Thursday, December 1, 2022

OPINION AND ANALYSIS | 18-01-2020 10:28

Hello default my old friend

Kicillof has set the stage. But soon Alberto Fernández and Guzmán will be the leading actors. Or is this just Kicillof’s play?

Argentina is wading in a swamp of financial misery once again. The debt burden is huge. The crunchers of numbers are scratching the top of their heads. The politicians are asking the technocrats, ‘Can we pay this?’ The technocrats pull faces. The bondholders start to sweat. What will they get for these pieces of Argentine paper that they bought?

The new Peronist administration has turned a month in office and already, in the relatively slow months of summer, what appears to be looming is a painful restructuring of debt with private creditors and the International Monetary Fund (IMF).

Buenos Aires Province Governor Axel Kicillof, the progressive Kirchnerite economist, has announced that Argentina’s biggest province will seek to postpone a debt payment of some US$250 million due before the end of this month. The governor wants to call a time-out and delay the payment until May 1. Is Kicillof flirting with default? Possibly not, but he is probably trying to make the creditors edgy and force them to sit down at the table to negotiate. The message is this: We want to pay, but the size of the debt is “unsustainable.” There is no talk of default. The national and executive officials are avoiding the D word, but read between the lines and they are saying that they can’t pay. Argentina, according to the new government, must first start to grow again to then pay up.

President Alberto Fernández’s administration has already announced that it will not rescue Buenos Aires Province. But the speculation is that they are in league. Kicillof has sent out that first message to the creditors: There is no way out, you must be reasonable. The republic’s biggest province needs a lot of reasonable creditors: 75 percent of them must agree to the new governor’s terms for the wheels of provincial default not to start turning.

El capital es cobarde. It can also be unreasonable. Technically, if the payment is not made then the creditors can take the province to court in New York. You don’t want to go back and review the history of Argentina’s excruciatingly exasperating legal battles in the courts of a late Manhattan judge by the name of Thomas Griesa, regarding the so-called “vulture funds” that gobbled up the republic’s junk bonds in order to then sue to collect the compensation.

Kicillof’s announcement is simply the first shot in what will be a mammoth debt negotiation that will involve Economy Minister Martín Guzmán, a US-trained economist who has Nobel prize winner Joseph Stiglitz as his mentor. Guzmán’s biggest challenge is to navigate the upcoming obligations without ever falling into default. There’s other more reasonable words out there that Argentine officials would rather use, like “reprofiling” or “rescheduling.”

The political twist is that much of the debt was amassed by former centre-right president Maurico Macri during his fouryear mandate that ended when he was defeated last year. The Cambiemos sought so much debt that the result for him was electoral default.

Kicillof has also blamed his predecessor, the pro-Macri former governor María Eugenia Vidal, for increasing the provincial debt. Her economists dismiss this as nonsense. The battle is rhetorical and the incumbent governor’s challenge is to convince the public that the debt burden is part of the economic mess left behind by the previous neoconservative administration that he defeated convincingly last year.

Kicillof, as a former economy minister who served under now Vice-President Cristina Fernández de Kirchner, was involved in previous debt negotiations when she was president. But the next big chapter will be dominated by Guzmán and the national debt. The international picture includes players like US President Donald Trump, who don’t necessarily pay any attention to a provincial debt rescheduling. Kicillof has set the stage. But soon Alberto Fernández and Guzmán will be the leading actors. Or is this just Kicillof’s play?

The president will meet with Pope Francis at the Vatican in the coming weeks. There is also speculation that Guzmán will meet with the IMF’s top brass at the Vatican during an economic forum scheduled for early next m o n t h . Ph o to g r a ph s showing the Argentine pontiff meeting with Stiglitz (a renowned critic of past IMF austerity recipes) and Guzmán early last year, well before Alberto Fernández won the election, are out there for all to see. The Pope is not a fan of capital.

Argentina’s potential financial collapse would be bad news for the IMF considering that during Macri’s presidency it granted a US$56-billion loan in tranches, purportedly at the behest of Donald Trump. Macri’s economic performance was full of fumbles. Argentina’s inflation rate in 2019, his last year in office, hit 53.8 percent – the highest in 28 years. Where did all that IMF money go? That’s exactly what the president is likely to ask. But still there will be financial drama and suspense ahead while the Fernández administration gets down to the task of slowing down inflation.

Kicillof wasted no time in floating the debt issue and sending out a message to the bondholders very early in the year. Crikey, doesn’t Argentina know it? There’s no summer holiday from debt.

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Martín Gambarotta

Martín Gambarotta


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