Latin America Advisor

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Will Argentina Be Able to Reach a Deal With its Creditors?

Argentine President Alberto Fernández’s government is seeking debt relief in talks with international creditors. // File Photo: Argentine Government. Argentine President Alberto Fernández’s government is seeking debt relief in talks with international creditors. // File Photo: Argentine Government.

Argentina has extended to May 22 a self-imposed deadline to reach a deal with international bondholders to restructure more than $65 billion in foreign debt, after its largest creditor groups rejected the government’s offer last week. May 22 also marks the end of a grace period for about $503 million in delayed interest payments. Failure to reach an agreement or make the payment would result in the country’s ninth default. What needs to happen for Argentina to avoid a default this month? What are the major sticking points keeping Argentina’s government and creditors from reaching a restructuring deal, and are the two sides likely to iron them out before the new deadline? What would default mean for the country and President Alberto Fernández’s government?

Jorge Argüello, Argentina’s ambassador to the United States: “Argentina’s economic problems long predated the current government and have been exacerbated by the current Covid-19 pandemic. President Alberto Fernández has pledged to make Argentina’s public debt sustainable and put the country back on a growth trajectory. In April, the government presented to foreign creditors an offer that would responsibly restructure Argentina’s debt. This proposal has been praised by a broad, bipartisan spectrum of Argentina’s provincial state governors, legislators and more than 1,400 mayors, businesspeople and union leaders. The issue has also garnered global attention, with the IMF acknowledging that Argentina’s debt is not sustainable and with more than 150 international economists—including four Nobel laureates—calling for debt relief as the only way to combat the Covid-19 pandemic and set the economy on a sustainable path. Many creditors have supported Argentina’s offer, while others have not—with several indicating that there are better alternatives. We remain open to discussing any proposal that meets the sustainability objectives we need to secure, including through interest rates, capital reduction, grace periods and extension of maturities different from those we proposed. Hence, the government is eager to receive from creditors their counterproposals, assess them diligently in good faith and thereby move forward with the negotiation. Without an orderly resolution, both Argentina and its creditors confront the prospect of a damaging default. The government deems an agreement to be within the parties’ reach and also assigns to it the outmost importance for the country to weather this period of turmoil and return to growth.”

Kezia McKeague, director at McLarty Associates: “In this ongoing game of chicken, one side will need to blink first in order to avoid default. Ideally, however, both parties would attempt to find common ground. The Argentine government would need to improve its initial offer and reveal some detail about its economic plan, while the principal creditor groups would need to provide a counteroffer that acknowledges Argentina’s solvency challenges. Alternatively, as some economists have proposed, a temporary solution would be a ‘standstill’ agreement to postpone debt service and renegotiate under a more stable, post-Covid-19 economy. For now, the major sticking points are the proposed three-year moratorium on payments and a cut in average coupon payments from 7 percent to 2.3 percent, which many investors have criticized as an unreasonable reduction from a serial defaulter. There is little sign of a deal in sight. Although President Fernández publicly favors the avoidance of default, the IMF’s assessment that Argentine debt is ‘unsustainable’ emboldened the government in the restructuring; more recently, the pandemic gave it another reason to play hardball in the hopes that creditors would be less likely to insist on tough repayment terms in a context of global financial distress. For the Fernández administration, a default would represent a jump into the unknown, with both reputational and economic costs. Foreign direct investment and credit to domestic private firms have declined in the aftermath of previous sovereign defaults, hitting tax revenues and increasing reliance on central bank emissions to finance public spending. The impact of the pandemic response on a pre-existing recession will make these costs even more painful to bear—and the medium-term political consequences for the diverse governing coalition even more uncertain. In the near term, however, the Fernández administration has effectively garnered broad domestic support for the debt restructuring strategy and is enjoying high approval ratings for its management of the Covid-19 crisis.”

Arturo Porzecanski, chair of the International Economic Relations Program at American University: “It is too late for Argentina to avoid a default, at least on the bond that went unpaid, unless the authorities remit the $503 million they owe before the end of the grace period. As it is, the Alberto Fernández administration has been defaulting on local-law debt obligations (in both pesos and U.S. dollars) since taking office in December, almost three months before the Covid-19 pandemic arrived in Argentina. Thus, unless the overdue amount is paid, the existing state of default will merely be generalized to encompass the first of potentially all foreign-law, foreign-currency debt obligations. The major sticking points are that Fernández is repeating the mistakes made in 2004, when he was Néstor Kirchner’s cabinet chief. First, he has taken no initiatives to improve the business climate, regain the confidence of investors or reduce wasteful public spending. Second, he has not lined up support from the IMF, to which Argentina owes almost $50 billion needing to be repaid between now and 2024, or from other bilateral or multilateral government creditors. Third, he came up with a debt-restructuring plan on his own and presented it to investors on a take-it-or-leave it basis. Fourth, instead of focusing on attaining maximum debt relief this year and next, to account for the cost of the pandemic, the plan needlessly punishes investors for several decades to come. Making matters worse, in 2004 and subsequent years, world commodity prices boomed, generating the fiscal resources that investors would not provide, but now Argentina is experiencing a commodity bust.”

Horacio Verbitsky, president of the Center for Legal and Social Studies in Buenos Aires: “Argentina has been in default since 2019, when Macri announced the ‘reprofiling’ of bonds for $10 billion. Macri contracted the highest indebtedness in the two centuries since independence. He obtained the largest IMF loan since its inception, and he defaulted on commitments that he himself signed. Kirchner canceled debts that were taken on during the military dictatorship of 1976. Cristina Fernández de Kirchner paid debts that the dictatorship took on when it defeated Perón in 1955. Macri only took 15 months to break his word. He left the highest inflation in three decades and the highest known poverty record. That is why he was the only Latin American president not to be re-elected. Fernández is trying to remedy this catastrophe, with a sustainable proposal that, according to the IMF, should involve a trimming of between $55 billion and $85 billion. With the pandemic, there are dozens of countries and hundreds of corporations queuing up to declare default. When the interest rates in the United States and in Europe are zero, and the price of a barrel of oil is negative, an offer that includes interest payments of 2.3 percent, a waiver until 2023 and just 5 percent of capital withdrawal is not a hostile offer. It’s not about bondholders losing; but rather, that they gain less. The government is trying to get out of the default that Macri left, but it won’t sign an economically, socially and political unsustainable agreement. Being self-sufficient in food and energy, and having an outstanding technological and scientific capacity, there is life after default for Argentina.”

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