Debt be not proud

Why was yesterday a D-Day in the first place, if indeed it was? “D” for debt perhaps but not for default – only the government’s self-imposed deadline for acceptance of its offer to creditors expired yesterday, not the grace period for the Global bonds which ends on May 22 (with cross default kicking in on June 22). If the offer expiring yesterday does not click, the government has an admittedly narrow window of a fortnight to scramble together another and finally negotiate – that option had already been hinted last week when Economy Minister Martín Guzmán challenged the investment funds to make counter-offers instead of flat rejection and received one from BlackRock. And should a fortnight prove insufficient to reach agreement on a bond swap, the government could always pay up and continue negotiating (a road followed by the far more intransigent Buenos Aires Province Governor Axel Kicillof earlier this year) – if the entire debt under foreign jurisdiction is some 15 percent of Gross Domestic Product when many developed countries owe more than their economies, why incur the enormity of default for half a billion bucks?

Even if this editorial had to be written ahead of knowing yesterday’s final outcome, the finality is thus relative. So are the parameters for success or failure. The Economy Ministry itself has made this a grey area by reserving the right to define the majority of bondholders binding on the others (which will not help acceptance). And what would mark failure – below 20, 30 or 40 percent? In any event there remains a vast middle ground between success and failure, which would dictate negotiations.

There was no foregone conclusion ahead of yesterday’s final upshot. An aggressively unilateral offer is nevertheless far from doomed to failure in a world of zero or negative interest rates, as dozens of prestigious economists mustered by Guzmán’s mentor Joseph Stiglitz have pointed out – Argentine bond prices picked up in New York last week (even if any attraction of Guzmán’s offer depends on their staying low). But what probably irks creditors most in the offer is not so much the 62 percent haircut on interest rates (the seven percent average of the pending bonds looks hopelessly outdated in today’s pandemic world) as the three-year grace period until almost the end of the Alberto Fernández presidency – is an upper middle income country like Argentina really incapable of paying a cent for three years, especially with a trade surplus likely to reach US$20 billion this year with the collapse of imports? The only way Guzmán can banish the suspicion that this government is seeking a free ride and passing on all the debt problems to the next presidency is to insist that Argentina will be genuinely prostrate all this time with constant recession and epic fiscal deficits but this only makes Peronist rule look even more disastrous than the demonised Mauricio Macri presidency – a stigma perhaps only avoided by overacting quarantine.

Why gun for a settlement now in these impossible times, starting with the most difficult (private foreign bondholders ahead of multilateral and local creditors), and why insist on three years when Ecuador showed last month that other more harmonious options are available? That country obtained ready assent from its creditors that the ravages of Covid-19 rule out any reasonable negotiations now, agreeing with 91 percent acceptance on a four-month standstill suspending debt payments before sitting down to serious talks. If Argentina shows no interest in this option (a one-year standstill would be feasible, for example), the suspicion is that it does not want reasonable negotiations – a “the worse, the better” logic to make the most of the extreme uncertainty from the pandemic to obliterate debt. An extended quarantine has proved medically correct so far but also happens to serve the hidden agenda of leftist populism – not only regarding debt negotiations but displacing the market economy with state intervention.

All too many people seem to think that there is nothing to lose with default, given the absence of any overseas credit or investment, but even in these desperate times anything would be better. Default would only make bad worse – credit for the public sector to maintain its deficit and upgrade infrastructure along with investments and export guarantees for the private sector would all vanish. If the argument is that a country must grow before it can pay debt, default would thus kill any chances of that growth, not to mention proving a political suicide historically – everybody loses, not least the creditors. A catastrophe all round.