By Rodrigo Campos

NEW YORK (Reuters), Argentina’s refusal to compromise on its deficit-spending plan has put it back on a collision course again with the International Monetary Fund. Analysts predict that the country will have to change its stance to avoid a larger crisis.

Since more than a decade, talks between the Argentine government & IMF have continued for over a year. Argentina wants to avoid defaulting with IMF because $19 billion of payments are due this year. This is part of $45 billion worth debt which must be refinanced in order to restore South American country’s credibility to the markets.

Martin Guzman (Finance minister) said last week that Argentina’s fiscal deficit was the biggest sticking point during negotiations with the Fund. His economic plan includes five years more of deficit running and the printing of money to fill in the gaps.

Guzman claimed that while the Fund proposal “would stop the economic recovery Argentina’s is having,” his plan would allow for “continuity to this strong recovery.”

Although the IMF didn’t comment on this article, it said last month that Argentina must reduce its fiscal deficit by monetizing it and increase inflation-adjusted interest rates.

For a related graphic on Argentina schedule of payments to the IMF, click https://graphics.reuters.com/ARGENTINA-IMF/PAYMENTS/znvnekdoopl/chart.png

Guzman’s announcement was met with dismay by many international investors.

The details in the presentation were “disappointingly scant,” said Stuart Culverhouse, head of sovereign & fixed income research at Tellimer in London.

Culverhouse explained that it is not possible to see where the growth comes from without strong increases in farm prices.

Siobhan Morden (a managing director at Amherst Pierpont Securities) described the plan in a “defiant” approach that insists on a failing economic model.

In a research note, she stated that the Minister Guzman presentation “looked more like political theater than any rational technical discussion on an economic program.”

To even out what the government perceives to be a politically motivated program that was approved by the Fund in 2018, to benefit former President Mauricio Macri, it seems like the government is relying on requesting leniency from Fund.

The Fund has criticised the plan because it was too inflexible to address Argentina’s political and economic realities. It also criticised the willingness of the government to accept optimistic projections.

Guzman’s proposal seems to also be based on optimistic forecasts.

The IMF shares his plan for economic growth, which he predicts will be almost twice the rate of current market consensus. Inflation is expected to be at 33% by 2022 while most expect it will remain over 50%.

The IMF program is the only way for Argentina to prevent economic collapse. Failure to agree would result in Argentina defaulting with the Paris Club, a group of state creditors that last year demanded Argentina make a deal for its debt with it.

With its dollars sovereign bonds yielding around 20% at different maturity levels, the government finds it difficult to access international debt markets. According to economists, this leaves little choice than to print additional money to pay down the deficit.

“Absent access to external markets and amid low domestic savings, a slower fiscal consolidation path implies higher monetary assistance and therefore higher inflation and wider financial imbalances in terms of the parallel-official FX gap,” Diego Pereira, chief economist for the Southern Cone & Peru at JPMorgan (NYSE:), said in a client note.

Official exchange rates are around 103 pesos per $1, but the black market rate is very close to 205.

PRICE CRUNCH

The Argentina central bank increased rates for its 28-day note by 200 points to 40% on Thursday. This implied 48.3% annualized rate, according to JPMorgan is still lower than inflation forecasts at 50%.

Goldman Sachs (NYSE) described the move as a “very minor step on a long path towards monetary normalization” while stating that the current monetary-fiscal policy mix, extensive capital and financial control systems are unsustainable. This is inconsistent with medium-term growth.

An analyst agrees that there is a chance of a deal being reached given the importance of the issue.

Carlos de Sousa (Zurich emerging market debt strategist, Vontobel Asset Management) stated, “First, you need to avoid having a default at the IMF. Which in itself would not trigger a default for the (sovereign bonds), but it will negatively affect pricing.”

Pereira also believes a deal would be the foundation case of JPMorgan. However, he said negotiations might experience a temporary blockage in the weeks ahead. He stated that any fiscal adjustment required by the IMF will be much less painful than the possible economic chaos caused by defaulting on Fund loans.

He said, “Agreement with IMF before March ends seems to be a prerequisite for avoiding more disruptive scenarios.”