Argentina’s president was in no mood to compromise. Agreeing a quick deal with the IMF would mean “going down on my knees and complying with the creditors’ demands”, Alberto Fernández bellowed to a crowd of trade unionists in Buenos Aires last week. “That’s not what a Peronist does. We know who we represent: we represent you, not the creditors.”

As a March deadline looms for Argentina to repay billions of dollars to the IMF from a record-breaking $57bn bailout, the leftwing government faces an economic crisis and needs a fresh deal with the fund to unlock more cash. But instead of pushing for an agreement, Fernández and his key ministers are hardening their line ahead of midterm elections on Sunday, in which the governing Peronist party may lose its senate majority. They have surprised IMF officials by insisting on big concessions, such as lower interest rates and much more time to pay.

“I have become increasingly pessimistic,” says a source close to both sides in the talks. “Right now, it’s so uncertain that anything could happen.”

At stake is the reputation of the IMF as it tries to help key emerging market economies out of pandemic-induced recessions and the future path of Argentina, a G20 member and major grain exporter which risks cutting itself off from the international community and retreating into isolation.

Most economists agree that failure to reach a deal with the IMF by the end of March would be disastrous. It would mean Buenos Aires falling into arrears with the fund, a move which would cut off credit from other multilateral lenders. With private investors already shunning Argentina after it defaulted briefly on their debt last year, a confrontation with the fund would leave Argentina an international financial pariah.

Yet for a hard core of the governing Peronist party, such a result would be hailed as a victory, proving that Argentina can defy the international financial system and pursue its own nationalist path towards economic development.

“The IMF’s relationship with us is not one of a creditor to a debtor,” says Juan Grabois, leader of a radical grassroots social movement allied to the ruling coalition. “It’s the relationship of a scammer to someone they’ve scammed. For us, the IMF is the devil.”

‘Only game in town’

The IMF’s $57bn bailout to Argentina was controversial from the start. Agreed in haste in 2018 when Mauricio Macri, the pro-investor president, hit a markets crisis that triggered a two-week run on the peso, the loan was approved amid strong support from Donald Trump, the then US president, for the Argentine leader, whom he considered a political soulmate.

Concerns about making such a large loan to a country that had already been bailed out 21 times in six decades by the fund were waved aside.

“We were the only game in town,” Christine Lagarde, who was president of the IMF at the time, said in 2019 when justifying the bailout. “There was nobody else at the time to invest in the recovery process?.?.?.?and given the size of the challenge, we had to go big.”

The payment timetable for the $57bn loan aroused particular ire among critics in Argentina. They pointed out that while the IMF disbursed almost all the money before Macri faced re-election in October 2019, most of the repayments were bunched into two later years, 2022 and 2023.

In the event, Macri lost a primary by a landslide two months before the main election, markets plunged again and the IMF stopped the payments. Only $44bn out of the agreed $57bn was disbursed by the time Macri left office in December 2019 after a heavy election defeat and handed over an economy already in recession to Fernández.

“The loan from the fund was very obviously to finance Macri’s campaign,” says Santiago Cafiero, Argentina’s foreign minister. “The biggest loan in the history of the fund was used to finance capital flight in 2018-19, the fund has a big responsibility for that?.?.?.?there were inadequate procedures in the fund.”

Gerry Rice, the IMF’s director of communications, said last week that “we continue to work toward a programme that can help Argentina and face the challenges of the moment and set the basis for inclusive growth”. Rice has previously rejected Peronist claims that the fund broke its own rules with the bailout to Macri’s government.

Those briefed on the negotiations have been particularly concerned that economy minister Martín Guzmán, Argentina’s chief negotiator and formerly a moderate voice in the government, has toughened his line.

In October, he accused the IMF of using the loan to finance Macri’s election campaign. In an interview with the Financial Times, he blamed the IMF for Argentina’s looming shortage of dollars next year. “The reason why Argentina faces a problem in its balance of payments in 2022 is precisely because of the presence of the IMF loans”, he said. Argentina is due to pay the fund a total of nearly $19bn next year.

