IMF’s message to Argentina’s bondholders: Prepare for a haircut

The International Monetary Fund (IMF) warned Argentina‘s bondholders on Wednesday that they would likely need to incur losses on their investment to help resolve the country’s “unsustainable” debt burden.

The IMF, wrapping up a week-long visit to Argentina, said rising public debts meant the country needs a definitive plan to restore debt sustainability, which would require a “meaningful contribution from private creditors.”

Argentina is battling to restructure its debts to avoid defaulting on approximately $100bn in loans and bonds – including to the IMF – after a biting recession, high inflation and a market crash pummeled the country last year.

The IMF’s stance lends support to Argentina’s new Peronist government, which has maintained that it cannot pay its debts unless given time to revive growth. Argentina is looking to wrap up debt negotiations with creditors by the end of March.

“They are basically calling for a large haircut,” said Gabriel Zelpo, director of Buenos Aires economic consultancy Seido, adding the move gave Argentina’s Economy Minister, Martin Guzman, more leverage to ask creditors to take losses.

He said while the stance was not totally unexpected it was generally a negative for bondholders and implied potentially tougher negotiations. “It implies a longer period of restructuring and a longer period for returning to the market.”

The IMF said Argentina’s ability to service its debts had deteriorated sharply compared with mid-2019 when it categorised the country’s situation as “sustainable, but not with high probability.”

“IMF staff now assesses Argentina’s debt to be unsustainable,” it said, adding that the fiscal surplus Argentina would need to reduce its debts was “not economically nor politically feasible.”

The IMF said meetings with Argentine officials had been “very productive” and that the Fund’s Managing Director, Kristalina Georgieva, would meet Guzman at the Group of 20 Finance Ministers summit to discuss its “next steps.”

Argentina’s centre-left president, Alberto Fernandez, said on Twitter that he welcomed the IMF’s stance. “If all parties demonstrate a willingness to agree, we can grow again, honor our commitments and put Argentina back on its feet,” he wrote.

Argentine bond prices, which were hammered last year, have wobbled recently as investors waited on signs from the IMF about its stance, likely to be influential in how Argentina goes about its debt-restructuring plans.

“The worst-case scenario for bondholders would be for the IMF to issue a statement supporting a deep cut, or a cut in capital owed to bondholders,” Fernando Marrul, director of consultancy FM & Associates, said in advance of the fund’s statement.

Guzman recently said austerity policies backed by the IMF were to blame for Argentina’s debt crisis and warned that upcoming debt talks would likely be frustrating for bondholders.

Argentine bond prices have dropped 3.5 percent this year as uncertainty rose about the country’s ability to pay $44bn to the IMF, its biggest single creditor.