Debt Relief Alone Won’t Save Argentina

There are many deserving cases of debt cancellation amid the global coronavirus pandemic. The G20 has proposed freezing debt repayments to the governments of the more than 70 poorest countries and called on 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, deserves just as much.

The South American nation has accumulated $ 323 billion in debt, much of it under the previous administration of Mauricio Macri. Investors bet on his vision of a new Argentina that had learned from eight previous flaws. Those who bought a 100-year bond offering a yield of 7.9% at the height of Macri-mania have only themselves to blame. The IMF also joined in, hastily approving the biggest bailout in its history after market confidence in Macri began to falter in 2018. The fund handed over most of the $ 57 billion. dollars pledged before Mr. Macri left office, leaving a heavy repayment schedule for his successor. , the Peronist Alberto Fernández. See more at https://dedebt.com/ :

Now Martín Guzmán, the Minister of the Economy, declares that the country is indeed bankrupt. Citing a persistent recession and widespread poverty, he argues that Argentina can offer nothing to private bondholders for the next three years. After that, holders of $ 65 billion of foreign law debt can only expect an average coupon of 2.3%, plus a modest discount in the value of the principal. Estimates of the current value of the offer range from 32 to 35 cents on the dollar. The creditors rejected Mr. Guzmán’s proposal. They say there is no incentive to agree to a deal that gives them nothing until mid-2023, when the government is nearing the end of its term.

If an agreement cannot be reached before May 22, a default will be triggered. When the latter occurred in 2001, Argentina was excluded from international markets for 15 years. Both sides would have to compromise this time around to avoid such an outcome.

The coronavirus pandemic, cited by Guzmán as the reason for non-payment, is not the main problem. The economy was already in free fall and debt levels unsustainable long before the virus arrived in Buenos Aires. While the need for additional health and social spending is undeniable, the economic crisis triggered by the pandemic will affect Argentina less than some other countries.

The extraordinary circumstances of Covid-19, however, warrant further reflection. Proposals have been made for the IMF to issue 1 billion Additional Special Drawing Rights (SDRs) for loans to middle-income countries, although the United States has yet to be convinced. There are arguments for a broader debt freeze encompassing countries such as Ecuador, an oil exporter with a dollarized economy. It makes sense for the IMF to insist on a standstill deal for private sector debt before committing new resources, in order to avoid financing capital flight.

Mr. Guzmán could also do more to help his country return to prosperity. Above all, Argentina lacks a compelling medium-term economic narrative that would persuade its citizens to repatriate and invest the more than $ 300 billion they hold abroad. Instead, the central bank is printing money at an ever-increasing rate, threatening runaway inflation in a country where confidence in the national currency is already close to zero. Tariff freezes, exchange controls, export and wealth taxes complete an unfortunate picture. Not all debt relief in the world will save Argentina if Mr. Guzmán fails to attract the private investment needed to jumpstart the country’s growth.

About Kenny Elizalde

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