Monday, March 4, 2024

OPINION AND ANALYSIS | 25-04-2020 10:03

Default: a ticking time bomb

An initial interpretation of what Guzmán says — and does — should put everyone on high alert, as a default appears imminent.

In this coronavirus era, the spectre of sovereign debt defaults is once again on the rise as the global economy flushes itself down the toilet. Argentina, along with Ecuador and Lebanon, are the prime suspects. The latter has already defaulted on its debt, becoming one of the first nations to slide into a cessation of payments since the global outbreak of the pandemic. Ecuador could be next in line, having agreed with bondholders to defer payment on US$19.2 billion of debt until August, when it must cough up approximately US$800 million or be marked with the scarlet letter “D.” And then there’s us.

Economy Minister Martín Guzmán laid out his restructuring offer to private creditors on April 16, sitting alongside the last Argentine president to oversee a default, Cristina Fernández de Kirchner. During that press conference, the recent collaborator of Nobel laureate Joseph Stiglitz — who recently presaged a global wave of defaults and asked for widespread debt forgiveness for lower and middle-income nations – explained he had been unable to reach an agreement with private creditors, putting a 20-day expiration date on his offer (making D-Day May 8). The sovereign formally missed a US$500-million debt service payment on April 23, triggering a 30-day period until generating a credit event, the formal instance of default, which leaves May 22 as the final day of negotiation. 

Guzmán, who counts with the full support of President Alberto Fernández, Pope Francis, and supposedly the International Monetary Fund, indicated this was a final offer. It’s a statement he echoed in an interview with journalist Horacio Verbitsky released shortly after the offer. Asked about a contingency plan in case his restructuring fails, Guzmán said, “Argentina is already in a virtual default,” and added, “Argentina is already in a situation where there is no external credit, it’s not that we will stop receiving it, we are not receiving any and we did not think we would.” The Economy Minister went further, noting his plan is based on the lack of external financing at low rates for a relatively long time. The restructuring offer is “the same we would have proposed before the coronavirus outbreak.”

An initial interpretation of what Guzmán says — and does — should put everyone on high alert, as a default appears imminent. While the terms of the offer weren’t as draconian as the market was expecting (Argentine bonds surged in the aftermath of the announcement), they appear insufficient given the position adopted by several major creditors including funds like Fidelity, BlackRock, Pimco, and Greylock, to name a few, who have already rejected the offer. Even if Argentina counts with the explicit support of IMF Managing Director Kristalina Georgieva, and the political backing of leaders from powerful nations including Donald Trump, Angela Merkel, and Emmanuel Macron, it doesn’t seem enough to sway the titans of Wall Street. Assets classes across the board have suffered violent corrections with a speed that easily surpassed what happened during the 2008 Global Financial Crisis, meaning fund managers are already facing massive write downs, while those exposed to Argentine debt have been licking their wounds since the debt orgy they indulged in during the administration of Mauricio Macri, who made them rich with his surprise 2015 electoral victory over populist Kirchnerismo through a preceding and ensuing rally in Argentine stocks and bonds.

Not only does the “final” restructuring offer seem insufficient, it will probably already exceed Argentina’s capacity to pay once the three-year grace period is concluded. Given the immensity of the global depression that is upon us, Argentina’s GDP could contract anywhere from 5 to 10 percent this year, which would add to at least a decade of stagnation, high inflation, and chronic fiscal deficit. President Alberto could almost thank Mauricio for handing over a country with a fiscal deficit of around 0.5 percent of GDP and a level of monetary contraction that has given him room to launch substantial countercyclical measures, if it weren't for the weight of the debt service. (And President Macri could almost thank Cristina for passing him the torch with a low debt-to-GDP ratio, if it weren’t for the massive deficit, absolute lack of foreign currency and already rising inflation). Oh right, Macri didn’t actually voluntarily do that for President Fernández, it was the market that punished him for his economic “gradualism” with a series of violent devaluations.

Guzmán’s offer was based on the logic that continued austerity in order to repay debt is not only immoral, it is also incorrect from a macroeconomic standpoint. Greece clearly demonstrates what happens when austerity is the name of the game, forced to ask for several bailouts while sinking its population into a decade of oblivion. Growth is the only thing that can allow a sovereign the conditions to service its debt. So the problem becomes: How do we get Argentina on a path of sustainable economic growth that hasn’t occurred in more than half a century? Guzmán’s grace period and restructured bonds were part of the answer, while true reform and the effort of the population (a plan which hadn’t been laid out before the corona-crisis), and a little luck, are the second part. The immensity of this economic crisis – which is being likened to the Great Depression – suggests we haven’t been graced with good fortune this time. According to former economy minister Hernán Lacunza, who virtually defaulted peso-denominated debt and imposed currency controls in the aftermath of Macri’s surprise defeat in the PASO primaries, the government’s fiscal and monetary plan amounts to three percent of GDP, and the primary deficit will balloon from 0.4 percent to 5 percent of GDP this year. Conducting a generalised bailout of the economy without reserves or access to international funding means money printing is in vogue, putting extreme downward pressure on the peso.

The damage to our national accounts from the response to the coronavirus outbreak and global recession will hurt for years, maybe decades. In the same way, it isn’t clear where the limit between a quarantine to contain the virus and its negative economic effects lies – the point at which the future impact of saving the economy today will come back to haunt us in the form of excessively high deficits is impossible to ascertain.

Guzmán’s offer is close to the best the nation can offer. Close to him they confirm his intention is not to play hardball and oversee another default, which is aligned with what President Fernández is saying. The coming weeks will see a flurry of virtual meetings and negotiations that will go down to the wire, hopefully averting a full default. In that best case scenario, Argentina would still need a globalised response to the coronavirus-sparked crisis that prioritises low- and middle-income nations to get back on its feet.


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Agustino Fontevecchia

Agustino Fontevecchia


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