Argentina Proposes IMF-Humiliating 'Debt Re-Profile' As It Soft-Defaults For 9th Time Since Independence

Less than a week after we suggested The IMF is in for humiliation over the collapse of Argentina - just months after its unprecedented $56 billion liquidity crisis bailout - it appears the South American nation is set to default for the ninth time since its independence in 1816.

Amid a 20% crash in the peso and a collapse in government bonds, which pushed the implied risk of default above 80%, IMF delegates arrived in Argentina on Saturday and, as Bloomberg reports, immediately began meetings with policy makers, facing a deja vu choice from two decades ago: risk making the turmoil even worse by withholding a $5.3 billion installment due next month - or cough it up, and risk even more losses with the IMF bailout program on the verge of collapse.

"The IMF has put a lot in - not just money, but prestige," said Hector Torres, a former executive director at the Fund who represented South American countries. 

“The fact that the arrangement is not performing well right now is an embarrassment,” he said. And the September installment is “going to be a difficult call.”

Then earlier today, things got worse as Argentina bond spreads widened to the most in 14 years after opposition leader Alberto Fernandez ripped the debt-laden country’s accord with the International Monetary Fund. Fernandez said much of the IMF loan had been wasted on financing capital flight out of the country.

In a statement following a meeting with IMF officials, Fernandez said he agreed with the objectives of the IMF deal, but added that the IMF and the current government generated the current crisis and are now responsible for reversing the “social catastrophe.”

Argentina has struggled to rollover the debt in the wake of a stunning loss in a primary for the market-friendly government coalition, and now tonight, according to a statement from the finance ministry, Argentina seeks to re-profile $57 billion debt owned to private holders and the International Monetary Fund. Re-profile is a public-relations-friendly way of saying soft-default, but the ministry was quick to explain that there’s no haircut nor change to interest paid.

“It’s important to highlight that this is only an adjustment of maturities."

The proposal is that Argentina will delay payments on $7 billion of short-term debt

  • Argentina will pay 15% of its debt at maturity

  • It will pay 25% of its debt three months after maturity

  • Final 60% of debt will be paid six months after maturity

  • Government will continue to pay interest on short-term debt

And will seek Congress authorization to launch a voluntary reprofiling of debt maturing between 2020 and 2023 under local legislation.

“The government is aiming to clear the outlook for the financial program in the short, medium and long-term horizon,” Economy Minister Hernan Lacunzasaid.

“This is due to short-term liquidity stresses and not due to problems with the solvency of the debt.”

Call it what you want, but foreign-currency reserves have plummeted more than $10 billion in the past month as policy makers sought to shore up the peso after the primary on Aug. 11.

Tens of thousands of people marched through the streets today to demand the government do more to mitigate the impact of the economic crisis in a country that has defaulted on its debt eight times since independence from Spain.

But, as we noted last week, while creditors will be hit, it will be the ordinary Argentina citizens that will be crushed: Ordinary Argentines also have traumatic memories of failed IMF programs. Many blame the Fund for the epic collapse of two decades ago, one reason why Macri’s decision to go to the IMF last year was so risky.

“I think it’s neutral to positive,” said Ezequiel Zambaglione, head of strategy at Balanz Capital Valores in Buenos Aires.

“In the worst case scenario, nobody accepts the offer and you are in the same situation as yesterday. And if they reach an agreement and are successful in the swap, you’ll have less funding needs for the next years.”

Finally, after all this, IMF staff are left to do the walk of shame back to Washington to analyze the debt operation announced by Argentine authorities today. According to a statement from IMF spokesperson Gerry Rice:

“Staff understands that the authorities have taken these important steps to address liquidity needs and safeguard reserves.

“Staff will remain in close contact with the authorities in the period ahead and the Fund will continue to stand with Argentina during these challenging times.”

As we noted previously, Patrick Esteruelas, head of research at EMSO Asset Management in New York, warned "The IMF is in a serious pickle."

It reminds me of the saying: If you owe the bank $100, it’s your problem. If you owe the bank $100 million, it’s the bank’s problem.”

We wonder how the Europeans feel now about their new hire as head of The ECB?

But then again, we all know who is on the hook for these losses...

The good ol' US taxpayer!