The risks that Argentina would face if it does not comply with the IMF
To fall into default with the IMF, Argentina is exposed to the risk of being excluded from any line of financing launched by that organization or any of its international peers (World Bank or Inter-American Development Bank) and starting a process that could end two years later with the country’s expulsion as member of that credit institution.
That would block any possibility that might exist for Argentina to be assisted by the Resilience and Sustainability Trust. (RST) that this body plans to develop to help poor or developing countries: The objective is that they can face initiatives that allow them to leave behind the impacts of the pandemic or develop energies that help avoid greater global warming, according to an article published by the director of the strategy, policy and review department, Ceyla Pazarbasioglu, and second Uma Ramakrishnan.
This fund, which would reach US$50,000 million, would allow the organization to generate a new line of credits with longer terms and with lower cost of interest rates, like those demanded by the Fernández administration and even supported by the G-20 last year.
The formal steps that are activated in the event of a default were detailed in a report by Quantum Finance, a consulting firm chaired by the economist Daniel Marx, with a long career in the public sector and extensive experience in dealings with the IMF.
“Its standards identify a series of steps before arrears of a member country. The formal process has a temporal sequence that involves a period of 24 months, with well-defined stages, both in terms of actions and the effects on the relationship”, explains the work.
Upon incurring a delay, the country will receive a request to comply with the agreement, but in fact it will have up to a month to complete it, since only once this period has elapsed, the agency’s managing director (Kristalina Georgieva) will notify the board of the organism the irregularity.
If it persists, a stage of communications and summons is opened to achieve the payment of those that are participating, as the calendar progresses, higher-ranking officials of the different decision-making levels of the IMF.
If the default exceeds 6 months, for the IMF the debtor enters the category of “prolonged arrears” (protracted arrears), something that has already happened with 31 countries, “most of them low-income, with severe political and social conflicts (for example, revolutions as was the case in Cuba) or wars.”
The IMF does not face prolonged arrears today in the payment of credits granted to different countries since the cancellation made by Sudan (a country that defaulted on that debt for more than 37 years) in May of last year. The average number of defaults it faced was around 7.8 years and the country in the region that took the longest to regularize this situation was Peru, which defaulted on that debt between 1985 and 1993.
The Quantum report highlights that, from the moment it defaults, the debtor country “is automatically excluded from any IMF financing line until it cancels the arrears incurred”.
When arrears extend to 18 or 24 months, “the IMF first decides to suspend the voting rights of the member country and finally its exclusion as a member of the institution.”
The effects of entering into default “are varied and of changing intensity” and usually depend “on the way in which the debtor is linked to the IMF, the policies that are implemented to overcome the situation and its temporary extension, among others”, detail.
Basically, they have an impact on the country’s possibility of receiving assistance from other international credit organizations, which in recent years have provided Argentina with net financing of some US$2 billion per year through different programs.
But also the situation affects the commercial financing that companies with activity in the non-compliant country can access, since it is more difficult for them to receive pre-financing for foreign trade operations or from parent companies or external suppliers. “Last year, Argentina had imports of more than US$60,000 million and commercial debt (intercompany and third parties) with maturities between 0-180 days was in the order of US$30,000 million”, points out the work to measure the impact that it could have on these operations.