Argentina's risk premium rose to 4,044 basis points on Wednesday amid the financial markets crisis prompted by the economic implications of the Covid-19 pandemic. In Buenos Aires, stock market activity decreased by more than 12 percent and the value of Argentine shares listed on Wall Street fell by almost 27 percent.
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The combined effect of these events makes Argentina's public debt, which was already unsustainable at the end of 2019, become difficult to restructure, thus opening a scenario of a potential default.
As a result of the policies implemented by former President Mauricio Macri (2015-2019), Argentina was plunged into a recession for two years and with a debt of US$320 billion.
President Alberto Fernandez aspired to restructure US$69 billion in sovereign bonds issued under foreign law. Negotiations with creditors, however, have been difficult due to the global crisis. Besides, the value of Argentine dollar-denominated bonds has accumulated drops of up to 40 percent so far.
This value loss becomes attractive to hedge funds whose business is to buy debt bonds at the "junk" price, refuse debt restructuring, sue governments, and demand payment of the bond's original value.
The Argentines were exposed to similar financial blackmail in 2001 when their country was forced to suspend the payment of its debt.
The State then began an arduous process of negotiation with creditors, popularly known as "vulture funds", which culminated fifteen years later, validating juicy payments to them.
Currently, this South American country is under pressure to accelerate a debt restructuring given that US$48.9 billion of capital and US$14.8 billion of interest should be canceled this year.
"Argentina can go into default simply because of the impossibility of fulfilling commitments that expire in the second quarter. They are really impossible to sustain," economist Pablo Tigani said.
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Until now, President Fernandez has chosen to raise money in the domestic market to pay off past due debts. He has also proposed to creditors to exchange their peso-denominated bonds with short maturities with bonds with longer maturities.
Although this strategy has worked so far, the volume of maturities in the very short term limits the ability of the Argentine government to maneuver.
Before the Covid-19 hit the financial scene, Argentine production was expected to decrease by 1.2 percent in 2020. To alleviate the economic slowdown, the Fernandez administration Tuesday announced policies that would allow the introduction of US$10.7 billion into the economy.
"The Government's challenges are to keep the domestic market alive, to have a competitive exchange rate, and to make extractive businesses sustainable over time. Debt is a background issue," the economist Salvador Di Stefano said.
"If we do not ensure more economic activity, if we don't take care of the levels of employment, we cannot pay to anybody," he added.
To avoid a deeper economic slowdown, the government should also ask bondholders for a reduction of up to 80 percent over the value of the debt to be restructured. If the creditors do not accept that proposal, the default will be imminent.
"Today a default would be preferable so as not to maintain the uncertainty of Argentina's internal actors, who are the ones needed to recover the economy," Tigani said, recalling that his country's economy grew at an average rate of 8 percent between 2001 and 2005, that is, during the time that debt payments stopped.