Nobel Prize-winning economist Joseph Stiglitz has a message for investors in Argentine debt: prepare for major losses.
“The reality is there will have to be significant haircuts,” Stiglitz said in an interview Tuesday at the World Economic Forum in Davos. “I cannot conceive of any reasonable model not saying that there has to be significant haircuts. It would be fantasy to think otherwise.”
Stiglitz’s words certainly carry weight. The Columbia professor mentored Economy Minister Martín Guzmán, who is in charge of renegotiating Argentina‘s debt. They also authored numerous papers together, and after Guzmán’s appointment, Stiglitz wrote an op-ed praising his former mentee.
Argentina’s economic future largely hinges on the debt renegotiation. South America’s second largest economy is expected to contract for a third straight year in 2020; unemployment currently remains in the double digits and inflation is above 50 percent.
Guzmán and President Alberto Fernández have yet to unveil their strategy to renegotiate billions of dollars in bonds and loans with private creditors and the International Monetary Fund (IMF). Still, Fernández recently said he wants talks to wrap up by March 31 because debt payments balloon after that date.
It’s unclear what Stiglitz knows about Guzmán’s current thinking and his plans to renegotiate debt. The two may cross paths during an event at the Vatican in early February, according to the Vatican’s agenda, though the economy minister hasn’t confirmed his attendance yet.
Guzmán skirted a question about Stiglitz’s comments during a press conference in Buenos Aires on Tuesday, saying only that details of the debt talks “will be released in due time.” He added that Argentina isn’t able to pay its debt under current conditions and that the government will send to Congress on Tuesday a plan to address the debt crisis.
Stiglitz said Argentina needs time to grow the economy, a line frequently repeated by Guzmán, because “we know what happens if we go down the other course.” He added that investors should have known what they were getting into when they bought Argentine bonds and were rewarded with very high returns.
“The lenders should have known the risk; that’s why they charged a high rate,” he said. “They’re not being blindsided. They probably didn’t do their homework, but they knew there was a risk.”
By now, investors in Argentine bonds have mostly priced in such losses. The country’s century bond maturing in 2117 currently trades at 47.15 cents on the dollar, yielding 15.1 percent.
by Simon Kennedy & Patrick Gillespie, Bloomberg