Argentina is just a week away from a deadline to avoid a chaotic default, its ninth since independence in 1816.
Unable to pay its debt even before the coronavirus crisis, the government is trying to reach an accord with creditors to restructure US$65-billion of international bonds before May 22.
“Argentina always seems to be inches in front of an avalanche and in that sense, as dramatic as this situation is, it feels familiar,” said Benjamin Gedan, former South America director on the White House’s National Security Council. “For a period of time, Argentina can outrun the avalanche, but almost inevitably the country ends up buried.”
Here’s everything you need to know about how Argentina got to this point, and what happens next.
Why can’t Argentina’s pay its debts?
Investors poured billions of dollars into Argentina in 2016, when a new administration committed to economic orthodoxy spurred bets on a rebound in growth after years of government interference under Cristina Fernández de Kirchner.
It quickly went wrong. President Mauricio Macri’s government struggled to rein in spending and shore up the budget. The currency plunged, inflation soared and the economy – now shuttered because of coronavirus – is headed for the third straight year of contraction.
In 2018, Macri signed a record US$56-billion credit line with the International Monetary Fund as he tried to stave off collapse. A year later, he lost his bid for re-election to Alberto Fernández, an ally of Fernández de Kirchner. The IMF debt is now also being renegotiated.
How are the government and creditors trying to avoid a default?
On April 17, Argentina announced a debt restructuring offer that would suspend all payments for three years, impose a 62-percent cut in interest payments, and a 5.4-percent cut on the face value of Argentina’s dollar securities.
The country’s three major creditor groups balked at the offer, calling it “unacceptable” and pushing the bonds near record lows. The bonds started to edge back up though in May on hopes the two sides would iron out their differences and reach a new agreement.
What are the key deadlines?
After the government pushed back an initial May 8 deadline, creditors have until May 22 to accept Argentina’s proposal. That is the end of the grace period for interest payments of about US$500 million. Failure to reach an agreement or pay by that date would mean default, the country’s third this century.
In the run up to that date, Economy Minister Martín Guzmán has said the country is open to offers from creditors, but they are yet to come forward with a counter-proposal.
Bondholders may get clues as to a possible outcome on May 14, when Buenos Aires Province faces a deadline for US$150 million in unpaid bond payments. It will be declared in default if it doesn’t reach a deal to restructure US$7 billion of its own international debt by then.
“A default in the province harms the national government because the governor, Axel Kicillof, is so closely associated with the administration,” Gedan said. “Any decisions taken at the provincial level are seen as having the blessing of the national government.”
Who are the key players?
Across the table from Guzmán are representatives from Argentina’s largest institutional investors including BlackRock Inc, Pacific Investment Management Co, Ashmore Group Plc, as well as Greylock Capital, Fintech Advisory Inc and Gramercy Funds Management. The talks have have largely been held via video conference.
Guzmán has some of world’s most prominent economists in his corner, including his mentor, Nobel Economist Joseph Stiglitz, who penned an open letter with more than 100 economists asking creditors to reach a negotiated settlement.
What’s next if Argentina defaults?
If the government and creditors don’t reach a deal, Argentina will once again be isolated from international credit markets and faces drawn out legal battles with creditors. The country would suffer even more damage to its reputation and international relationships, according to Gedan.
“The default scenario would be extraordinarily costly, and I fear may be underestimated by some in the Argentine government,” Gedan said.