Argentina: Report on Exceptional Access For Request of Stand-By Arrangement

Good progress has been made in stabilizing the economic and social situation since the crisis. Fiscal adjustment over a prolonged period will bring the public finances to a sustainable path. To protect social expenditures and allow higher public investment, a comprehensive tax reform is required. Strengthening central bank autonomy is essential for the successful implementation of inflation targeting and restructuring of the financial system. Full cooperation with the multilateral development banks is important to secure necessary program financing, re-establishing sustained growth, and reducing widespread poverty.

Abstract

Good progress has been made in stabilizing the economic and social situation since the crisis. Fiscal adjustment over a prolonged period will bring the public finances to a sustainable path. To protect social expenditures and allow higher public investment, a comprehensive tax reform is required. Strengthening central bank autonomy is essential for the successful implementation of inflation targeting and restructuring of the financial system. Full cooperation with the multilateral development banks is important to secure necessary program financing, re-establishing sustained growth, and reducing widespread poverty.

I. Introduction

1. As set out in the new framework for exceptional access cases, this separate report evaluates the case for exceptional access under the proposed stand-by arrangement with Argentina, based on consideration of the four substantive exceptional access criteria in capital account crises.1 The four substantive criteria are: exceptional balance of payments pressures in the capital account; a rigorous and systematic debt analysis that indicates there is a high probability that debt will remain sustainable; good prospects of regaining access to private capital markets within the time Fund resources would be outstanding; and a reasonably strong prospect of program success. The Board recognized that where debt restructuring is needed, difficult and well-informed assessments would be required to deal with the financial challenges and needs that are fundamentally different from those of countries with a sustainable debt burden. In particular, the substantive criteria for exceptional access in capital account crisis would generally not be met.

2. Directors generally agreed that access in debt restructuring cases would normally be expected to be within the access limits, although there could be rare circumstances warranting exceptional access. One such circumstance would arise where the country is not in a position to make significant net repurchases to the Fund and there are large scheduled repurchase obligations.2 The staff proposed some general guidelines to help inform access policy in a restructuring context: (i) as in all Fund-supported programs, its design needs to ensure that Fund access does not substitute for adequate adjustment effort over the medium term; (ii) Fund financing should not be made available to continue payments on a restructured stock of debt that would be unsustainable, or unaffordable without exceptional financing from the IMF; and (iii) Fund financing should not unduly increase the rigidity of the member’s debt stock by leaving, for example, the member country with an excessively large debt to the international financial institutions.

3. Access under the proposed arrangement with Argentina would clearly be exceptional. Argentina’s outstanding use of Fund resources at end-August was over 500 percent of quota, which is above the cumulative access limit (300 percent of quota) in the credit tranches and under the EFF. Consequently, any proposed access—even one SDR—would trigger the exceptional access procedures. In addition, and reflecting the balance of payments needs arising from large repurchases falling due to the Fund over the arrangement period, the proposed access of 424 percent of quota over the three-year arrangement exceeds the annual access limit of 100 percent of quota.

4. Against this background, this paper considers each of the four exceptional access criteria in turn in Argentina’s case.

II. Criterion 1: Balance of Payments Need

5. The exceptionally high access proposed under the new arrangement (424 percent of quota) reflects the large financing needs that Argentina faces over the next three years. The external financing gaps projected over the program period mainly reflect the need to restructure public and private debt and to rebuild reserves. The balance of payments projections are based on the assumption that it will take time to normalize relations with the international community and establish confidence.

6. The gross external financing requirements for the period 2004-06 are estimated to average US$25 billion a year, including debt service obligations on a contractual basis on unrestructured public and private debt. The authorities are seeking to meet these financing needs through: (i) a restructuring of public debt; (ii) new purchases under the requested Fund arrangement of almost SDR 9 billion (about US$12.5 billion); (iii) extension of repurchase expectations totaling the equivalent of about SDR 1.94 billion during the first year of the arrangement;3 (iv) broadly maintaining exposure by the World Bank and the IDB, involving new disbursements by these institutions totaling about US$6 billion; and (v) a requested rescheduling of obligations to Paris Club and other bilateral creditors for all principal payments due during the program period, including payments arising during the deferral period, estimated at about US$3.2 billion. The authorities are actively engaged in seeking a restructuring of sovereign obligations to private creditors and facilitating corporate debt restructuring so as to normalize the arrears situation as soon as possible. Paris Club creditors have already signaled their preparedness to provide general financing assurances for the program;4 and the authorities will continue to collaborate closely with the World Bank and the IDB.

