By Valerie Hernandez, International Banker
Few countries in the world can lay claim to having more experience with sovereign defaults than Argentina. Having first failed to pay its debts back in 1827, South America’s second-largest nation has gone on to achieve the undesirable feat on a further seven occasions, with the most recent episode occurring in 2014. To say that economic turbulence is fairly commonplace for Argentina, therefore, is something of an understatement. And with the country once again seemingly running out of money, a scarcely believable ninth default now looms.
The country’s new president, Alberto Fernández, has even compared the current situation to the 2001 default, which was perhaps the most disastrous of all eight episodes in terms of the economic damage it inflicted. This itself provides some indication of just how dire Argentina’s economy has become. “It is not the same as 2001, but it is similar,” Fernández acknowledged in December. “At that time poverty was at 57 percent, today we have 41 percent poor people; then we had a debt default, today we are in virtual default.”
A centre-left Peronist, Fernández was sworn in on December 10, along with his vice president—and former president—Cristina Fernández de Kirchner, taking over from Mauricio Macri of the Republican Proposal party. Despite his best efforts to promote a free-market, pro-business agenda, Macri ended his tenure with a deep recession, soaring poverty rates, a severely weakened peso and perhaps most importantly, a debt burden more than 85 percent of gross domestic product (GDP), which is now threatening to send Argentina hurtling towards another default. Around $60 billion of that debt is due this year to creditors, which means the pressure is firmly on Fernández to avert a default during the coming months.
The government is now seeking to restructure $100 billion of debt in total, $44 billion of which is due to its biggest creditor, the International Monetary Fund (IMF). All eyes are now firmly on the showdown between these two parties, with many wondering if the Fund will insist on a deal that presses Buenos Aires to first embark on a fiscal-austerity programme in order to repay its debts. Kirchner has insisted that the IMF agree to a significant haircut and that the government will refuse to repay anything so long as Argentina remains in recession. “This government will not allow the Argentine society to be hostage to international financial markets, nor will it favour speculation over the wellbeing of the people,” the economy ministry stated in mid-February. The economy minister, Martín Guzmán, has also made clear that a fiscal-austerity programme is likely to trigger only further economic deterioration and, thus, will continue to stymie the government’s ability to fulfil its repayment obligations.
Therefore, growth-stimulating policies rather than a fiscal surplus, Mr Guzmán believes, should be the priority. “There is going to be frustration among the bondholders,” Guzmán told the National Congress in a bid to drum up support for implementing an independent government economic policy that’s not directed by outside investors. “It is neither realistic nor sustainable to reduce the fiscal deficit in 2020. We need expansive policies.” Given that Argentina’s 2001 debacle saw millions of its citizens fall into poverty, which many attribute to the IMF-mandated fiscal policies that were enacted, it is perhaps understandable that the country has since developed an aversion to going down the same road again.
As Guzmán has warned, private bondholders are indeed now fearing that they may have to end up taking a substantial hit, while Argentina escapes having to implement fiscal reforms to at least attempt to pull the country out of recession. “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. And their frustrations are likely to only grow in the short-term, especially given that Argentina has yet to formulate a clear economic strategy to support its bargaining position. Indeed, no target for reducing the fiscal deficit has been announced, other than a 1-percent surplus set for 2026. The evidence thus far suggests that bondholders are not in a particularly charitable mood, moreover. The Buenos Aires province, for instance, managed to narrowly avoid default in early February by deciding to honour its $277-million payment on a 2021 bond, after creditors such as Fidelity Investments refused to grant an extension.
And creditors will have been at least moderately reassured after IMF Managing Director Kristalina Georgieva confirmed that her institution will not be offering any haircuts. “Our legal construct is such that we cannot do measures that may be possible for others without this big global responsibility,” Georgieva stated. The Fund has also described Argentina’s outstanding debt as unsustainable and that it would be insufficient to simply rely on fiscal-policy measures to alleviate the burden. It has already pressed for Argentina to produce a plan that restores debt sustainability and includes a “meaningful contribution from private creditors”.
It may seem, therefore, that the two parties remain at an impasse. But after Guzmán met with Georgieva in late February, there has appeared to be a hint of progress. For one, Argentina has now allowed the IMF to conduct an Article IV review of the country’s accounts, which could potentially be a precursor for a new agreement that may end up replacing the $57-billion loan agreed with the previous government in 2018. Again, creditors will undoubtedly be wary of the nature of any new deal. “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.”
The situation within Argentina, meanwhile, remains a precarious one. With the debt restructuring still not resolved, many businesses are freezing their investment plans until progress has been made. Some businesses and wealthy individuals have even left Argentina, with the last couple of years seeing almost $50 billion exit in capital flight. And Fernández’s hike of taxes on assets held abroad by individuals to thrice the rate in effect under the previous administration immediately upon taking power in December will do little to convince them to stay.
Then there is the not exactly insignificant issue of inflation, which has skyrocketed to among the highest in the world, with rates remaining above 50 percent throughout most of last year.
Bringing this rate down will be a decidedly tricky challenge for Fernández, especially given the scarcity of US dollars, which are used in Argentina to price important markets such as real estate and commodities and which have become the preferred currency for Argentinian savers following the previously well-publicised problems experienced with domestic units. But the greenback shortage has sent both official and black-market exchange rates skywards. From the end of 2015, the official rate has climbed from 12 pesos per dollar to more than 60 at present, while the black-market rate is now around 80 pesos per dollar.
According to Hernán Letcher, director of the Center for Political Economy of Argentina (CEPA), it remains “difficult” to have inflation running below 20 percent in an economy like Argentina’s, as salary raises consistently fail to keep pace with rising prices. “We have an economy that is dominated by consumption. So when you lose purchasing power, you have a grave macroeconomic problem,” Letcher recently observed.
There is also a growing fear that the government simply resorts to printing money to address its debt payments, which would only exacerbate the already disastrous inflation problem. “The big narrative is always that there’s no fiscal discipline,” Benjamin Gedan, director of the Argentina Project at the Wilson Center in Washington, told Bloomberg. “They want to import products that require dollars, they overspend and borrow in dollars, and they don’t generate dollars because they have a closed economy. And so it’s this endless cycle. That’s the story every time.”
So, is there any way Argentina can avoid a ninth default? Absolutely, but much remains pending with respect to outstanding negotiations with creditors. A tentative deal may be struck by the end of March, but as a former finance secretary, Daniel Marx, recently warned in the Financial Times, there will “still be a lot to sort out after that”, and it “won’t be that easy”. That said, Marx believes that the chance of achieving a successful restructuring is at least more than 50 percent at this stage. Indeed, it would seem likely that all parties involved will end up softening their positions, especially Fernández, who would bear economic and political costs that would severely damage his presidency should a default transpire. As such, while there is still a long way to go, some hope exists for Argentina at this stage.