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Argentina Teeters on Default, Again, as Pandemic Guts Economy


BUENOS AIRES — Argentina is hurtling toward default on international loans in two weeks, a prospect that threatens to revive its reputation as a serial deadbeat and global financial pariah that could haunt the Latin American country long after the coronavirus pandemic is over.

If Argentina defaults, which as of Friday appeared likely, it would be the third time in two decades that the country has failed to meet loan payments after having amassed billions of dollars in foreign debt in a deepening spiral of economic dysfunction. Argentina would join Lebanon as the first defaulters in the financial tumult caused by the coronavirus.

Argentina’s 45 million people already were suffering through the third year of a serious downturn when the coronavirus scourge hit, accelerating the economic pain by forcing a lockdown that closed many businesses and left workers jobless.

That suddenly threw a wrench into the government’s plans to restructure $66 billion in debt owed to a range of mostly foreign creditors that include Wall Street investment banks and other private investors around the world. Some of that debt is a vestige of unpaid loans from Argentina’s default in 2001.

The country faces a $500 million interest payment May 22.

The center-left government, elected just seven months ago, says it cannot afford to meet obligations to international creditors at a time when it is raising health care spending and providing emergency cash to Argentines already reeling from soaring inflation and rising poverty.

International creditors have scoffed at the plan Argentina presented to restructure the debt, which came and went with a Friday deadline.

There is little sign that the creditors and government are close to striking a deal. Barring an agreement for an extension beyond May 22 to hold further negotiations, Argentina would default for the ninth time in its history.

“It’s very difficult to see how they can reach an agreement when both sides say they are in the right,” said Jimena Blanco, head of the Americas research team at Verisk Maplecroft, a risk consultancy that has assigned an 89 percent probability to a default by the end of the year. “Argentina presented its offer and said it is the only offer — you either take it or leave it.”

The administration of President Alberto Fernández, which took office in December, has signaled in recent days that it is willing to make some concessions. But the government has said it has little room to maneuver, considering its economy is projected to shrink by 6.5 percent this year.

The government’s offer to creditors envisioned a three-year grace period on future payments, a 5.4 percent reduction in the loan balance and a 62 percent cut in interest payments. The three largest bondholder groups said no.

Argentina’s latest crisis follows years of efforts to reinsert itself into the global economy following its default in 2001 on about $100 billion in debt, which led to one of the largest economic collapses in recent history in Latin America and years of litigation in American courts.

The story of how Argentina once again is facing such a disaster is partly rooted in its success in escaping previous defaults.

When Mr. Fernández’s predecessor, Mauricio Macri, was sworn in as president in December 2015, global financial markets began warming up to Argentina. The new government set in motion an ambitious plan to scrap subsidies and other fiscally unsustainable policies implemented by the two presidents who preceded Mr. Macri, both leftist populists.

Mr. Macri’s immediate predecessor, Cristina Fernández de Kirchner, led a furious battle against the holdout creditors she frequently referred to as vulture funds. She is now vice president.

Early in his presidency, Mr. Macri settled the remaining legal battles with creditors in American courts and began issuing debt again with attractive rates of interest. Suddenly, foreign investors were eager for them.

But then Argentina was slammed with a mix of economic shocks that weakened its currency, the peso, making interest payments on the bonds more costly. The challenges included a recession in its giant neighbor Brazil, rising interest rates in the United States and a devastating drought in 2018.

All the gains Argentina had made in reducing poverty over the past decade went into reverse, and Mr. Macri sought a $57 billion loan from the International Monetary Fund.

The bleak outlook for Argentina turned catastrophic as the new coronavirus was declared a pandemic in March.

Argentina imposed one of the strictest lockdowns in Latin America on March 20, which has helped to keep the number of deaths relatively low from Covid-19, the disease caused by the virus. But those measures, which included shuttered borders and strictly enforced quarantines, have gutted an economy that was already weakened.

The pain has been felt acutely by many Argentines who had hoped for better times.

Hernán Calliari, 40, and his business partner, owners of the Faraday bar and restaurant in the Palermo neighborhood of Buenos Aires, opened it with confidence in 2017 but then struggled. As the peso’s value shriveled and inflation reached 50 percent annually, it became far more expensive for the business to make money.

Mr. Calliari said that with the pandemic lockdown, he is now barely surviving from a delivery operation yielding only about 15 percent of his usual revenue.

“We’re treading water, desperately trying to stay afloat,” he said. “I can’t think about what will happen if a big wave comes crashing down on us now.”

If these were ordinary times, economists say, Argentina would get little sympathy for verging on default again. But the broader economic meltdown caused by the coronavirus may oddly give it some bargaining leverage.

“Covid-19 improves Argentina’s chances of receiving a favorable deal,” said Miguel Kiguel, a former finance secretary who runs Econviews, a consultancy. “Creditors are losing money everywhere and Argentine bonds are at a very low value so there is a possibility that if Argentina makes a reasonable offer” creditors will not object.

Claudio Loser, the former director of the I.M.F.’s Western Hemisphere Department, agreed that the pandemic could make creditors reluctant to insist on tough repayment terms.

“Creditors have to be careful because I don’t think they’ll find the same sympathy for their cause as they did in the past,” he said. “There’s a perception of force majeure due to the pandemic and in that context what is happening to Argentina is much more understandable.”

Ecuador recently reached an agreement with bondholders to delay interest payment on $20 billion in debt through August.

Earlier this week, a group of 138 economists, including the Nobel laureates Joseph Stiglitz and Edmund S. Phelps, wrote an open letter supporting Argentina’s efforts to restructure its debt.

“Debt relief is the only way to combat the pandemic and set the economy on a sustainable path,” the economists wrote.

Yet, to make meaningful concessions, like a three-year moratorium on payments, creditors will likely want to see a detailed plan on how Argentina intends to resuscitate sustainable growth, said Daniel Kerner, the managing director for Latin America at the Eurasia Group, a political risk consultancy.

Ordinary Argentines would not likely feel the imminent impact of a default. The country is already locked out of international capital markets and investors are largely staying away — not just from Argentina but also from all so-called emerging economies.

“Defaulting would not really affect your credit today,” Mr. Kiguel said. “But you’d start to feel it when things begin to turn around,” he added, noting that Argentina would find it hard to get new lines of credit or attract new investment.

For many Argentines, the latest wave of uncertainty is part of a pattern.

Azul Agulla, 27, works in marketing and lives with her boyfriend, Santiago Dymensztein, a 28-year-old economist. The couple calculated that their wages have increased only 2 percent adjusted for inflation over the past two years, despite several promotions.

“We’re moving backward,” she said. “It feels like you’re constantly trying to escape from a hole that pulls you down.”

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