III. Criterion 2: Debt Sustainability Analysis

7. Reflecting the fact that Argentina has defaulted on a portion of its sovereign debt and the need therefore for a debt restructuring, Argentina does not meet the debt sustainability criterion for exceptional access. The baseline debt sustainability analysis shows continued financing gaps from 2005 onwards (Annex). The analysis shows that with a constant primary surplus of 3 percent of GDP during 2004-10, even with generous rollover assumptions and a complete write down of Argentina’s Phase 2 debt, financing gaps would arise in the outer years.

8. The authorities are aiming for a public debt restructuring that would, in conjunction with revised fiscal commitments associated with the restructuring, eliminate financing gaps going forward and achieve a sustainable debt profile over the medium term. The authorities are developing an offer to private creditors for the restructuring of public debt. They have indicated the desire to move toward completion of a debt restructuring by mid-2004, following an initial announcement at the IMF-World Bank Annual Meetings. Under the proposed program, the authorities have committed to engage in good-faith negotiations with their private creditors on the formulation of a debt-restructuring proposal and to keep staff informed of progress in reaching a restructuring agreement. This will allow staff to evaluate whether the restructuring offer has the prospect of closing future financing gaps and is consistent with reducing IFI exposure starting from 2007.

IV. Criterion 3: Capital Market RE-ENTRY

9. Argentina’s re-entry to international capital markets during the period of the proposed Fund arrangement is unlikely. New domestic financing at market rates is assumed to be sufficient to roll over 100 percent of phase 1 loans, bank compensation bonds, and other provincial debt. The central bank is assumed to roll over 100 percent of maturing quasi-money bonds. Bonds issued for deposit conversion and to compensate civil servants for unpaid wages (averaging US$1 billion per year during 2004-06) are assumed to be amortized on their scheduled dates. No additional market access beyond these rollovers is assumed for the period 2003-10. A successful restructuring, as well as a significant increase in the fiscal primary surplus and a strengthening of other policy reforms are necessary to restore market access, create the conditions for lasting growth, and repair the damage to Argentina’s financial system and restore market access. Argentina’s ability to achieve these conditions is essential for its capacity to repay Fund credit over time.

V. Criterion 4: Strong Program Design and Implementation Prospects

10. The strategic objectives of the authorities’ program (http://www.imf.org) are: to begin restoring fiscal solvency within a fiscal framework that includes the provinces and makes room for adequate social and infrastructure spending; to implement a credible sovereign debt restructuring; to restructure banks; to improve the framework for restructuring corporate debt, including that of the utility companies; and to instill legal certainty to improve business confidence and growth. The program includes quantitative and structural performance criteria and benchmarks in the critical areas of macroeconomic policy, fiscal reform, bank restructuring, and the improvement of the investment environment.

11. The program has yet to be fully elaborated and key differences of view with the authorities may put at risk its implementation prospects. The fact that important fiscal, banking, and other structural reforms will only be elaborated later in the program is a key program weakness, especially given the front-loaded phasing of purchases under the proposed SBA.

12. With the proposed arrangement for Argentina—a prolonged user of Fund resources—the Fund will assume somewhat larger risks than in other recent cases of exceptional access (Table 1). Although appropriate country comparisons are difficult given the diversity of individual country circumstances, illustrative comparisons with the recent Fund-supported programs of Brazil (2002), Turkey (2002), Uruguay (2002), Ecuador (2000), and Russia (1998) indicate that, on average, in the year of approval of the arrangement and in the three subsequent years: (i) Fund credit outstanding in these countries remained at about 525 percent of quota, but a significantly smaller share of GDP (averaging about 5.5 percent of GDP); and (ii) repurchases absorbed a significantly smaller share of export receipts (about 5 percent on average), and about 10 percent of gross international reserves.

Table 1.

Argentina: Proposed Access, 2003

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Source: executive Board documents. MONA database, and Fund staff estimates.

High access cases include all available data at approval and on augmentation for the 22 requests to the Board since 1994 which involved the use of the exceptional circumstances clause or SRF resources. Exceptional access augmentations are counted as separate observations. For the purpose of measuring access as a ratio of different metrics, access includes augmentations and previously approved and drawn amounts.

The data used to calculate all ratios is the projection, at the time of program approval, for the year in which the program is approved.

Phasing is based on program years.

