Argentina first established its bilateral swap agreement (BSA) with China in 2009 to provide a liquidity line of up to ARS38 billion or CNY70 billion (about USD10.3 billion). Signed between the Banco Central de la Republica Argentina (BCRA) and the People’s Bank of China (PBC), the agreement was set up to facilitate trade development and liquidity support.
The agreement was renewed and expanded several times over the years, allowing Argentina to access a larger liquidity facility. The swap size was expanded to about USD18.28 billion in 2018. The latest renewal of the BSA with the same size took place in June 2023.
It is a well-known fact that Argentina also has an array of financial programs with the International Monetary Fund (IMF) since 1958 to aid the country’s macroeconomic stability. As of September 1, 2023, Argentina’s borrowing from the IMF amounted to USD44 billion, making it the largest borrower of IMF financing among its global membership.
In 2018, Argentina sought financial assistance from the IMF to tackle economic crises and restore market confidence. The IMF approved a 36-month Stand-by Arrangement (SBA) for Argentina, which amounted to USD50 billion, or 1,110 percent of Argentina’s quota. The 2018 program marked the country’s 21st arrangement with the IMF and became the largest lending in the IMF’s history.
However, the 2018 SBA program failed due to deep-seated structural issues of the country, including extremely fragile public finances. The government finally cancelled the program after 14 months. As the problem of balance of payment remained huge, Argentina approached the IMF again in 2022, requesting a 30-month Extended Fund Facility (EFF) with access of around USD44 billion.
According to the 2018 SBA program, Argentina was scheduled to repay the IMF USD2.7 billion and USD2.6 billion in June and July 2023, respectively. Due to dwindling foreign exchange reserves, Argentina was reportedly drawing down a total of USD2.7 billion equivalent in yuan from its BSA with China to repay the IMF.
This unusual maneuver, or the so-called “bridge loan,” is viewed by market observers as Argentina’s attempt to avoid a default status from the IMF. It not only helped Argentina uphold market perception but also facilitated the disbursement from the IMF under its 2022 EFF program. Argentina reportedly repaid its debt to China using the USD7.5 billion equivalent disbursement under the EFF in August 2023.
While unconfirmed, it is conceivable that Argentina utilized the yuan’s freely usable currency status to potentially repay the IMF initially with yuan, subsequently using the funds received from the IMF, possibly in yuan or SDR, to repay China.
In the face of lingering financial difficulties, Argentina’s use of its BSA as a bridge loan appears unorthodox but played a significant role. This approach not only helped avert a potential default, which could have further undermined market confidence in Argentina, but also ensured continued financial support from the IMF to continue the financing program.
However, the bridge loan, serving as a temporary measure for a sovereign borrower to fulfil its financial obligations, entails substantial risk for creditors. If the sovereign borrower fails to secure continuous funding, creditors face significant risks. While using one financial solution to patch another leak may provide a temporary relief, sustainable recovery hinges on implementing substantial structural reforms to stabilize the economy and rebuild foreign exchange reserves.
To gauge the outcomes of the bridge loan taken by the former administration, one should closely monitor the new international financial policies and reforms under Argentina’s new president, Javier Milei.