Paula Arrus is a second year International Relations student at King’s College London and a Staff Writer for International Relations Today.
In the past, sovereign defaults in emerging markets were mainly associated with financial crisis in the rich world as the former were practically unable to shield themselves from the latter’s spillover effects. However, now sovereign defaults have been influenced by a variety of factors, including the volatility of economic growth, dependence on primary sector exports, domestic fiscal irresponsibility and the inability to expand and diversify the economy’s productive capacity.
A sovereign debt financial bubble?
Global debt is at historically high levels reaching 230% of GDP in 2018 and is continuously growing as many central banks have followed loose monetary policies in recent years. Debt in the developing world is increasingly worrying as it makes these countries even more vulnerable to shocks or trade wars. JP Morgan CEO, Jamie Dimon has stated that sovereign debt is the only current financial market bubble. If various countries racking up debt begin to default, it would demonstrate the overvaluing of sovereign debt, subsequently decreasing the value of bonds and making investment prospects for governments in the future more difficult than ever while leaving developing economies stuck in a cycle of financial distress.
Macri Era – Argentina’s economic woes
Argentina’s primarily agribusiness export economy has been vulnerable to constant price fluctuations over time which has increased the government’s disposition to run large deficits to maintain social program spending stable. This has racked a massive debt for Argentina since the turn of the century and it is constantly building up.
After more than 10 years of populist rule in Argentina by the Kirchners, the election of Macri seemed like a breath of fresh air by promising to open up markets and promote the return of foreign investment. However, it appears to have become the norm that political promises are never meant to be kept as Macri proceeded to issue more debt in order to finance the government’s public programs, steering away from his campaign promises in a heartbeat.
With mounting popular discontent and creditor’s dissatisfaction with President Macri’s policies, in 2018 he negotiated a $57 billion loan from the International Monetary Fund (IMF) to prevent cuts to government spending. Nevertheless, instead of increasing domestic support he encountered severe financial backlash. In 2019, capital flight in Argentina caused the Argentine peso to fall against the dollar, causing mayhem for their sovereign debt and forcing Macri to introduce exchange controls, reducing his political and economic credibility once more. Moreover, Argentina’s loans serviced in dollars became more expensive while future payments to the IMF have darkened its prospects of avoiding a ninth default in the country’s history.
Restructuring the debt – New administration, same economics?
Under Macri’s tenure, Argentina’s inflation reached 50% and GDP has decreased 5% from 2018 to 2019. Argentina’s financial woes have escorted its citizens to vote for the other side of the aisle. Last year’s election saw a 180º political shift back to the new populist-left President Alberto Fernandez. This subsequently caused Argentina’s bonds and currency to fall dramatically as few investors were confident on this new appointment: Argentina’s dollar bond maturing in 2021 fell to a “price of 42 cents on the dollar” and the country’s 100-year bond suffered similar losses.
These developments have strained Argentina’s negotiations with creditors and a low exchange rate would likely increase inflation and worsen the recession in the future. Needless to say, the situation looks incredibly dim. Fernandez has recently celebrated small ‘wins’ such as the recent swap of $1.66 billion in Treasury bills to prolong repayment deadlines to reduce Argentina’s debt burden in the short term. Repayments now due in September and December will give more time for the Argentine economy to grow and expand its productive capacity, overall seeking to make the debt more sustainable in the long term. Diego Bastourre, Argentina’s finance secretary, has claimed they have achieved key objectives such as “extending deadlines, lowering the amount and the rate” of the loans. However, there is still no concrete plan on how Fernandez’ administration will seek to revive the economy and increase GDP which is the key for Argentina to at least get back on its knees.
Nevertheless, these small ‘wins’ are still substantially unconvincing. Francisco Rodriguez writing for Financial Times argues that ‘haircuts on creditors’ may not be the way to move forward. Rodriguez argues that the root of Argentina’s problems is a crisis of confidence in financial institutions such as their central bank. Merely, Argentina not only needs time and space to build economic confidence but a whole restructuring of its institutions and way of life. This in turn requires an honest, well committed young breed of new politicians who are not scared of developing serious long-term realistic plans for one of the most endowed countries in the world and Latin America’s third biggest economy. Argentina needs a full commitment towards honoring it’ debts and living within its own means and possibilities, which are not few. This new political class of responsible politicians will need to make their country pay its debts in an orderly fashion rather than hold others accountable for their mistakes.
What the future holds
President Fernandez’ administration has set up a deadline to reach an agreement with creditors and bondholders by the end of March in an attempt to revive Argentine confidence, avoid default and produce a fiscal plan for future rehabilitation of the economy. Many economists have argued that the international creditors must keep a strong stance against Buenos Aires, which is desperate for a bailout. This would send a strong message that the government has become more fiscally conservative and could potentially motivate creditors to accept a postponement of payments, giving Argentina more time to improve their economy’s productive capacity. Therefore, this would produce a coherent national strategy to grow the economy and improve Argentina’s fiscal situation.
Furthermore, Fernandez faces the challenge of finding different ways to stimulate the economy, as the World Economic Forum claims there are “no resources left through government spending”. The mismatch between Argentina’s economic vision and what international lenders such as the IMF are imposing, is plunging the country into a cycle of borrowing and defaulting as the economy’s productive capacity fails to grow. While the IMF promotes austerity programs (spending cuts) in their reforms which have already caused recessions in the past (2001), Argentina wants to heighten its economy’s productive capacity in order to start re-paying loans rather than keep prolonging maturities which would increase their debt burden in the long-term. While we have yet to see a coherent plan from Fernandez’ administration to achieve this, Argentina could capitalize on its positive relationship with China to help them obtain valuable resources to restructure and stimulate their economy.
Likewise, the IMF must rethink the frameworks they employ to restructure debt in an economy that lacks the confidence to grow and the capabilities to re-pay those debts in the future. While the IMF should not have continued to lend the Argentinian government in the first place, their conflict of interests leads them to do so as cutting off revenue sources would have most likely ended the government’s social programs which fight against impoverishment. Reform of their policies is the least we could ask of the IMF right now and a complete overhaul of their frameworks. The IMF must take a strong stance against dishonest politicians who are simply not paying their debts and understand that if they continue to lend money, they are merely allowing them to get away with it.
Argentina is currently facing a make or break situation. If President Fernandez fails to restore the $100bn of debts and bondholders suffer large losses, future investments will be severely averted and Argentina could be forced to default. If the debt situation is fixed and economic growth can lead to increased tax revenues and better organization of fiscal plans in the long-term then the government would be in a much better position to deal with its deficit. A stable exchange rate obtained by foreign currency controls and overseen by the central bank plus a realistic target to reduce inflation will also be key to economic recovery.
Even though Argentina’s record of recovering from crises is not spectacular, this new administration must attempt to reconcile politics and take responsibility for fixing the budget deficit the previous Kirchner administration increased in the first place. Otherwise, Argentina will have to make way for a new generation of economists and politicians that can save the country from its self-inflicted miseries.