An earlier version of this article incorrectly listed Templeton as part of the creditor group involved in the current debt restructuring negotiations with Argentina. They are not part of the group and the copy has been updated to reflect this.
Buenos Aires, Argentina- The lid came off the high-stakes showdown between Argentina and its international creditors this week, as the crisis-ridden country moves ever closer to another devastating debt default.
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Martin Guzman, the South American nation’s economy minister, has played hardball since unveiling a plan that expires Friday for restructuring part of Argentina’s debt.
“The time for illusions is over,” he wrote in an op-ed in the Financial Times on Monday. “We cannot continue to spend 20 percent of government revenues or more on debt payments – as some creditors have effectively asked”.
Guzman has secured broad political and business support for his plan in a notoriously divided country, along with the backing of a long list of esteemed international economists.
“We have a serious problem here, a serious problem with real consequences for real people,” Guzman said on Wednesday during a webinar hosted by Columbia University’s Institute of Latin American Studies. “These are not just numbers on a spreadsheet, and we are needing more collaboration from some of our creditors.”
But Argentina’s creditors are not budging. A key block composed of major asset managers has repeatedly rejected the government’s blueprint, arguing that bondholders are being asked to “bear disproportionate losses that are neither justified nor necessary”.
Though Guzman maintains “Argentina cannot afford to pay more”, on Wednesday he said the country is “flexible” and willing to hear “alternatives”, as long as they respect the debt sustainability constraints the country faces.
“It is our intention to reach a successful deal,” he said.
If not, the stage will be set for Argentina to default on its debt for the ninth time. But the stakes could be even higher than that. With so many indebted nations now struggling with the unprecedented economic fallout of the coronavirus pandemic, what happens in Argentina could deeply influence how other countries and their creditors navigate looming sovereign debt crises.
Deal or no deal?
In mid-April, the government of President Alberto Fernandez presented put forth its proposal for restructuring $65bn worth of Argentine sovereign bonds governed by the law of a foreign jurisdiction – so-called “foreign law debt”.
Fernandez and Guzman stressed the need for breathing room and their proposal leans into that: no payment to creditors for three years, until 2023; a 62 percent reduction in interest payments, which would reduce what the country owes by $38bn; and a 5.4 percent cut to the principal payment, representing another $3.6bn in savings for Argentina.
That translates into an average bond coupon or yield rate of 2.3 percent, rather than the 7 percent return creditors were expecting.
Argentina entered the COVID-19 crisis already steeped in recession. Rampant inflation, widespread poverty and suffering have only worsened in the wake of lockdowns that have ground the formal and informal economies to a halt.
Guzman has reminded creditors of this, underscoring that the goal of any restructuring deal should be long-term economic sustainability that enables debtors to keep paying and their economies to recover.
“Unsustainable demands can only breed unsustainable outcomes,” he has warned.
Economist Martin Kalos agrees, telling Al Jazeera that brokering a deal that strangles any chance of growth is worse than falling into default for Argentina.
“What Argentina needs is the capacity to pay. If it doesn’t have the capacity to pay, it’s going to generate new problems with the debt,” he said.
While debt restructuring has birthed a language inscrutable to most, it is deeply familiar to many Argentines. Reprofiling. Selective default. Restrictive default. Reprofiling plus. All have been applied to Argentina over the past eight months by ratings agencies, government officials and the media as it became increasingly clear that the country is in lamentably familiar financial territory.
For many Argentines, the word default and its various derivatives conjure nightmarish memories of the last time the country could not pay its creditors, in 2001 – an episode that ravaged the peso, eviscerated life savings and ruined lives.
President Fernandez knows this all too well, and has sought to position himself as the hard-bargaining saviour of the public purse, blaming the previous administration of former President Mauricio Macri for leaving the country in “virtual default”.
The offer on the table represents a promise the country can keep, he says.
Though creditors have until May 8 to accept or reject the offer, Argentina would not officially fall into default until May 22nd.
‘It’s a negotiation’
On Monday, three bondholder groups issued a joint statement doubling down on their previous rejection of Argentina’s restructuring pitch.
Those groups boast such names as BlackRock Financial Management – the world’s largest asset manager – as well as Fidelity and other large funds that collectively hold more than a quarter of Argentine bonds issued after 2016.
“The rejections are logical and expected,” said Matias Rajnerman, chief economist with the Buenos Aires consultancy firm Ecolatina. “It’s a negotiation … What the government has to do is make creditors believe that it isn’t afraid of falling into default,” he told Al Jazeera.
Rajnerman believes there is room for Argentina to improve the proposal. Lucia Pezzarini, an economist with Ecolatina, holds the same view.
“What the bondholders are saying is that you presented me with a proposal that you can’t pay me in the next few years, but how can I be sure that you will be able to pay me in the years that follow?” she told Al Jazeera. “You haven’t presented me with a fiscal plan or a long-term growth plan.”
But that could prove very difficult. Drafting economic policy is an imperfect science under normal conditions. But the unknowns surrounding the trajectory of the coronavirus pandemic have thrown even more uncertainty into the mix.
‘It’s very difficult to design a macroeconomic plan if you don’t know what is going to happen, not just in Argentina but in the world,” said Pezzarini.
The cost of default
Argentina is hardly the only country that entered the coronavirus crisis with unsustainable debts. And even countries that could have shouldered their debt burdens may find themselves unable to pay as their economies are decimated by COVID-19 lockdowns.
In an open letter this week, leading economists around the globe – including Nobel laureates Joseph Stiglitz and Edmund S Phelps – defended Argentina’s debt restructuring plan as a “responsible offer” that if accepted could “set a positive precedent, not only for Argentina, but for the international financial system as a whole”.
Another signatory on the letter, economist Jeffrey Sachs of Columbia University, underscored that point during the Columbia University webinar on Wednesday.
“We’re not talking about Argentina right now, we’re talking about a global crisis that is the worst since the Great Depression [of the 1930s],” he said. “And I hope that some collective rationality can prevail before we have a massive financial crash.”
Argentina cannot access international financing as it stands. And a default would cast it adrift for the foreseeable future, when it will need help badly.
“Today the economy is being propped up in large measure by the state,” said Pezzarini. “But once the quarantine ends, the private sector will have to pick itself up. And the consequence of a default is that you’re going to have financing interest rates that are going shoot up. And Argentina needs financing, especially from the outside, to start to pick itself up again.”