an agreement with the International Monetary Fund (IMF) aimed at refinancing the Stand By agreement it executed in 2018, by means of a new 30-month Extended Fund Facility.

The agreement was approved by both parties. By means of Law No. 27,668, the Argentine Congress authorized the Executive to incur into the sovereign credit transactions provided under the Extended Fund Facility to be executed between the Executive and the IMF. Subsequently the IMF Executive Board approved such program under the terms proposed by the Argentine Government.

This is the first time that a transaction of these characteristics is approved by law, as established by Law No. 27,612 for the Strengthening of the Sustainability of the Public Debt, enacted last year (see our article New Requirements for Issuance of Sovereign Bonds Governed by Foreign Law and for Future IMF Loans).

The general principles of the agreement are provided for in the Memorandum of Economic and Financial Policies (Economic Memorandum), while the specific goals are set out in the Technical Memorandum of Understanding (Technical Memorandum).

Specifically with respect to sovereign debt, the program contemplates measures to gradually eliminate monetary financing of the fiscal deficit, improve the monetary policy, and strengthen the internal Peso debt market. Below we detail the provisions of the agreement related to this aspect, distinguishing between internal and external debt.

1. Sovereign Debt in Pesos under Local Law

According to the Economic Memorandum submitted by the Argentine Government, a multi-year fiscal consolidation strategy has been outlined, targeting a primary (or fiscal) deficit of 2.5% of GDP in 2022, which would be reduced to 1.9% in 2023 and 0.9% in 2024.

In this line, the primary deficit is planned to be financed mainly through a strong expansion of Peso-denominated internal public debt, with the goal of eliminating monetary financing of the deficit by the end of 2024.

The Economic Memorandum states that the Government's plan aims to obtain net Peso-denominated private sector financing to the Treasury of about 2% of GDP per year during 2022-24. The Government plans to gradually reduce the use of inflation-linked instruments, broaden the portfolio of instruments, and extend the maturity profile.

It also plans to strengthen debt management practices in order to establish a deep and liquid sovereign debt market and develop a reference yield curve.

The Economic Memorandum indicates that an annual indebtedness plan will be prepared that contemplates measures to "(i) rationalize the current number of instruments; (ii) improve the predictability of debt auctions; (iii) limit the use of minimum prices in auctions only to provide guidance on new instruments and for periods of market stress; and (iv) develop reference bonds to support liquidity and price discovery in the secondary market."

It also sets a plan on the expansion of the Market Makers program established a year ago, increasing the number of eligible instruments and boosting the investor relations program by releasing semi-annual presentations and holding regular meetings with investors at which macroeconomic developments and outlooks will be reported and details on public debt and financing developments will be provided.

In order to support this Peso financing and ensure debt sustainability with respect to monetary and foreign exchange rate policy, the goal is to maintain a positive real interest rate structure to strengthen the demand for Peso assets and the domestic sovereign debt market, thus contributing to stability.

To determine the real interest rate, the Central Bank will take into account inflation indexes that will be updated monthly, in communication with the IMF staff, also considering other factors such as the evolution of reserves.

At the same time, the foreign exchange rate will be managed to ensure the medium-term competitiveness of the real effective foreign exchange rate, and to encourage the accumulation of reserves. To this end, specific goals have been included, and the official foreign exchange rate adjustment path would keep the real effective foreign exchange rate in 2022 broadly unchanged from end-2021 levels in order to preserve competitiveness. The development of a conditions-based strategy is contemplated with the aim of gradually easing capital control measures.

On the other hand, the Technical Memorandum of Understanding (Technical Memorandum) sets specific goals to which the Argentine Government has committed l, as well as a series of reporting/information requirements to be met. With respect to internal debt, the Government must inform purchases and sales of instruments, debt balances, and the interest rate of the instruments on a biweekly basis, among other requirements.

2. Sovereign Debt in Foreign Currency and under Foreign Law

With respect to debt issued in foreign currency and under foreign law, the new program documents indicate that "the support of the international community" is expected so that, by 2025, Argentina can gradually return to the international debt markets.

At the end of August 2020, Argentina restructured its sovereign debt instruments issued in foreign currency and under to foreign law through the exchange of 99% of these bonds (see our article Results of Sovereign Debt Exchange under Foreign Law: 99% of Bonds Restructured). However, since the prices of the new bonds fell due to different factors and are far from the expectations created in the exchange and discussed during the restructuring, Argentina does not have access to the international debt market today.

The new program  contemplates reaching an agreement with Paris Club creditors on the schedule for repayment of obligations, to be consistent with the country's ability to pay and debt sustainability. On this point, at the end of March the Ministry of Economy announced that Argentina agreed with the Paris Club a deferral of the existing understanding and the parties committed to conclude the process of definitive amendment of the agreement before June 30 of this year. (See our article How Argentina’s Paris Club Payments Have Been Deferred).

At the provincial level, the Economic Memorandum mentions that an agreement has been reached with 21 provincial Governments on a new fiscal consensus, which provides for the reduction of fiscal imbalances and debt levels of the provinces. The agreement also contemplates that, with the assistance of the IMF, work will be done to limit future foreign currency indebtedness by provincial Governments.

The Technical Memorandum includes a number of reporting obligations as in the case of internal debt, including a monthly reporting obligation for external debt services, as well as debt balances by creditor and instrument.

3. Conclusion

From the documents of the new Extended Fund Facilities Program agreed with the IMF, it appears that a priority for the Argentine Government is to develop and deepen the local debt market in Pesos, through the implementation of the tools described above.

A series of commitments and goals related to sovereign debt have been established, which undoubtedly represent one of the most important elements to consider within the framework of the agreement, and which will have a relevant impact on the future of the Argentine economy and on the sovereign instruments market.

To see the relevant documents related to the agreement, click here.