Such statements, says the source close to the talks, “affect how the fund’s shareholders see the country. It makes them less willing to accept a programme”.

Benjamin Gedan, who runs the Argentina project at the Wilson Center, says: the government’s arguments about the bailout “are completely irrelevant”.

“The Peronists for domestic political purposes want to re-litigate the terms of the last bailout rather than have a conversation about managing debt, the deficit and inflation. [They] say there is a tactical advantage to doing this but the reality is that the IMF leadership and board will judge a new programme on its merits,” he adds.

Ground control to Fernández

As the mood between Argentina and the IMF sours, the economy is stuttering.

Cut off from most sources of international finance, the government has resorted to printing money to help fund its deficit, fuelling inflation which is topping 50 per cent a year. To conserve scarce foreign currency, strict capital controls limit the amount of dollars Argentines can buy and the black market dollar has rocketed to almost the official rate. Ministers have ordered a price freeze to control the cost of more than 1,400 household items.

“Macri’s big idea was for Argentina to be part of the world,” says a second source close to the debt talks. “That is not part of the current Peronist ideology.”

A viral video meme, “The Dollar Goes to the Moon”, conveys vividly the sense of despair in the country. Using footage from the film Apollo 13, it shows mission control with the countdown to lift-off under way.

The flight director runs through a pre-launch checklist: “Economy?” “Stagnant,” comes the reply from colleagues in mission control. “Investment?” “Zero.” “Country risk?” “Through the roof.” “Small businesses?” “Bankrupt.” “Inflation?” “Rising.” “Price controls?” “In progress.” “Taxes?” “169 and counting”, and so on.

Then the controller presses a button and a giant US dollar soars into space, to the despair of watching Argentines. “Damn, I didn’t buy,” sighs one. The clip has been shared 2m times across different social media platforms.

“The checklist in this rocket launch scene was perfect for our country,” says Andy Olivera, a comedian from Buenos Aires who co-produced the meme. “Our biggest concern as voters in Argentina is the economy, that’s why this video is so popular. People are poorer. It’s simple.”

Economists see a moment of reckoning approaching. “Inflation and the foreign exchange gap are at near multi-decade highs; the fiscal deficit is too wide for a country with limited market access; the central bank’s balance sheet has deteriorated markedly, with net FX reserves dwindling. And import and capital restrictions limit activity and cloud the growth outlook,” said Fernando Sedano of Morgan Stanley in a recent report.

The government dismisses such gloom. “Argentina is on the correct path,” says Cafiero. “The problem is the debt, the problem is not our path of economic recovery.” 

Yet bankers in Buenos Aires blame government policies for scaring away investors. As one put it: “Argentina has a viable economy but it is financially bankrupt. It’s like a company which keeps producing but can’t finance itself.”

The prospect of IMF negotiations not succeeding before the March deadline for a $2.8bn repayment to the fund is causing alarm. Both sides repeat mantras about making constructive progress, even though officials say privately that few real advances have been made so far.

“The chances of a deal have declined significantly,” says the second person close to the talks. “I would still put it as the most likely outcome but there are some people?.?.?.?who already think the probability is much lower”.

The key sticking points are Argentina’s demands for surcharges to be dropped on the interest rates it pays to the IMF and to have more than the standard 10 years for repayment. For its part, the IMF wants to see a credible plan to cut the country’s fiscal deficit over the next few years.

With Argentina’s net foreign currency reserves running low, economic logic suggests that even a bare-bones deal would be the best outcome for both sides, yet the politics of a deal are becoming increasingly complex in Argentina.

The Peronist coalition is likely to suffer a heavy defeat on Sunday, something that would sharpen internal divisions ahead of the next presidential campaign in 2023. The radical wing, led by Cristina Fernández de Kirchner, the influential vice-president, believes the answer is to reinforce nationalist policies, step up government controls on the economy and insist the IMF gives way.

