A broker looks at a screen at the Buenos Aires Stock Exchange in the financial district of Buenos Aires on Aug. 20, 2019 after Argentina's President Mauricio Macri swore Hernan Lacunza in as the country's new economy minister. Lacunza made stabilizing the country's battered currency his top priority, while still pledging to meet commitments made to the IMF. (Juan Mabromata/AFP/Getty Images)

As IMF $56 Billion Argentina Debt Nears Default, China’s $17 Billion Loans at Risk

News Analysis

With the IMF’s $56 billion loan issued to Argentina less than a year ago nearing default, China’s $17 billion to Argentina and $140 billion total debt to Latin America is at risk.

A team of International Monetary Fund bankers arrived in Buenos Aires on Aug. 25, with Argentina’s inflation rate at 54.4 percent; the prime interest rate at 75 percent; and Wall Street traders betting there is a 47.3 percent probability of a sovereign default.

Argentina is blessed with tremendous natural resources and abundant water wealth, but the nation of 44 million has suffered through a series of inflationary crises and sovereign debt defaults that finally resulted in the IMF cutting off further bailouts in 2001.

China has dramatically increased its engagement with Latin America and the Caribbean since 2002. At the end of 2018, China Development Bank and China Export-Import were the area’s largest lenders with $140 billion outstanding, led Venezuela: $67.2 billion; Brazil: $28.9 billion; Ecuador $18.4 billion and Argentina: $16.9 billion.

During the same period, China-Latin America trade increased from $17 billion in 2002 to almost $306 billion in 2018. Chinese leader Xi Jinping set a goal in 2015 of increasing total China-Latin American trade to $500 billion in 10 years. With $200 billion in foreign direct investment, China’s 2018 imports equaled $158 billion and exports equaled $148 billion.

But U.S. Secretary of State Michael Pompeo, while touring Latin America last fall, told reporters that under China’s “One Belt, One Road” (OBOR, also known as Belt and Road) initiative, “When China comes calling it’s not always to the good of your citizens.” He warned, “When they show up with deals that seem to be too good to be true it’s often the case that they, in fact, are.”

The comments drew a quick response from the state-run China Daily newspaper that called Pompeo’s comments “ignorant and malicious” for pointing “an accusing finger at Chinese state-owned enterprises for not being transparent and market-driven, alleging that they are pursuing benefits only for the Chinese government.”

The U.S. Congressional Research Service commented that “U.S. warnings about China [PRC] have been met with skepticism in the region and among some regional experts.” Several area leaders suggested that the recent U.S. withdrawal from the Trans-Pacific Partnership coupled with growing U.S. trade frictions with China and some Latin American countries, “may encourage greater PRC-Latin American cooperation.”

But carrying substantially more debt and its GDP unchanged since 2011, Argentina was forced to sign an IMF loan package two weeks later that required introducing a number of “emergency” austerity measures. The number of government ministries was cut in half, export taxes were raised; while annual health, education, science, transportation, public works and culture spending was slashed by $10 billion.

The Economist Magazine in a November 2018 article called China “Latin America’s sub-prime lender.” Brazil’s newly-elected hard-right president Jair Bolsonaro cast China as a menace for buying up $50 billion of Brazil’s oilfields, mines, ports, giant dams, and power grids. “The Chinese are not buying in Brazil; they are buying Brazil.”

Argentina’s sovereign debt was already considered at “non-investment grade” when the nation’s primary voters shockingly moved to oust conservative President Mauricio Macri in favor of leftist candidate Alberto Fernandez on Aug. 11. Argentina’s general election is scheduled for Oct. 27, but polls show Fernandez with a 15 percent lead.

On Aug. 16, Fitch issued a near default 3-level downgrade to CCC and Standard & Poor’s credit rating to B-. Both services joined Moody’s with a negative outlook.

Argentina has already received about $49 billion of its IMF loan, with another $5.3 billion installment distribution scheduled for early September. Bloomberg News reported that IMF bankers are currently meeting with policymakers that due to the recently downgraded credit ratings, could call the loan and force an Argentine sovereign default.

Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.