Argentina will learn on Monday whether enough creditors have accepted its offer to restructure $65bn of foreign debt, as Buenos Aires insisted that the country’s ninth sovereign debt default would be its last.
If all goes according to the government’s plan, the deal is expected to bring an end to the default process that began in May and avoid costly creditor lawsuits. But some analysts and investors are sceptical whether Argentina has turned a corner.
“Is there any reason to suppose things will be any different this time?” said Javier Milei, an Argentine economist who was one of the first to predict the country’s latest default.
The leftwing government of President Alberto Fernández has shown little sign of changing tack in its attempts to revive an economy in terminal decline for most of the last century, he argued. Mr Milei also warned that without a fiscal surplus and return to economic growth, Argentina’s debt would remain unsustainable. The country was on course for a deficit of 10 per cent this year and only a brief rebound in growth was likely next year, he said.
The restructuring, which the government has said shaves some $38bn off the value of the country’s debt over the next decade, also only covered a fifth of Argentina’s $323bn burden. The $130bn owed to public-sector institutions was a particular problem because it threatened to boost inflation, Mr Milei added.
Some economists disagree with the gloomy prognosis, saying that much depends on how the government plans to haul the country out of recession. The IMF said it expected a GDP contraction of more than 10 per cent this year amid the coronavirus crisis.
“There is great uncertainty right now,” said Martin Castellano, Latin America economist at the Institute of International Finance. “What investors most want to know is how economic policy will look after the restructuring and the pandemic. That will have big implications for debt sustainability.”
Argentina has for decades been plagued by debt defaults, devaluations and hyperinflation. Its inflation rate of more than 42 per cent is among the highest in the world, and capital controls introduced last year to protect dwindling foreign exchange reserves have left the peso heavily overvalued.
Investors and economists say that to escape the cycle of economic crisis and boost growth and investor confidence, the country needs to improve productivity and exports to generate enough foreign currency to service external debt. Challenges include restoring faith in the peso and stimulating domestic saving as well as strengthening institutions and governance.
A new IMF programme, which the government formally requested on Wednesday, was an essential step, say analysts. Argentina only has a year before hefty interest payments on the $44bn the fund has loaned it since a currency crisis in 2018 fall due.
“Nothing less than a full rollover of Argentina’s repayments will do — but even that won’t be enough. Argentina must get a grip on its fiscal deficit if its debt is ever to be sustainable,” said Mr Castellano.
It is unclear what conditions the IMF would set before agreeing a new programme, but analysts say the fund is likely to take a dim view of growing intervention in the economy by the government. Last week, internet, television and mobile phone tariffs were frozen until the end of the year by a presidential decree aimed at curbing inflation. The government also made an abortive attempt to expropriate Vicentín, Argentina’s largest grains exporter.
Mr Fernández now faces a tough trade-off between phasing out the printing of money to finance the deficit or avoiding unpopular austerity measures and so fuelling inflation.
The short-term market outlook is not encouraging, say analysts. Many bondholders are likely to sell their debt in the coming weeks to cut their losses, make short-term gains or reduce exposure to Argentina “irrespective of whether these people believe Argentina is likely to default in the near term or not”, according to a former government official.
“There will be tons of speculation about the financial situation of Argentina in the next months,” said the former official, adding that investors were also likely to question the level of savings the government is claiming it will make in the restructuring, as opposed to simply pushing maturities further into the future.
Another former official described as “nonsense” the government’s claimed interest payment savings for its century bond, given Buenos Aires’ questionable assumptions about long-term events.
But some economists argue that Argentina’s debt is only one of the barriers to restoring economic health.
“The problem is the Argentine character, the country’s idiosyncrasies,” said Marina dal Poggetto, executive director of EcoGo, an economic consultancy in Buenos Aires. “Argentina has a horrible record. If we continue on the same path as the last 50 years, nothing is sustainable.”