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Argentina’s Debt Dilemma: Déjà Vu?

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22.12.2016

Nick Phillips speaks to local experts about the Argentine government’s rapid accumulation of foreign debt in 2016, a trend that has some looking back to the country’s recent economic crises.

On Tuesday, 19th April 2016, sovereign debt traders saw an unfamiliar name in their order books. For the first time since its massive 2001 default, the Argentine government was offering bonds on the international market. Not content to slip back in quietly, Argentina made a splash by selling US$16.5bn in dollar-denominated bonds, with interest rates ranging from 6.25% (for 3-year notes) to 8% (30-year). It was the largest emerging market bond sale in at least 20 years. Three days later the government paid out more than half of the total sum, some US$9.3bn, to the final holders of defaulted 2001 debt.

The re-entry into international markets and subsequent payment marked the end of another chapter in the Argentine government’s troubled history with debt, which now includes eight credit defaults. The move would have been unthinkable under former President Cristina Fernández de Kirchner, but current President Mauricio Macri – a former business leader – was elected on a platform of cleaning up the economy and re-opening the country to international markets. The bond sale highlights part of this dramatic shift in approach to managing the country’s fiscal needs.

As the government continues to run a fiscal deficit—estimated to reach 5-6% of GDP in 2016—there are only two ways to make ends meet. Rafael Flores, President of the Argentine Association for Budget and Public Financial Administration (ASAP), explains, “The previous government financed a good part of the deficit by printing new currency… The current government is replacing [printing money] with external debt.”

Experts consulted by The Indy disagree on the merits of the new strategy. Flores stated that it “permits a more gradual reduction of the deficit that does not generate a recessive impact… In the context of very low international interest rates, it seems like a reasonable policy.” Economic historian Alejandro Olmos Gaona disagrees, saying, “When the country takes debt to cover its fiscal deficit and operating costs, as is happening now, the debt is not sustainable.”

The current situation traces its roots to Argentina’s devastating crisis that ultimately led to default in 2001. Throughout the 1990s, Argentina witnessed strong economic growth, fuelled in part by a steady influx of foreign capital. But by the late 90s the economy began to slow and eventually entered a recession. Debt rose sharply and the government was forced to take out more loans at higher rates just to pay interest on the existing debt. The peso-dollar convertibility system, which had once given confidence to skeptical foreign investors, made it impossible for the government to devalue its way out of recession. When Adolfo Rodríguez Saá finally announced a default in December 2001, it was too late to control the fallout.

In 2002 the Argentine economy slumped into its worst ever crisis. Productivity contracted and official unemployment numbers rose above 20%. Public debt reached 166% of GDP. In the political tumult of 2003, Néstor Kirchner took office as Argentina’s creditors began to sue the country in international court. In 2005, Nestor’s administration offered creditors a deal: the government would pay its overdue loans at a rate of 35 cents to the dollar. Three-quarters of bondholders accepted this offer. In 2010 a similar deal was offered and another 17% took the money. But the holders of the last 8% of Argentina’s defaulted credit did not want to settle for anything less than full payment.

A minority of creditors, led by Paul Singer’s vulture fund NML Capital, continued holding out for payment of the original value of their bonds, plus interest. They stepped up their claims in international courts, attempting to freeze government funds stored in foreign accounts and seize assets including. In 2012, they had an Argentine Navy ship briefly impounded in a Ghanaian port.

Ultimately, however, ex-President Fernández was able to continue to rebuff the holdouts, making debt reduction a signature part of her economic plan. This policy found some support from countries in the international community, but had the effect of restricting Argentina’s ability to borrow more foreign capital.

In the final years of Kirchnerism this began to pose a problem, manifest in a shortage of dollars (needed to pay for imports and service existing debt). Argentina’s economy relies heavily on commodity exports, so the worldwide slump in commodity prices drove down GDP sharply. Tax revenue went with it, but government spending did not, producing a widening fiscal deficit. The operating deficit in 2010 was 1.3% of GDP; by 2015 most economists agree that figure had grown to over 6% (there remain question marks over divergent methodologies). With limited access to credit, the government turned to the printing presses to cover its costs, contributing to years of punishing double-digit inflation.

Anger at banks in the 2001 economic crisis (photo/Thomas Locke Hobbs)

When Macri’s government took over in December 2015, the federal operating deficit had grown to worrisome levels and efforts to contain the supply of dollars (mainly via currency and trade controls) had damaging economic side effects. As the Cambiemos coalition has continually emphasised, the “inherited” economy was already struggling, with government officials suggested it was near collapse. That remains a subject of debate, but most analysts agree that at least it was not saddled by debt. “The best inheritance from the previous government, really one of the few redeeming qualities, is the low level of external debt,” says Flores.

The Macri administration achieved a.....