Debt relief alone will not save Argentina
There are many deserving cases for debt forgiveness amid the global coronavirus pandemic. The G20 has offered to freeze repayments on debt owed to governments by the 70-plus poorest nations and has invited private creditors to join. It is less clear that Argentina, an upper middle income country that is a net creditor to the rest of the world, is equally deserving.
The South American nation has run up $323bn of debt, much of it during the previous administration of Mauricio Macri. Investors gambled on his vision of a new Argentina that had learnt from eight previous defaults. Those who bought a 100-year bond offering a 7.9 per cent yield at the peak of Macri-mania have only themselves to blame. The IMF joined in too, hastily approving the biggest bailout in its history after market confidence in Mr Macri began to wobble in 2018. The fund handed over most of its promised $57bn before Mr Macri left office, leaving a heavy repayment schedule for his successor, the Peronist Alberto Fernández.
Now Martín Guzmán, the economy minister, says the country is effectively bankrupt. Pleading persistent recession and widespread poverty, he argues that Argentina cannot offer private bondholders anything for the next three years. After that the holders of $65bn of foreign-law debt can expect only an average coupon of 2.3 per cent, plus a modest haircut in the value of the principal. Estimates for the current value of the offer range from 32 to 35 cents in the dollar. Creditors have rejected Mr Guzmán’s proposal. They say there is no incentive to accept a deal that gives them nothing until mid-2023, when the government will be nearing the end of its term.
If agreement cannot be reached by May 22, a default will be triggered. When this last happened in 2001, Argentina was locked out of international markets for 15 years. Both sides should compromise this time to avoid such an outcome.
The coronavirus pandemic, cited by Mr Guzmán as a reason for non-payment, is not the main issue. The economy was already in freefall and debt levels unsustainable well before the virus arrived in Buenos Aires. While the need for extra health and social spending is undeniable, the economic crisis triggered by the pandemic will affect Argentina less than some other nations.
The extraordinary circumstances of Covid-19 do warrant fresh thinking, however. Proposals have been made for the IMF to issue 1tn of additional Special Drawing Rights (SDRs) for lending to middle-income countries, though the US has yet to be persuaded. There is a case for broader debt standstills encompassing countries such as Ecuador, an oil exporter with a dollarised economy. It makes sense for the IMF to insist on a standstill agreement for private sector debt before committing fresh resources, to avoid financing capital flight.
There is also more that Mr Guzmán could do to help his country return to prosperity. Above all, Argentina is missing a compelling economic narrative for the medium term that would persuade its citizens to repatriate and invest the more than $300bn they are estimated to hold abroad. Instead, the central bank is printing money at an ever faster clip, threatening runaway inflation in a country where confidence in the national currency is already close to zero. Tariff freezes, exchange controls, taxes on exports and wealth complete an unhappy picture. All the debt forgiveness in the world will not save Argentina if Mr Guzmán cannot attract the private investment needed to get the country growing again.