Why Argentina Is Unable to Solve Its Debt Predicament

RIO DE JANEIRO, BRAZIL – The news was no surprise to many Argentineans: three foreign investment funds have rejected a proposal by the government of Alberto Fernández to restructure Argentina’s debt.

Another attempt to avert a default thus failed. “Despite the Group and other stakeholders’ efforts, these proposals are not ones that the Group can or would like to endorse,” said the Ad Hoc Bondholder in a press release.

The government’s proposal is designed to “impose a disproportionate share of Argentina’s long-term fiscal consolidation obligations on international creditors”. Negotiations with the Committee of Private Creditors of Argentine Public Debt (ACC) have been underway since mid-April.

Specifically, the negotiations focus on Argentina’s intention to reduce the interest burden on its approximately US$68 billion debt from seven to 2.3 percent, the original debt principal by 5.4 percent, and to negotiate a grace period without payments until 2023 to allow the economy to first recover. This is a demand that the country had not abandoned even after the first rejection by the ACC in April.

“The proposal reflects Argentina’s reduced ability to pay its debts as a result of years of austerity and in the midst of a deep economic and unprecedented health crisis that is further deepening the economic recession,” the official document of the Argentine Ministry of Economy states.

In an official statement, the government now describes its situation as “desperate”.

However, it is hoped that the time left for further talks will be sufficient. Negotiations may continue until May 22nd; only then will the 30-day deadline for the planned repayment of an installment of US$2.1 billion finally expire.

The Minister of Economy Martín Guzmán expects – if an agreement is reached with the ACC – that the economy will start to recover this year and that growth will remain constant at 1.7 percent from 2023.

In a video statement on Wednesday, the Minister emphasized that this would be achieved by increasing exports and investing in science and the energy sector. The Columbia University’s Institute for Latin American Studies invited guests to join the event. In addition to Guzmán, other speakers included the US economist Jeffrey Sachs and the Argentinian economist Martín Uribe – both former colleagues of Guzmán.

The Minister advocated a period of years free of payments, said to have been recommended by the International Monetary Fund.

However, Sachs considered Guzmán’s proposal to be “serious” and described the bondholders’ demands for seven percent interest as “ridiculous” and “absurd”. In a financial policy environment with low-interest rates – “almost zero percent in Germany and 1.2 percent in the USA for a 30-year term”, Sachs said – the 2.4 percent now being negotiated “would still be higher than the rates for US government bonds”.

He hopes that creditors are now “wise enough” not to allow the economy to plummet. In view of the coronavirus pandemic, Argentina is not alone in dealing with this issue.

Sachs said it was possible that many countries would experience payment difficulties in the coming weeks and months.

Source: Amerika21