After successfully restructuring some US$66 billion in debt with external creditors, Argentina now faces the challenge of rebuilding its economy and generating the confidence which would permit the return of credit markets, according to analysts.
Despite its long track record of defaults and economic crises, Argentina notched up an important victory in securing the adhesion of 93.5 percent of bondholders in its swap offer for debt under foreign legislation this week, a percentage which extended to 99 percent thanks to class action clauses (CACs).
Economy Minister Martín Guzmán calculated debt relief at some US$37.7 billion, essentially thanks to reduced interest rates and extended deadlines.
"We’ve come out of the labyrinth. We did not want to condemn any more Argentines to prostration," celebrated President Alberto Fernández, who said the agreement was sustainable for Argentina, which is engulfed in by the twin nightmares of economic crisis and the coronavirus pandemic.
The same conditions agreed with external creditors will now apply to the debt issued under national legislation, around US$41.7 billion.
Nevertheless, Argentina’s debt continues to be high. And it will have to be paid.
"Capacity for payment will depend on the confidence generated by the macro-economic policies," said Gabriel Torres, an analyst for Moody's risk assessment agency.
"The problem is not merely the volume of debt but also Argentina lacking market access. It has no debt markets of its own and thus has always had to go to international markets," said Torres, speaking via videoconference on Tuesday.
Credibility
Economists say that the debt can only be paid down by issuing new debt.
"No country pays its debt out of tax revenue," highlighted Torres.
Furthermore, even taking this restructuring into account, Argentina’s public debt will continue to represent almost 100 percent of Gross Domestic Product over the next few years, a percentage much higher than the 60 percent defined by the International Monetary Fund (IMF) as a sustainable level, according to the Capital Economics investment firm.
"When the time comes, they are going to pay the debt with new debt. That’s why conditions of credibility must be generated so that [the markets] lend to us again. That’s the key point," Matías Rajnerman, an economist with the Ecolatina consultancy firm told AFP.
Next stop: IMF
The next step for the Fernández government will be to negotiate a new credit programme with the IMF. Argentina owes the Fund around US$44 billion out of the US$57 billion secured via a 2018 stand-by agreement signed with the Macri administration.
Talks over a new financing programme were formally launched a week ago.
"I hope that we will shortly be clearing away the obstacle which is the debt to the IMF," said Fernández on Monday.
Argentina has been in recession since 2018 and its economy is expected to suffer a dramatic contraction this year due to the Covid-19 pandemic. The government needs to postpone upcoming payments to the IMF, with most concentrated into a period of just two years. The first tranches are due in September.
"I think that negotiations with the IMF will be manageable. Argentina cannot meet those payments so they will be rescheduled without doubt," said Marina Dal Poggetto, an economist with the EcoGo consultancy firm.
The first payments of the restructured debt will start from next July although until 2024 they will be relatively low sums, about US$1.2 billion annually.
"The IMF, apart from rescheduling the payments, would have to help towards a programme offering some certainty of fiscal consolidation," Dal Poggetto told AFP.
The government projects for 2021 a primary fiscal surplus (before paying interest on the debt) of 4.5 percent of GDP. This year it is calculated that it will reach seven percent.
"Some signal towards fiscal consolidation is needed. The point is how you give that signal when you simultaneously have to lower the tax burden so that the economy can grow and cut spending in a context where poverty levels of at least 40 percent are very high and double-digit unemployment growing," reflected Dal Poggetto.
– TIMES/AFP
by Nina Negron
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