Analysts say Guzmán is under heavy pressure from hardliners to take a tougher line with the fund. In what was widely seen as a shot at the economy minister, Kirchner implied that the government had erred by not spending enough in an open letter published after the Peronists suffered a drubbing in primary elections in September.

“Our supporters voted for social assistance which didn’t happen,” says Eduardo Valdés, a Peronist congressman close to Kirchner. “Budgets which should have helped people were not fully spent.”

With polls showing the opposition heading for a big victory in Sunday’s elections, Fernández and his ministers want to be seen to take a hard line with the fund. Horacio Larreta, the Buenos Aires mayor who is among the opposition’s most popular figures, has said the bailout deal is not good or bad in itself and that the best way to renegotiate it is to convince the IMF that Argentina has a sound economic plan.

Guzmán said that the chances of an IMF deal by March depend “principally on the support of the international community for what Argentina is proposing”. He reiterated demands that the fund drop the interest surcharges it imposes on Argentina’s debt and give the country more time to pay.

“It’s a kind of weird strategy in which Argentina puts something on the table that is very hard for the fund to deliver,” says the second person close to the talks. “And they have it lingering there as an excuse in case there’s no agreement on a policy programme.”

The repeated Peronist outbursts against the fund have taken a toll in Washington — the US is the fund’s biggest shareholder. Officials close to the talks warn that among some of the IMF’s other larger shareholder nations, who must approve any new deal, patience with Argentina is wearing thin.

“They are not the country you would want to make an exception for,” says one official familiar with the negotiations. Guzmán’s own credibility with markets has also declined as months have passed without progress on the IMF talks. Many believe he missed a golden opportunity to seal a deal with the fund last year, straight after successfully renegotiating $65bn of debt owed to international investors.

“The [IMF’s] original plan was to have an agreement a year ago,” says the first source. “It was never the idea to get to the end of 2021 in this position. There were consistent warnings to Argentina that delaying would only make things more difficult”. 

“In two years, Guzmán has done nothing other than debt negotiations,” says Alfonso Prat-Gay, who was finance minister in Macri’s first year, before the IMF bailout. “The deal with private creditors last year just kicked the can down the road and nothing has been achieved with the IMF. It’s a fiasco.”

‘Absolute nightmare’

Sergio Berensztein, an influential political consultant and newspaper columnist, thinks the most likely scenario is what he terms “mediocre muddling through”. “There will be a suboptimal deal with the fund, a small devaluation” and some modest reduction in the deficit. “It won’t solve anything fundamental,” he adds.

Even if such a deal were struck, people close to the talks warn that it could quickly veer off track. A new IMF agreement would provide Argentina with fresh cash to repay existing debt to the fund. But a review of whether the country had met its obligations would be needed before every payment.

“It would be an absolute nightmare,” says the first person close to the talks. “Every three months you would have a nail-biting panic over whether the review was on track and whether the IMF board would approve a disbursement.”

Asked about the chances of reaching an IMF deal by March, Guzmán told the FT: “It will depend principally on the support of the international community for what Argentina is proposing”.

“We all think the same way,” says Cafiero, the foreign minister. “We want a good agreement, not a quick agreement. We need the fund to show willingness to advance on a?.?.?.?programme which includes the particularities of this country.”

As the prospects of a deal by March fade, some are starting to prepare for a worst-case scenario. “I’m pretty sure that Argentina will go into arrears [with the IMF], either because the negotiation ends without a programme or as part of the negotiation,” says the second person familiar with the talks.

“There seems to be a line of thinking within the Argentine government that arrears for the fund are more costly than for Argentina,” he says. “So they might play that card for a month to see if the fund is going to bend on some of Argentina’s demands?.?.?.?their policies are crazy.”