Argentina on brink of ninth debt default
Argentina’s showdown with its private creditors is set to go down to the wire. After an offer to restructure $65bn of foreign debt failed to secure enough support among investors by the government’s self-imposed deadline on Friday, it has now been extended to Monday.
If there is no agreement between the two parties, Argentina could descend into its ninth sovereign debt default as soon as May 22, when a grace period ends for a $503m debt payment that the government skipped last month. For now, both the government and investors appear to be locked into intransigent and incompatible negotiating positions. Will they be able to cut a deal?
Few would disagree that Argentina needs to restructure its debt. It now stands at $323bn, or 88 per cent of GDP, and according to the government it will balloon to 146 per cent by 2040 if left unchecked. The spreads between yields on Argentine bonds and US Treasuries — a key indicator of risk — have soared since markets took fright after it became clear last year that the populist Peronist party was likely to return to power. The historic highs illustrate the market’s fears about the country’s ability to repay its debt, with a default already fully “priced in” to Argentine bonds.
Argentina’s government is the first to agree that it cannot repay its debt — indeed, President Alberto Fernández likes to say the country is already in a “virtual default”. In the words of economy minister Martin Guzmán, Argentina’s debt is “unfinanceable, unaffordable and unsustainable”. The IMF, Argentina’s largest creditor having lent it $44bn since a currency crisis in 2018, weighed in with a debt sustainability analysis in February, which also concluded that Argentina’s debt is unsustainable.
The ructions in the peso over the past few years are another clear sign of the severe stress that Argentina’s economy has been under. The 2018 currency crisis triggered a deep and long-lasting recession (the government expects a 6.5 per cent contraction this year) that is complicating Argentina’s ability to repay its debt, and has fuelled one of the highest inflation rates in the world, now running at around 50 per cent.
At the root of Argentina’s problems is that it does not generate enough foreign currency through exports to pay its external debt. “To avoid the pattern of boom and bust that Argentina has experienced in the past, it is necessary that the country experiences growth in exports that is consistent with the growth in imports” that happens when the economy grows, Mr Guzmán told the FT this week. “This has never been easy for Argentina and it requires economic reforms that allow production in the trade sector to take off.”
Other countries with well-developed domestic banking systems can issue much of their debt in local currency. But Argentina’s banking system is tiny, largely because confidence in the long-term stability of the devaluation-prone peso is virtually nil, so locals are reluctant to save in pesos. Argentina’s long history of economic volatility, with periodic crises that end in default or devaluation or hyperinflation, explains why Argentines hold at least $300bn in offshore bank accounts, which governments have repeatedly failed to lure back into the country.
The government says that it cannot afford interest payments that are nearly as high as they were in the run-up to Argentina’s last major default in 2001, when they drained more than 20 per cent of government revenues. As recently as 2015, before the previous president Mauricio Macri took office, they represented less than 7 per cent.
Therefore, Argentina is asking bondholders to accept a suspension of all debt payments for three years — which means that Mr Fernández, who is already five months into his four-year term, will largely sidestep the headache of having to repay the country’s debt unless he is re-elected. The offer also includes a cut in average coupons from 7 per cent to 2.3 per cent, which many creditors argue is unreasonably low given that Argentina has a reputation as a “serial defaulter”.
Bondholders complain that Argentina is not making enough effort to repay its debts. While they accept that Argentina should be given breathing space to recover from its current economic crisis — which is exacerbated by the impact of Covid-19 — they worry that far from implementing austerity measures, public spending is actually set to rise in the coming years.
At the same time, investors claim that Argentina is purposefully forecasting low growth in order to get away with paying creditors less. The government’s debt offer projects that nominal GDP will rise to $558bn in 2030, which is $120bn lower than the IMF’s forecast. That difference would translate into a $4.8bn additional annual debt service capacity in the medium to long term, according to research by Pharo Management, a member of one of Argentina’s three main bondholder groups.
“Argentina likes to claim that it is doing everything possible, but cross-country comparisons show that this is not so — there’s nothing structural that says that Argentina can’t run a disciplined budget in the medium term,” said one international investor, pointing out that countries such as Brazil and Turkey ran much higher primary fiscal surpluses while reducing their debt burdens in the 2000s. The investor clarified that allowances must be made for the short term: “No one is arguing for more austerity in the face of the coronavirus crisis.”