13. The key risks to the program are set out in the main staff report (http://www.imf.org). Significant risks arise from the fact that key fiscal and banking reforms that are crucial to sustainability will only be fully elaborated and formulated at a later stage. In the fiscal area, the lack of specific commitment on the medium-term fiscal effort involves large uncertainties and risks undermining the credibility of the debt restructuring strategy. The electoral cycle of ongoing congressional and gubernatorial elections and the administration’s need to consolidate its influence constrain the room for maneuver presently, and create uncertainties about the eventual political consensus for key parts of the program. The authorities view the sequencing of actions under their program as necessary to develop a strong domestic consensus for reforms and to facilitate their implementation. There is however, a clear risk that the absence of up-front strong commitments masks fundamental differences of view with the staff on key policy areas, which will only become apparent later. Another major risk—and source of market concern—is the authorities’ strategy for restructuring their debt with private creditors. Good-faith efforts in pursuing the restructuring, including demonstrated willingness to make additional fiscal efforts to assure the restructured debt can be serviced, will be essential on the part of the authorities, and an early and sustainable restructuring is crucial to the ultimate success of the program. Notwithstanding the above, the authorities have demonstrated considerable ownership of this Fund-supported program during its negotiations with a high degree of personal involvement by President Kirchner.

ANNEX: Debt Sustainability and the Sovereign Debt Restructuring

1. This Annex discusses Argentina’s public debt sustainability, and provides updated information on the projected availability of resources to meet debt service due to official and private creditors.

A. Background

2. In November 2001, Argentina embarked on a two-phase approach to debt restructuring to deal with a debt service burden that was no longer sustainable:

  • The first phase (“phase 1”) was aimed mainly at domestic creditors. The exchange involved an offer to exchange all U.S. dollar and Argentine peso bonds for new domestic guaranteed loans. It was completed in December 2001 with about US$42 billion of federal government bonds exchanged, and was later extended to include Arg$23 billion of provincial debt. Debt restructured in phase 1 has continued to be serviced.

  • The second phase (“phase 2”) was to be aimed mainly at foreign creditors. However, on December 23, 2001, the authorities declared a moratorium on the service of bonds held by private creditors and of debt to most official bilateral creditors. As a result, the phase 2 restructuring was never initiated.

3. Phase 2 debt is projected to reach US$89 billion by end-2003 (Table 1). Most of this debt is held by external creditors—both institutional and retail—from Europe, Japan, and the United States. In August 2003, the authorities issued an executive decree that moved some US$13 billion of bonds held mainly by domestic pension funds from phase 1 into phase 2 (these bonds had an original value, after including arrears, of US$ 19-20 billion prior to the phase 1 exchange); the pension funds had not accepted the pesoization of their guaranteed loans denominated in foreign currency.

Table 1.

Projected Consolidated Public Debt: 2001-03

(In US$ billions, end period)

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Sources: Fund staff estimates based on historical data provided by the Argentine authorities.

Includes provincial debt assumed by the federal government.

The calculation uses US$ GDP of the preceding 12 months.

This includes the sum of nonperforming Phase 2 debt, bilateral, bank and other debt, and assumes half of provincial debt is nonperforming.

Reflects arrears to multilateral development banks at end 2002.

4. The authorities intend to announce the broad terms of a restructuring offer to creditors at the 2003 Annual Meetings. In particular, they have said that they will clarify the scope of debt to be restructured, the treatment of initial claims, including past due interest, and the general terms of the new restructured instruments.

B. Debt financing and sustainability analysis

5. The staff’s baseline scenario makes the following assumptions (with details shown in Table 2):

  • A constant primary surplus of 3 percent of GDP from 2004-10.

  • The program macroeconomic framework as illustrated in the authorities’ Memorandum of Economic and Financial Policies (http://www.imf.org).

  • Exposure to the IFIs is kept constant during the program period, and is then reduced by USS1.5 billion each year from 2007 onwards, of which US$1 billion relates to the Fund and US$0.5 billion to the World Bank and IDB. A rollover of principal to the Paris Club and other creditors throughout the projection period is also assumed.

  • New domestic financing at market rates is assumed to be sufficient to roll over 100 percent of phase 1 loans, bank compensation bonds, and other provincial debt throughout the projection period.

  • The BCRA is assumed to roll over 100 percent of maturing quasi-money bonds. Bonds issued for deposit conversion and to compensate civil servants for unpaid wages (averaging about US$1 billion a year during 2004-06) are assumed to be amortized on the scheduled dates.

