aAs another debt deadline came and went this week, Argentina found itself in a familiar place: immersed in recession, beholden to the International Monetary Fund and at cross purposes with private lenders. If the coronavirus pandemic has bought Argentina some international indulgence, as the IMF made clear in a statement on June 1, it hasn’t eased the country’s burden or lifted uncertainty.
Argentina surely deserves debt relief, but also a credible way forward. Borrower and creditors alike reckon that a deal will emerge; they have been inching closer for weeks. Yet the country still needs a path to growth, new investment and the prospect of fiscal reasonableness beyond the pandemic. And that is where the road map ends.
What’s new and heartening is the gentlemanly tone of the talks. Under President Alberto Fernández, respected as a pragmatist and a low-decibel political operator, there’s been none of the nationalist fist-shaking that marked many of Argentina’s past debt imbroglios, notably under former president Cristina Fernández de Kirchner (2007 to 2015), who vilified creditors as vultures and carpetbaggers.
Now she is Fernández’s vice-president and, fortunately, mostly sidelined as he has orchestrated the national response to the pandemic. Moving decisively, Fernández imposed strict social distancing measures in mid-March and targeted nine million poor in harm’s way for emergency cash. Although many Argentines grouse about the restrictions, and as many as three million of the most vulnerable families may have been overlooked, the quick policy response has hoisted Fernández’s approval ratings. The political windfall has helped him pressure Argentina’s contrarian political class and keep the fractious ruling Peronist coalition in tow.
“In a way the pandemic has been a gift for Fernández, giving him a purpose and type of leadership he never had,” said Argentine political analyst Bruno Binetti, a non-resident fellow of the Inter-American Dialogue.
That cachet plus the government’s more congenial tone have won Argentina international backing from academia to the Vatican, and emboldened the government to stand tough with creditors. Hence Economy Minister Martín Guzmán’s insistence on holding out for a “sustainable” deal — not so onerous as to break South America’s second-biggest economy and not so niggardly as to leave Argentina a financial pariah.
To that end, Guzmán has warned of following in the false steps of his predecessors, who he suggests have gone for the quick fix over an enduring solution. The 37-year-old scholar built his academic career documenting such risks. “Over the last four decades, more than half of the restructurings with private creditors were followed by another restructuring (also with private creditors) or a default shortly afterwards,” he wrote in 2018, while at Columbia University.
Two years on, Guzmán is striving to fashion that thesis into Argentina’s rescue. Yet the problem is hardly academic. “It’s been written that all too frequently debt deals fall apart and borrowers and creditors find themselves back at table. But the real issue may not be the debt deal itself. It also depends on how you perform and follow through,” said Guggenheim Securities LLC senior managing director Mark Walker, who counsels parties to debt negotiations. “Unless they formulate and follow sound policies, the best debt deal won’t work.”
Argentina has repeatedly come up short in that department. While a carefully designed and cordially presented restructuring could avert an ugly stand-off and bruising litigation, that’s not enough to shield the country from its chronic dysfunctions.
Rigid labour relations, dragging productivity, over-taxation of the most productive sectors and a bureaucracy living beyond its means weigh on the national balance sheet. The World Economic Forum ranked Argentina 83rd of 141 nations in global competitiveness last year. Enterprise is hobbled by legal uncertainties, including flagging perceptions of judicial fairness (Argentina’s judiciary ranks 112th in the world) and policy stability (118th place).
An insular economy does the country no favours. With exports and imports combined kicking in just 30 percent of national wealth, Argentina languishes, alongside Brazil, as the least open major market in Latin America, the world’s least open trade region, the Banco de Espana reports.
The pandemic has camouflaged these weaknesses. For the moment, Argentine-style big spending and a bloated state to mitigate the tandem health and economic crises are just the new global normal. With a fiscal deficit yawning and international credit cut off, Argentina has turned to the central bank, which is printing about 300 billion pesos (US$4.38 billion) a month to ventilate the prostrate economy, or about half of government spending, former economy minister Alfonso Prat-Gay estimated in a recent webinar.
How the country will sop up the excess pesos once the twin health and debt emergencies have passed is unclear. “Uncertainty is what will prevent the economy from recovering. Uncertainty has been the name of the game for the last 50 years,” said Prat-Gay.
Don’t bet on a ready pivot to fiscal sobriety. “Since the pandemic, the world has migrated toward the populist Peronist vision which gives the government a temporary licence to print money,” said Adriana Dupita of Bloomberg Economics. Will Fernández leverage his newly minted political clout to curtail spending and open the economy once the worst is over? “That’s not part of the Peronist gospel,” said Dupita.
The problem is, a default without fists is still a default. Even if Argentina and its lenders avoid another messy legal row, a debt deal won’t automatically usher the country back into financial good graces. “The real issue is not litigation, it’s the consequences of default itself and the impact on the exchange rate, capital flows and market confidence,” said Walker.
No-one needs to tell Argentina that nine times ain’t the charm.