BUENOS AIRES (Reuters) - A new program being discussed by Argentina and its biggest lender, the International Monetary Fund, could set up private bondholders for heavy losses without requiring the spending cuts needed to make the country solvent, investors say.
Argentina and the IMF announced last month they would start Article IV consultations - allowing the Fund to inspect Argentina's accounts - as a stepping stone to a possible new program that would replace a defunct $57 billion loan agreement struck by the previous government in 2018.
An IMF technical team is due in Buenos Aires this week to meet with economy ministry officials and review the left-leaning government's economic plans.
The negotiations with the Fund are part of a broader restructuring of about $100 billion in debt that Argentina's government says it cannot pay unless given time to revive stalled economic growth.
Analysts and bondholders said discussions on a new program between President Alberto Fernandez's government and the Fund are better than the alternative of having Argentina unilaterally impose terms without IMF feedback.
But so far, the Fund has not challenged Argentina's refusal to impose fiscal austerity on an economy in recession.
That is stirring unease among investors - who are hoping the new program will include measures to rein in spending - as they brace for hefty "haircuts," or reductions in principal payments on their bonds.
"Our view is that the capacity for Argentina to service its debt is a lot higher than what the government claims and they should be aiming for a higher fiscal surplus," said Steffen Reichold, portfolio manager at Stone Harbor Investment Partners, which holds some Argentine debt.
"Many people have raised this point. We've raised it to IMF. This will be a key issue in the discussions once Argentina makes its first offer," he said.
Economy Minister Martin Guzman has stressed two points in talks with the IMF and comments to Congress: the government, in office since December, will not keep paying debts it considers unsustainable and fiscal austerity would only hinder Argentina's repayment capacity by worsening the economy.
Guzman insists that growth, not fiscal surpluses, should be first on the agenda as he tries to steer Latin America's third-biggest economy toward solvency. Wall Street, aware of Argentina's decades-long history of financial mismanagement, wants to see close IMF supervision.
"The market would like to see the Fund use its institutional credibility and expertise to encourage the authorities to strengthen their fiscal stance and embrace structural reforms," said Goldman Sachs emerging markets analyst Alberto Ramos.
"But it seems the IMF will not do that. The Fund seems happy with Argentina's lack of commitment to significantly improve the medium-term fiscal picture and deal with its perennial fiscal imbalances," Ramos said.
'MEANINGFUL CONTRIBUTION'
The last IMF mission to Argentina ended on Feb. 19. At that time, the Fund said Argentina's debt situation was unsustainable and urged Buenos Aires to draft a definitive plan to restore debt sustainability, including a "meaningful contribution from private creditors."
President Fernandez - initially deeply skeptical about continued involvement with the IMF - has set a March 31 deadline to deal with the country's public debt, and the Economy Ministry has published a timeline for the process.
Some analysts, however, doubt the deadline is realistic.
"It's a fantasy," said Mariano Marco del Pont, chief of trading at Silver Cloud Advisors in Buenos Aires.
Carlos de Sousa, lead emerging markets economist at Oxford Economics, said it was unlikely Argentina and the IMF would agree on a new program before the year ends.
"IMF loan maturities don't start coming due until the second half of 2021, so there's no rush to agree on a new program," De Sousa told Reuters.
The last time Argentine did a big bond restructuring was in 2005 and 2010. That deal, done without the IMF's endorsement, resulted in years of lawsuits that kept the country in default until 2016. Guzman has said he wants to avoid that this time around by striking a collaborative agreement with holders.
It will not be easy. Bond prices are already showing expectations of a 40% to 50% haircut, depending on bond maturity and whether the debt is governed by local law, Marco del Pont said.
The big question, analysts said, is whether the IMF will sign off of on a program that contains no push to cut spending in order to ensure the government's ability to repay its debts.
"The IMF will ask for tougher measures for Argentina and the government should take them if it wants the fund's support," Marco del Pont said.
"There is a great uncertainty and the clock is ticking," he said. "I would be very cautious."
