There is a way forward for Argentina and its creditors
The negotiations between Argentina and its creditors is the first episode of what will become myriad sovereign debt restructurings triggered by the pandemic. I am a behind-the-scenes adviser to both sides in the Argentina talks — I have taught or worked with several of the leading participants. Their outcome is important not only for Argentina but as a precedent for the many other debt talks to come.
The task is daunting. Creditors and debtor nations will be negotiating in the unprecedented conditions created by Covid-19. The old playbook of sovereign debt talks is no longer a guide, if it ever was. Much of the debtors’ troubles were not caused by the pandemic. But it has put them under vastly increased strain. At the same time, there is no model or statistical distribution either side can rely on to forecast the future with any credibility. We are sailing in the fog, or what the Chicago economist Frank Knight called “radical uncertainty”. Still, there are some guidelines that both sides can turn to.
First, it is important that financiers recall the broader context. The ideology of shareholder maximisation and deification of markets is under challenge. Unsustainable social outcomes and climate change meant that this playbook was being publicly questioned before Covid-19 struck, even by leaders from the world of finance.
Enlightened figures such as Larry Fink, the chief executive of BlackRock, entrepreneur Mark Cuban, and members of the US Business Roundtable such as Jamie Dimon, the chief executive of JPMorgan Chase, saw that it was time to reach for higher ground and restore public trust in business and finance. Finance has become a poster child for the public resentment that grew out of the 2008 financial crisis. So, today, business leaders need to assert a vision of what has to be done that is broader than their asset managers’ narrow notions of fiduciary responsibility. The captains must run the ship and steer the crew in a new direction through the storm.
What practical actions can be taken amid this ungodly uncertainty? I turn to Joseph Campbell, the scholar of mythology, who described a hero as “someone who has given his or her life to something bigger than oneself.” Heroic action on both sides might look something like this.
First, negotiate with humility. Second, cast aside excessive faith in models and scenarios. Third, acknowledge we are in a situation where we cannot know what the future looks like. Finally, recognise that both sides must therefore share the risk.
In Argentina’s case, creditors cannot demand a restructuring that dooms the country to a horrific struggle, government collapse and yet another round of restructuring. It will only cast Wall Street’s leaders as villains on a world stage where they are already suspect. The very brand reputation of finance is at risk; so too the notion that finance can be a steward and a contributor to more prosperous societies. Creditors can ill-afford to look tough on the populations of debtor countries who will suffer from the economic consequences of something they did not cause. The Argentine discussions involve $65bn of debt. But the IMF estimates emerging markets financing needs at more than $2.5tn.
In turn, the Argentine government must rebuild the trust of its creditors by working transparently with the IMF on a programme that fosters a disciplined national recovery. It must create debt structures that shares any potentially good developments with creditors. One way would be to create contingent convertible assets that increase the value creditors receive should the pandemic’s economic effects prove milder than feared.
This negotiation is important for Argentina, its creditors, other troubled sovereign debtors, and even global morale. It may be tempting to make an example of Argentina and show the next group of debtor nations how tough creditors can be. But that only increases the likelihood of a costly default for both sides. True leadership would recognise that a constructive, balanced deal will have positive ramifications for future cases.
Argentina and its creditors must now direct their energy to creating something bigger than what either side has been historically, and to do what they might aspire to tell their children about. It is a daunting challenge. But I have worked closely with both Martín Guzmán, Argentina’s finance minister, and Philipp Hildebrand, vice-chairman of BlackRock, a member of the creditors’ group, and I know them as men of integrity and vision.
That gives me some hope these negotiations can avoid a calamitous outcome. As Campbell once said, the experience of rising to great challenges involves recognising, within yourself, that: “The cove you fear to enter holds the treasure you seek.” That is the direction in which Argentina and its creditors must now sail.
The writer, an adviser to both Argentina and its creditors, is president of the Institute for New Economic Thinking, a former chief economist of the US Senate Banking Committee, and was a Soros Fund Management managing director in the 1990s