This time it only took six months of haggling and five missed deadlines, but Latin America’s best known recidivist borrower – nine sovereign debt defaults since independence and 20 International Monetary Fund bailouts – has finally come to terms with the foreign holders of its bonds. And for Argentina, which has spent one of every three years in recession since 1950, the new deal, signed August. 4, may once again prove to be the easy part.
President Alberto Fernández and Economy Minister Martín Guzmán deserve plaudits for keeping the talks for rescheduling US$65 billion in foreign debt civil and on topic – with remarkably little pushback from alpha Peronist and Vice-President Cristina Fernández de Kirchner. Recall 2014 and 2015, when Fernández de Kirchner (no relation to Alberto) was running the country and made a point of turning debt negotiations into a passion play.
Yet decorum isn’t deliverance, and to honour the agreement with private lenders Fernández not only must convince the country’s biggest creditor, the International Monetary Fund, to reschedule US$44 billion in loans, but sell his own recession-battered compatriots on the inevitable sacrifices and unpalatable political changes required to return Argentina to solvency and growth.
Three years into a deepening economic contraction, Argentina has fallen hard. It earned the second lowest score on Bloomberg LP’s latest misery index, with around 40 percent of the population living in poverty. Locked down since March, the pandemic-smothered economy is set to contract by as much as 13 percent this year. The IMF says it will take US$55 billion to US$85 billion in debt relief to see Argentina through the next decade.
This combination of afflictions has bought Argentina some indulgence and may have helped grease the way to a debt deal. Argentina will have four years to start paying off its pared down debt, and many analysts foresee the IMF agreeing to reschedule the loan to its biggest debtor. Nonetheless, the Fund’s imprimatur will come with conditions.
“Guzmán deserves applause but the question is, what will he do with the breathing room he’s won for Argentina?” said Adriana Dupita at Bloomberg Economics. One major unanswered dilemma: How to manage the 70 percent of national debt denominated in dollars at a time Argentina has been all but shut out of foreign capital markets? “He’ll have to bring the economy back to growth and to do that will require reducing inefficient public spending and take on structural reforms.”
It’s hard to know where to start. Even before this year’s compound emergencies, Argentina was a global straggler. It earned the World Economic Forum’s lowest rank for economic competitiveness among the Group of 20 countries and placed an underwhelming 83 out of 141 countries worldwide. Don’t count on much relief from the government’s proposed judicial reform, which critics suspect is designed to shield Fernández de Kirchner from numerous criminal charges such as money-laundering. The Casa Rosada’s attempt to nationalise financially troubled soy crushing giant Vicentin in June didn’t help; although a judge, overruled the takeover, Fernández declared that nationalisation is still on the table.
Multinational companies are pulling up stakes. LATAM airlines recently announced it was ending domestic flights in Argentina, and Covid-19 was only part of the problem. Spiking operating costs due to onerous taxes, chronic labour disputes and low productivity by flight crews had inflated operating costs to the breaking point, Bloomberg News reported. Perhaps it’s no surprise that many Argentine companies are weighing relocation across the border to more business-friendly Uruguay. “Argentina has become a very hostile place to invest with an out of control executive that seeks to expropriate businesses and the governing Peronist coalition threatening further expropriations,” said Nicolás Saldias, a political analyst at the Wilson Center’s Argentina Project.
Argentina isn’t a poor country, just a mismanaged one, chronically squandering the country’s enviable human capital and enterprise. “The high tax burden, low productivity and protectionism have delivered years of underinvestment and boom and bust,” Alberto Ramos, a senior economist at Goldman Sachs told me. “What’s needed are structural reforms.”
Mauricio Macri surged into office five years ago on precisely that promise – fiscal consolidation, streamlining public spending and taxes, and opening the economy. Macri was not wrong. “While it has taken time, these policy efforts are starting to bear fruit,” the IMF declared in its fourth review under the Argentine Standby agreement 13 months ago. “Financial markets have stabilised, the fiscal and external positions are improving, and the economy is beginning a gradual recovery from last year’s recession. The Fund is strongly supportive of these important policy efforts.”
That was then. Instead of transformational reform, Macri delivered gradualism and half measures, with the prostrate economy setting up the rival Peronists for a triumphant return. Will Fernández take up that vital if politically toxic unfinished agenda? Don’t hold your breath.
“The rest of Fernández’s term will be damage control,” said Bruno Binetti, who teaches political science at the Torcuato Di Tella University in Buenos Aires. “What we might see is Fernández justifying necessary spending cuts and reforms by transferring the blame to the pandemic or to Macri.” The deflection may already have begun. “A pandemic without the virus,” is how Fernández recently described his predecessor’s policy bequest as his own sky high approval ratings began to slip. Whether such partisan cant will persuade his crisis-weary compatriots is another matter.
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