Argentina’s sovereign debt restructuring has once again put the South American nation and serial defaulter centre-stage on a global scale. As the coronavirus pandemic rages on, policymakers and intellectuals have tried to rationalise the dichotomy between extending lockdowns and quarantines and ameliorating their inevitable and painful economic impact. It is in this context that President Alberto Fernández instructed Economy Minister Martín Guzmán to renegotiate Argentina’s large and unserviceable sovereign debt, leading to a tense showdown with some of the world’s most powerful players in international finance, pitting divergent interests against one another in a scenario of absolute uncertainty. The battle lines are drawn – Guzmán has rallied an impressive amount of intellectual firepower to Argentina’s side, with some of the world’s top economists and several Nobel laureates arguing for a successful and fair deal that would avert the country’s ninth sovereign debt default. In the opposing corner are global investment funds with BlackRock — the world’s largest asset manager with US$6.84 trillion under management — at the helm, asking creditors to pay their legally acquired debt in its fullest form. A true global duel between the academics and the so-called “Masters of the Universe.”
The sovereign’s position appears sensible, and backed up by rationality. Before the Covid-19 outbreak, Argentina was already crushed under a mountain of debt that was impossible to pay, pushing the embattled nation toward an inevitable default. The disastrous final two years of the Mauricio Macri administration only exacerbated previous shortcomings, particularly in the second presidency of Argentina’s current vice-president, Cristina Fernández de Kirchner. Seen as the slayer of populism by major Western powers, Macri’s liberalisation of capital markets, reckless borrowing, and failure to tackle structural reform to reduce the weight of the state proved fatal once a global run on emerging markets triggered violent waves of devaluation, forcing him to the doorstep of the International Monetary Fund. With Christine Lagarde in charge, the IMF put together an economic programme that was doomed from the start, as the nation sunk deeper into stagflation, imposed currency controls and saw Macri disastrously lose an election to a Peronist coalition, orchestrated by none other than Mrs. Fernández de Kirchner.
President Alberto made it clear that one of the pillars of his administration would be a sustainable debt restructuring model, for which he courted the support of the likes of Donald Trump and Angela Merkel, while repatriating an academic that had worked with Joseph Stiglitz at Columbia University on the exact issue of failed sovereign debt negotiations. Pejoratively dubbed a Keynesian, Guzmán advocated against the austerity that was the norm during the European debt crisis that saw nations like Greece ask for bailout after bailout as its economy plunged into depression. The now-minister then argued that the only way a distressed sovereign can pay its dues is through economic growth, which requires macroeconomic stabilisation — not simple handouts financed with money printing — and time. With the support of the IMF, which categorised Argentina’s debt as “unsustainable,” he proposed a friendly haircut on capital and an aggressive slashing of interest payments to his creditors, which include major Wall Street firms like the aforementioned BlackRock, Templeton, Fidelity, and Greylock, to name a few.
Rockstar economists flocked to Guzmán’s cause. In a piece published via Project Syndicate (which is quickly becoming the global debate forum in the midst of the coronavirus pandemic), Stiglitz and fellow Nobel laureate Edmund Phelps, as well as renowned debt and financial crisis expert Carmen Reinhart argued that “restructuring Argentina’s private debt is essential.” They noted that “debt relief is the only way to combat the pandemic and set the economy on a sustainable path,” adding, “at this exceptional moment, Argentina’s proposal also presents an opportunity for the international financial community to show it can resolve a sovereign-debt crisis in an orderly, efficient, and sustainable manner.” More than 130 other respected economists added their names in support. Another rockstar economist, Jeffrey Sachs, indicated a default could trigger a “global financial catastrophe” amid the coronavirus pandemic. “Global financial markets tend to panic when even one country, much less several, begin skidding. There are probably 30-40 countries in deep fiscal distress now. They all need to refinance their debts this year and next, until recovery from the pandemic revives global economic activity, restores government revenues, and reduces the need for emergency outlays,” he said. Sachs suggests Argentina’s offer of an average 2.3 percent coupon rate is substantially higher than the zero or even negative interest rate major sovereigns like Germany and the US offer, singling out Larry Fink, the billionaire (at least in 2018) CEO of BlackRock and declaring that “it’s your turn to help prevent a global catastrophe.”
Global economic thought has tended toward a more open embrace of government intervention as the body count caused by Covid-19 has surged exponentially. In part as a reaction to the response to the 2008 Global Financial Crisis, major economists comprising a wide spectrum of ideologies have backed the use of massive fiscal stimuli, monetary expansion beyond the zero-bound, and debt forgiveness for distressed sovereigns. It is a far cry from the constant argument of the “moral hazard” of bailouts — which disincentivises capitalist competition and puts part of the burden for the profligacy of poorer nations and companies on their wealthy neighbours and sovereigns — that characterized the last crisis. Let’s leave the problem of massive deficits and humongous piles of sovereign and corporate debt until after the crisis.
The private creditors, on the other hand, also present a sensible and logical position. They run private companies that have a fiduciary duty to their investors to maximise returns, and legally purchased Argentine debt. Furthermore, Guzmán’s plan is based on a series of economic projections that are impossible to take at face value both in the context of the pandemic and the lack of a concrete economic plan based on structural reform and regaining productivity. The Economy Ministry projects a 6.5 percent contraction in GDP this year, a rebound to three percent in 2021 which then slides to 2.5 percent the following year and stabilises at 1.7 percent from 2023 to 2030. Major funds have taken a big hit this year (BlackRock’s reported assets at the end of 2020 stood at US$7.43 trillion, meaning they’ve shrunk at least eight percent in a quarter), and further declines will probably be in the cards. In a negotiation, they must go for the highest they can get, as no-one can guarantee Argentina (nor the rest of the world for that matter) will even be able to pay up.
In the heat of the negotiation, both sides have accused their opponent of acting in bad faith, while keeping their cards close to the vest and declaring that they are acting in “good faith.” But time is running out for the sovereign, which will effectively slide into default on May 22. The government still needs to negotiate with the IMF and the Paris Club of rich nations. Unemployment and poverty in Argentina will undoubtedly surge, and the room for continued fiscal and monetary support is extremely limited. The specter of vulture fund litigation looms. It’s going to be a nail biter that goes deep into extended time.