To save lives and restore growth, creditors should accept Argentina's offer
Trying to squeeze more out of Argentina during a pandemic will backfire by costing lives and undermining future growth.
When faced with the threat of COVID-19, Argentina put people’s safety first. A lockdown was swiftly implemented along with measures to protect the livelihoods of all working people. This action undoubtedly saved many lives and has been successful in containing the virus.
Shutdowns in Argentina and other countries have created economic setbacks. However, despite the immediate costs, a shutdown enables a healthy future with economic growth. It is a fitting parallel to the other crisis facing Argentina before it can start rebuilding from COVID-19: avoiding a default on its un-payable dollar-denominated debt.
Argentina made a good-faith proposal for an orderly restructuring to its creditors, based on realistic expectations of what it can pay. Creditors need to understand that while delaying repayment might seem costly now, giving Argentina the space to recover will benefit them in the future. Given the current global economic context and the fact that Argentina mostly exports commodities with prices that have collapsed, if anything, the government’s offer to creditors is too generous.
One of the first measures taken by previous president Mauricio Macri was to settle the dispute between Argentina and vulture funds. Through victories obtained in US courts, these holdout creditors were preventing Argentina from accessing international credit markets. The vulture funds bought Argentinean bonds at a steep discount during a previous restructuring and sued for full repayment. While most creditors agreed to the restructuring, some could choose to hold out. The strategy paid out and some vultures made 1200 per cent in profits.
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Markets cheered on Macri, and he started heavily borrowing in dollars, attracting large speculative capital inflows. This move soon backfired. When global conditions shifted and those investors started exiting Argentina, which no longer had capital controls in place, it caused the peso to collapse. In need of more dollar funding, Macri turned to the IMF and entered into a record loan agreement of almost $57 billion. However, the programme failed, the peso continued to fall, all while Argentina’s dollar denominated debt exploded.
It is against the rules of the IMF to lend to countries with unsustainable debt burdens, because this effectively means that IMF resources became a bailout for private creditors. Those rules were bent in the last IMF Argentina programme due to political pressure. Using an artful turn of phrase, in 2018 the IMF termed Argentina’s debt “sustainable but not with a high probability.” Most of the $44 billion that was subsequently disbursed by the IMF left the country through capital flight, while people in Argentina were subject to harsh austerity and immense hardship. Poverty skyrocketed from 27.3 per cent at the start of 2018, to 35.5 per cent of the population living below the poverty line by the end of 2019.
The IMF programme in Argentina was meant to “restore confidence” yet it pushed the economy into a much deeper recession. This is a common result of austerity measures that strangle the economy. A shrinking economy means less revenue available for debt repayment and thus also hurts creditors. Renewed austerity measures to provide bondholders with short-term returns would be a counterproductive measure. Further, it would be dangerous at a time when countries need to adequately spend on health, social protection and stimulus to recover from COVID-19.
Prior to COVID-19, there was already consensus that Argentina’s external debt is unsustainable. In a technical assessment published in February, the IMF concluded that there was no scope for any debt payments denominated in foreign currency for the next three years. In keeping with this reality, the restructuring proposal made by the government of Argentina requests a three year grace period from private creditors. This time, the IMF is following the rules and is making clear that it will not lend to Argentina before private sector debt is restructured.
There is no orderly process for countries to restructure their debt. This means that countries are left to negotiate with creditors, or face lengthy litigation without the kinds of protections afforded to businesses and individuals in a bankruptcy court. Big picture solutions are needed to avoid the situation that Argentina finds itself in now, including a comprehensive sovereign debt restructuring mechanism that acts like a bankruptcy court, a new debt relief process based on the Sustainable Development Goals, and investments by the international financial institutions for inclusive growth. There is also the matter of the substantial debt owed to the IMF, despite the fact that it mostly financed capital flight. That should be addressed immediately after a deal with private creditors.
For now, Argentina needs a deal with private creditors to survive and avoid a default that would hurt everyone. The presence of Collective Action Clauses can prevent the holdout strategy previously used by vulture funds. Under clauses in the bonds subject to negotiation, an agreement with a supermajority applies to all holders of that bond.
Argentina’s economy needs to recover in order to make payments. Policy failures under the IMF programme deepened and elongated a recession in Argentina while making the country’s economic, health and social systems more vulnerable. The external shocks of COVID-19 compounded these existing challenges. Nevertheless, decisive action by the Argentinian government has contained an outbreak of COVID-19. Squeezing more out of Argentina than is sustainable is shortsighted and, amid a pandemic, will backfire by costing lives and undermining future growth.
Private creditors should exercise realism, prudence and responsibility by reaching collective approval of the reasonable offer on the table.
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