Argentina faces the prospect of another default
The election of Mauricio Macri in 2015 was supposed to usher in a new era in Argentina, a country with a reputation for toothsome steaks, rapid inflation and defaulting on its debts. Mr Macri promised to tame soaring prices with tight monetary policy, a problem Cristina Fernández de Kirchner, Argentina’s previous president, had tried to obfuscate by publishing dodgy macroeconomic data and imposing currency controls. Mr Macri abolished these, allowing the peso to float freely, and removed export quotas and tariffs. Investors applauded. After resolving long-standing disputes with bond investors, Argentina was able to issue debt once more. In June 2017 Mr Macri even issued $2.7bn worth of 100-year bonds at a yield of 8%. They were almost four times oversubscribed.
Good fortune did not last. Unexpected changes to inflation targets and rapid debt issuance alarmed investors in 2017. These qualms mushroomed into a currency crisis last year. As the peso plunged, the central bank raised interest rates to 40%. Mr Macri was forced to seek a $57bn loan from the imf. In order to satisfy the terms of the bailout, he has cut public spending and raised the prices of utilities, such as gas and electricity, and public transport. The crisis has taken a heavy toll on the economy. Argentina has been in recession for the past year; inflation is over 50%. The poverty rate, as measured by the Catholic University of Argentina, has climbed from 27% in 2017 to 35% now.
Economic hardship has not played well with voters. “We voted last time for the president because we wanted a better life, especially for our children,” says Mercedes, a shop assistant in Buenos Aires. “But life was worse under him. We worked more to have less.” On August 11th they voiced their discontent in primary elections for the presidency. The opposition, led by a veteran Peronist, Alberto Fernández, with the former president Ms Fernández (no relation) as his running mate, won 47% of the vote. Mr Macri’s coalition won just 32%.
The reaction of investors was swift and vicious. On August 12th they rushed to dump Argentine assets. Mr Macri may not have been a panacea for all Argentina’s ills, but his stewardship of the economy was far more sober than that of his predecessor, who now seems likely to be restored to high office. Argentina’s stockmarket, the Merval, fell by 37%. At one point in the day the peso was down by 30% before the central bank intervened and raised interest rates to 74%. It still closed 15% lower. In dollar terms, the stock market’s collapse is the second-biggest one-day drop recorded anywhere in the world since at least 1950. The 100-year bonds that investors had clamoured for when Mr Macri issued them are now worth just 54 cents on the dollar, implying a default risk of 57%.
The rout in asset prices was severe, first, because the hope that Mr Macri can recover is small. On August 11th nobody actually won or lost office: the vote was technically a primary and the main candidates were uncontested in their parties. But since all Argentines over the age of 16 were legally obliged to vote, it functioned as a full dress rehearsal for the real election, which will be held at the end of October. If the Fernándezes win more than 45% of the vote again in October, they will seize victory in the first round.
Second, investors are rightly fearful of the policies the pair may put in place. Ms Fernández’s spendthrift reputation precedes her. Mr Fernández warned in the final days of the campaign that devaluation of the peso was coming. He also promised to renegotiate the $57bnimfloan, and said that he could in effect default on Argentine bonds.
In the aftermath of the vote, Mr Fernández tried to strike a more moderate tone. “We weren’t crazy in government before,” he declared. Reducing expectations, one of his advisers points out that if Mr Fernández wins, a weak peso will make the job of being president “that much tougher”. But it may already be too late. As The Economist went to press, the peso had fallen by 25% against the dollar since the election.
A weaker currency will push up the prices of imported goods, causing inflation to rise even further. It also has adverse implications for the country’s bonds. Argentina has defaulted on its sovereign debt eight times since independence in 1816, most recently in 2014 when Ms Fernández clashed with hedge funds. Government debt in Argentina is currently worth 88% of gdp. Three-quarters of it is denominated in foreign currency. A falling peso will push up the burden of servicing it. Economists at Bank of America now think the probability of a restructuring next year is high, and that the recovery value of Argentina’s debt could be as low as 40%.
Could the markets’ collapse persuade Argentines to change their minds by October? Some voters surely took the chance to punish Mr Macri in the primary vote, and will come back to him in the real thing. But few think it will be enough. Eduardo D’Alessio, of D’Alessio/ Berensztein, a polling firm, says it would take “a huge, obvious mistake” by los Fernández before October to keep Mr Macri in office. Inside the president’s camp, the mood was doom-laden. “This is a catastrophe,” said one of his advisers. “It’s almost impossible to come back from this.”
Mr Macri has vowed to fight back. On August 14th he told voters: “I understand the anger.” He has introduced a $740m stimulus package of tax cuts, price freezes and higher benefit payments. Maybe it will help him claw back some votes. But whoever gets the job after the vote in October, it has just become much harder.
This article appeared in theThe Americassection of the print edition under the headline"The bonds that tie"