One stock criticism of populism is that it leads to “bread for today and famine tomorrow” – Tuesday’s debt deal with the main bondholder groups was almost the reverse since it removes a major problem for some years ahead (the next five especially) while the current problems of pandemic and meltdown remain as acute as ever. Not that these problems would not have been very much worse if Argentina’s technical or selective default since May had become full-scale and permanent, crushing the slim chances of recovery – for these reasons this week’s debt settlement deserves praise without being cause for celebration in any way (least of all since the legal chapter still remains to be closed when the devil lies in such details as class action clauses). A necessary but not sufficient condition.
If there is little to celebrate, there are those who would argue that there is less to praise but that would be churlish – most criticisms of the government’s heterodox negotiating strategy leading to such an orthodox result are perfectly valid but also petty when measured against the bottom line of averting default. The 37 percent haircut is the exact average of the sovereign restructuring agreements worldwide in the last four decades – in these terms neither bad nor good. The quality of this haircut falling on interest rates way above recent levels rather than capital deserves praise, as does abandonment of the absurd three-year grace period exempting this administration from any payment. Honouring capital leaves debt almost unchanged as a percentage of Gross Domestic Product, confirming that Argentina’s problem is liquidity rather than solvency, as ex-minister Hernán Lacunza has always insisted.
Nevertheless, the praise cannot be unqualified. There can be no doubt that Economy Minister Martín Guzmán’s compulsive obsession with painting himself into a corner with a string of “final offers,” inspiring similar disbelief to the constantly receding peak of Covid-19 contagion, needlessly delayed this happy outcome during crucial months of the pandemic while gaining nothing. His fundamental premise can also be questioned if back in March sustainability ended at a net present value (NPV) of 39 cents per dollar but now remains intact at an NPV of 54.8 cents – or some US$15 billion less debt relief – for an economy shattered by four months of lockdown.
Yet even if this stage is not finally surmounted until the ink is dry on the August 24 presentation of the bond swap to the Securities & Exchange Commission in the United States, it is already time to look ahead. Next comes the International Monetary Fund (IMF) where the US$44 billion owed is nominally less than the US$68 billion of bonds under foreign jurisdiction now settled but with the significant difference of a haircut not being an option. This is when Argentina will need a plan – President Alberto Fernández has been widely criticised for telling the Financial Times: “Frankly I don’t believe in economic plans” but, quite apart from the best laid plans of mice and men seeming totally at odds with today’s chaotic universe of the pandemic and the accelerating technological changes behind and beyond it, any plan would have been premature ahead of talks with the IMF. Argentina’s chronic fiscal deficit underlying the foreign debt problem has been insanely compounded by the pandemic with this year’s deficit hovering dangerously close to a double-digit percentage of GDP. What cuts will the IMF be demanding to tame this deficit and rescue the peso – the provinces, pensions, public service billing or where? There is now every chance of the government seeking new IMF credit despite all the disavowals. IMF loans, the quasi-fiscal deficit of Leliq peso bonds to absorb excess liquidity – all the strategies of the Mauricio Macri administration so derided by its successors may well be back in place before long.
Drastic monetary action is already an urgency because pesos might be printed by the trillion but Central Bank reserves are rock bottom – last month they fell by half a billion dollars despite impressive farm exports and minimal imports. The trickle of the US$200 monthly purchase permitted each citizen (or most) explains much of this fall – almost four million such purchases last month plus exports being withheld in expectation of the yawning gap being official and parallel exchange rates being closed drain the dollars from an economy in deep recession. Intolerable pressure for a devaluation which is sure to be at the forefront of negotiations with the IMF. Miles to go before we sleep.
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