  • No additional market access beyond these rollovers is assumed.

Table 2.

Baseline Assumptions

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Source: Fund staff estimates based on historical data provided by the Argentine authorities.

6. On these assumptions, the baseline scenario gives the following results:

  • There would be large financing gaps during 2004-06, averaging 6 percent of GDP a year (assuming phase 2 creditors are paid on a contractual basis); these large gaps would persist in the outer years, averaging 3.5 percent of GDP a year (Table 3). Excluding phase 2 debt service would reduce the financing gaps to zero on average during the program period and to 0.9 percent of GDP on average in the outer years.

  • Net debt service to the official sector and on performing private debt would consume 3.3 percent of GDP on average over 2005-06, the final two years of the program period. IFIs and other official debt would account for one-third of this amount.

  • The financing need for servicing the official sector and the performing private debt would rise to 4 percent of GDP in the outer years, reflecting declining IFI exposure from 2007 onwards.

  • Thus, a primary surplus of 3 percent of GDP would not be sufficient to cover payments due on official debt and private performing debt after 2004; it would also leave no room for payments to phase 2 creditors (Text Figure).

  • The assumed rollover of domestic debt cannot be taken as assured.

  • Other ways to close the financing gaps (beyond increasing the primary surplus) include broadening the restructuring beyond phase 2 debt, and using international reserves.

Table 3.

Argentina: Medium-Term Consolidated Government Financing Projections Before Further Debt Restructuring, 2004-10

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Source: Fund staff estimates

Assumes a rescheduling in which amortization is fully rolled over.

Excludes cash interest and amortization payment needs arising from principal and interest arrears.

New borrowing results from the assumed full rollover at market interest rates of Phase 1 loans, quasi-money bonds and other provincial debt.

Assumes financing gaps will be eliminated by debt restructuring or other means and therefore will not add to debt levels or create interest costs.

A03app1ufig01

Baseline scenario

primary balance vs net debt service, % of GDP

Citation: IMF Staff Country Reports 2003, 392; 10.5089/9781451801385.002.A003

C. Sensitivity analysis

The baseline scenario is sensitive to key assumptions (Table 4):

  • A change in the primary surplus naturally has a one-for-one effect on the size of the financing gap.

  • A 1 percentage point reduction in the growth rate during 2004-10, to 3 percent over the program period, and below 3 percent thereafter, would raise the financing gap by 0.1 percentage points of GDP on average a year during the program period and around 0.2 percent of GDP on average during 2007-10.

  • A 10 percent step depreciation in the exchange rate in 2004 compared with the baseline would increase the financing gap by about 0.2 percent of GDP on average a year.

  • A 3 percentage point higher interest rate applying to new market borrowing during 2004-10 would increase the financing gap by about 0.3 percentage points of GDP throughout the period.

  • An assumption of 50 percent rollover by phase 1 and bank creditors, rather than 100 percent, would raise financing gaps by around 1 percent of GDP a year, while an assumption of 50 percent rollover by depositors, rather than zero, would reduce the financing gap by only 0.1 percent of GDP per year

  • Financing gaps could also be reduced by the resumption of new domestic and international market access before 2010.

  • In summary, the above results show that the size of financing gaps is sensitive to various assumptions but, in the absence of changes in the primary surplus, it is difficult to envisage a scenario that allows performing debt and restructured phase 2 debt to be serviced on a sustained basis.

Table 4.

Argentina: Sensitivity of Financing Gaps

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Source: Fund staff estimates.

On a contractual basis. Excludes cash interest and amortization payment needs arising from principal and interest arrears.

1

See “The Acting Chairman’s Summing Up of Review of Access Policy Under the Credit Tranches and the Extcnded Fund Facility”. and “Access Policy in Capital Account Crises-Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy.” Where time permits, this separate report is to be provided in advance of the circulation of program documents, which was not the case for Argentina. In all cases. this report would be included in the program documents and hence the need for this separate report.

2

See page 20 of “Access Policy in Capital Account Crises-Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy.”

3

This includes a repurchase expectation amounting to the equivalent of SDR 198 million that arises on September 19, 2003. The extension of this repurchase expectation has been proposed for Board approval in a separate paper because it arises prior to the likely date of Board consideration of the request for the proposed SBA.

4

In a meeting on September 11, the Paris Club agreed to provide general financing assurances that would cover a rescheduling of arrears and principal falling due during the period of the arrangement, although the specifics would be addressed at the time of the negotiations.