Just before extending the quarantine on Good Friday, President Alberto Fernández concluded a pep talk to a cross-section of pandemic fighters with a quote from María Elena Walsh: “Cuántas veces nos caímos, cuántas veces nos levantamos” (“So often we fell over and so often we got up again”). Perhaps an apt María Elena Walsh quote for this week, following Thursday’s debt announcement, would be “El reino del revés” (“The upside-down kingdom”).
Among the countless victims of this coronavirus pandemic is economic dogma, which has been completely turned on its head. Just to give a couple of examples, printing unbacked money was generally equated with inflation (even if some economists point out that speeding the velocity of circulation can have the same effect as any increase in volume) – now it has suddenly become the only way to keep an economy in lockdown going. Low-cost air travel had been one of the wonders of the modern world and a saving grace of the previous administration, trebling passengers to over 30 million annually since 2015, while Aerolíneas Argentinas (whose daily subsidies have reached US$2 million) was an anachronistic white elephant retained only by a fanatical “national and popular” ideology – now mass air travel has proved a prime vehicle of Covid-19 until bringing aviation to a dead halt worldwide with the nationalisation of airlines considered the only way out almost everywhere.
Which brings us to Thursday’s “virtual default.” That D-word had been the pits in Argentina perhaps more than in the rest of the world with memories of how 56 percent of the population had fallen below the poverty line within a year of the default at the close of 2001. But now that the government has finally braved the plunge after delaying its offer to creditors by over a fortnight, the immediate market response to this taboo was a slight dip in country risk and rising Argentine bonds in New York.
The government said everything and nothing on Thursday but it might as well have said nothing, given the extreme flux in which the economy is drifting both here and abroad. This seems to have been implicitly recognised by debtor and creditors alike but the number-crunchers had to be thrown a bone or two, so a few percentages were specified – a 62 percent haircut on interest payments and 5.4 percent on capital with a grace period of three years (almost all the remainder of the current presidential term) after which a bond swap yielding 0.5 percent interest would kick in. All of which leaves the devil in any number of far from minor details including currency, jurisdiction and the famous exit yield.
None of the above data should be considered to be written in stone. As in any negotiation, this is just an opening bid – perhaps more aggressive than usual but these are not normal times (indeed paying out only 38 percent of interest could even be seen as generous when measured against Argentine bonds often below 30 percent in recent weeks). It might have been eminently reasonable simply to await those normal times (whenever they arrive) for a more reasonable negotiation but now that the government has started the ball rolling, for better or for worse, the process should be more open-ended than ever. This might well even go beyond any “one size fits all” approach with the 62 percent etc., designing a menu of multiple option – ranging from those creditors who want their money sooner rather than later being offered less earlier to the “Uruguayan solution” propounded by President Fernández on last year’s campaign trail, payment in full years down the road.
María Elena Walsh’s “reino del revés” also has its political dimension. That presidential soft soap of a Uruguayan solution is light years away from today’s debt approach much closer to the ruling coalition’s Kirchnerite wing. Thus President Fernández has pledged to honour peso debt but what will those pesos be worth in 2023 even with current inflation (and if such mature economies as the United States and Britain could treble and quintuple their money supplies after the 2008-2009 crisis, how much printing awaits Argentina now)? Whether debt, Aerolíneas or printing money, today’s economic reality makes a dogmatic vice-president look more realistic than a pragmatic president – el reino del revés.
As of Thursday, Argentina is in virtual default – if Wednesday’s coupon is not paid, it will be default for real.