Someone explain to me like I'm 5 why any sophisticated financial institution would loan money to Argentina.
The IMF is p a humanitarian organization. It is the world's lender-of-last-resort. Play I Am ass is focused on return of principal, but not necessarily an adequate return on investment. Aiims will lend Argentina money when no one else will, at an interest rate lower than any rational investor, because of its political power, but also because it's Mission.
Someone explain to me like I'm 5 why any sophisticated financial institution would loan money to Argentina.
Good question. There are a few reasons.
First, the IMF doesn't have a lot of options. The IMF is already into Argentina for around $44B. Since there are no other investors willing to refinance this loan, the IMF's only choice is to roll over the debt itself with new terms (hopefully). China would probably make some type of mafia-style loan to Argentina, but the terms would be worse, so the IMF presents a better option.
Second, the IMF is not a rational investor. It does not seek an adequate return on capital. It does not adjust for risk the same way a capital markets investor would. The IMF's is funded by the world's richest countries and its mission (at least ostensibly) is humanitarian. It serves as the world's lender of last resort. This difference in profile and mission leads the IMF to make loans on economic terms that no rational investor can justify.
Third, those generous terms are not free. The IMF has a political mandate - steeped in orthodox economics - to influence the economic direction of the world in the mold of its benefactors. To receive/renegotiate an IMF loan, the debtor country must agree to economic measures consistent with western capitalism and free markets. As Greece learned to its considerable difficulty, sometimes those terms can involve painful alterations to an economy. As Venezuela learned, dictators are not shown the welcome mat at the IMF.
Last, due to the structure of the IMF, it's power is more than the terms outlined in the loan. No one really cares if Argentina grinds Blackrock down from par to $.55 cents. That's Blackrock's and its investor's problem. But to cross the IMF means to disrupt relationships with the IMF's funders - i.e. the US, most of Europe, etc...It also means to shut the emergency window of last resort. It's kinda like stiffing your rich in-laws on a loan. There's the money, but there's also all the qualitative difficulties that go along with it.
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