Covid-19 and debt: Argentina’s make-orbreak moment
Until recently advisers to Argentina’s president, Alberto Fernández, quoted the
old saw that crisis brings opportunity. Inaugurated in December, he is dealing
with two calamities that no one can blame him for: a deep recession inherited
from his predecessor, Mauricio Macri, and the covid-19 pandemic. Argentines
give Mr Fernández high marks for his response. On becoming president he
raised taxes and froze pensions and salaries to stabilise public finances. He
acted early to slow the spread of covid-19, shutting borders, business and most
transport by decree on March 12th. People who break the rules face fines and
The lockdown is having an effect. By April 21st Argentina had 3,144 confirmed
cases of covid-19 and 152 deaths from it. That is far fewer than in Spain, which
has roughly the same number of people (though it may be an underestimate).
Mr Fernández’s approval rating has soared. A recent poll by Poliarquía puts it
at 81%. “I didn’t think of him as a leader,” says Gabriel Más, a farm worker. “I
But both Mr Fernández and the country he leads are entering a dangerous new
phase. Pressure to ease the lockdown is building before the pandemic has
peaked. And the government has begun a gambit to support the economy that
may end up weakening it further. Success would be the making of his
presidency and brighten the future of his Peronist political movement. Failure
could be disastrous for both. “Will he be the creator of a new political
hegemony, or author of social chaos if he generates economic havoc?” asked
Jorge Fontevecchia, a media mogul, in a newspaper column.
On April 16th the economy minister, Martín Guzmán, demanded that creditors
accept new securities to replace $65bn-worth of bonds, almost 40% of foreigncurrency debt, equivalent to roughly a quarter of GDP. This does not come out
of the blue. Mr Macri had sought to stretch out debt payments. In appointing
Mr Guzmán, a specialist in debt negotiation, Mr Fernández made it clear that
he would give greater priority to restoring growth than to paying creditors.
The pandemic greatly increases the urgency. With revenue crushed by
recession, the government is on track to run a primary deficit, ie, before
interest payments, of at least 4% of GDP this year. The central bank is printing
money to keep it going, which risks driving up inflation, already at 50%.
Argentina’s scheduled payments of foreign-law, bilateral and multilateral debt
over the next two years are nearly as large as its foreign-exchange reserves of
less than $44bn. “Argentina can’t pay [creditors] anything right now,” says Mr
Guzmán. So far, though, bondholders are unsympathetic. Argentina’s demand “does not represent the product of good-faith negotiations”, complained one
group that holds about 16% of the debt.
The mood in the Casa Rosada, the presidential palace, is grim. Argentina may
be headed for its ninth default. “Between pandemic and debt, now maybe
default, it looks like double jeopardy,” says a presidential adviser. The
consequences of default would be grisly. Output, already squeezed by the
lockdown, would shrink by far more than the 5.7% forecast by the IMF for this
year. The peso would plunge, pushing inflation even higher. Unemployment
and poverty would soar. Despite a history of default, “even we may not
recognise what’s coming: economic meltdown and social unrest, alongside a
pandemic,” warns Sergio Berensztein, a political analyst.
The government wants to wring the maximum relief it can from bondholders
without triggering that disaster. Mr Guzmán is seeking a modest “haircut” of
5.4% on the principal (which would save the government about $3.6bn) and a
dramatic 62% cut in interest payments. These payments would start low, at
just 0.5%, and late, beginning in 2023, when an election is due. They would
peak in 2029 at less than 5%. Under this plan, the government would save
$37.9bn on its interest bill. Bondholders could suffer a loss of net present value
The absence of even a token payment until May 2023 will stiffen creditors’
resistance. With no prospect of money coming in, they could spend the next
three years lobbying and litigating for a better deal. They complain that the
government has been slow to disclose its strategy for servicing the debt that
would remain. The plans it has released so far do not take into account the
effects of covid-19. “If you’re a creditor, told to wait three years, you need to
hear the plan,” says a source close to both investors and the government.
There is little time to resolve the tussle. The Fernández team put a 20-day limit
on negotiations. But the real deadline is May 22nd, the end of the 30-day grace
period for a missed $500m payment. “There is recognition that default is much
more likely than not,” says the presidential adviser.
Veterans of past debt renegotiations hold out hope of an agreement.
Argentina’s offer preserves much of the face value of the debt. There may be
wriggle-room in the schedule for repayment. The price of Argentina’s existing
bonds rose after it made its offer, a strong sign that the new bonds will be
worth more than existing ones were before the offer was made. Government
negotiators are “pushing it to the cliff-edge, as they must, to remind all that
default is a disaster for all”, says a former finance minister.
Mr Fernández is using brinkmanship, too, in his battle with the pandemic.
“Quarantine, social distancing, will extend beyond April,” said Pedro Cahn, a
government epidemiologist. Even then, “we have to expect many more cases
and many more deaths.” Workers in private hospitals say that the
government’s low numbers for cases and fatalities reflect a lack of testing.
They fear “dramatic loss of life” when the virus peaks, probably in early June,
in poor neighbourhoods that ring Buenos Aires and in other cities.
Mr Fernández is trying to shield poor Argentines from the consequences of the
lockdown, in part by taxing richer ones. The government has given bonus
payments to welfare recipients, informal workers and people who work in
health, policing and supermarkets. It has imposed new freezes on prices of
food and medical supplies. Congress may reconvene to levy a tax on
Argentines’ worldwide assets to pay pandemic bills. The “patriotic” tax will “kill
the chicken that lays the eggs for future recovery”, warns Aldo Abram, an
The pre-existing recession makes the trade-off between public health and
economic growth even more painful than it is for most countries. Under
pressure from trade unions and business, Mr Fernández has allowed
organisations in 11 sectors, including export industries and refuges for victims
of domestic violence, to reopen. But he is likely to rule out a quick return to
normality like that advocated by Brazil’s president, Jair Bolsonaro, who makes
light of covid-19. Mr Fernández knows that the pandemic is more merciless
than Argentina’s creditors.