It is no secret that Argentina has a debt-sustainability problem, which is why its government has gone to such lengths to work with the International Monetary Fund on a solution. But, rather than recognizing that COVID-19 has complicated matters, Argentina's private-sector creditors continue to stand in the way.
LONDON – Last month, Argentina technically defaulted on its debt, following a 30-day grace period for the latest interest payments. Needless to say, sovereign defaults can have enormous economic and social costs. Whether Argentina will be spared the worst of them now depends critically on the negotiations that are still ongoing between the country’s government and its private-sector creditors.
Not all countries were equally prepared to confront the COVID-19 crisis. Argentina, for its part, had a significant debt-sustainability problem long before the pandemic arrived. Even the International Monetary Fund has said as much, affirming in February that, “The primary surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible.”
That statement was issued before COVID-19 had become a pandemic and triggered a global recession. Conditions since then have exacerbated Argentina’s longstanding problems, especially as it has become increasingly clear that the recession will be deeper, and the recovery more protracted, than initially expected.
Making matters worse, throughout the debt-restructuring negotiations – which Argentina initiated to bring its debt to a more sustainable level – creditors have dug in their heels and acted as if there was no pandemic. Argentina’s default is the predictable result of that obstructionism.
Whether the country’s private-sector creditors are deploying a negotiating tactic or simply being pigheaded, one can only hope that they will soon come to their senses. An outright default is in nobody’s interest. The assumption that Argentina could pay more if it was pressured to do so is unreasonable (to put it charitably), especially in the context of a looming global recession.
Argentina’s export revenues and GDP have sharply declined as a result of the COVID-19 crisis. Yet, instead of recognizing this hard economic reality, which comes on top of the IMF-imposed constraints Argentina already faces, the country’s creditors have taken the low road. Rather than looking for solutions, they have launched a campaign of disparagement, needlessly drawing attention to the fact that this would be Argentina’s ninth default – as if today’s conditions are anything like those of the past. The COVID-19 crisis, they argue, is just another convenient excuse for Argentina not to repay, implying that Argentina’s government was not negotiating in good faith.
But Argentina based its restructuring offer on the IMF’s own debt-sustainability analysis, and had essentially agreed to keep its payment obligations at the highest levels that could still be considered feasible. The point was to make the debt more sustainable, in order to reduce the roll-over and default risk on the restructured bonds, thereby lowering the interest-rate premium investors should demand as compensation for risk. Under the latest proposal, Argentina’s payments would be rescheduled to allow it to ride out the COVID-19 crisis. By pushing back payments, its economy would have a better chance of recovering, making it more likely that the debt would actually be repaid.
But, apparently, that strategy wasn’t good enough for Argentina’s private-sector creditors. Some of the main bondholders, particularly BlackRock, the world’s largest asset manager, have refused to countenance such debt relief, which they consider too generous. But in assessing the cost of the relief that is being requested, Argentina’s creditors are using a discount rate of 10%, which is simply too high in the current context.
After all, interest rates have declined sharply around the world, owing partly to the enormous economic relief efforts in the United States, Europe, and China, where central banks are expanding their balance sheets on a massive scale. Some advanced economies are even borrowing at negative interest rates; and emerging-market interest rates have declined to around 5% for BBB-rated debt, and to 8% for B-rated debt.
Under a lower discount rate – closer to 5% – the creditors’ counter-proposal looks egregiously tight-fisted and well beyond what is sustainable. They are effectively allowing only a negligible reduction in the present discounted value of Argentina’s debt. But Argentina’s own offer, using a 5% discount rate at the limit of what is sustainable, actually translates into a level of relief that the creditors themselves have said they would consider.
Argentina’s offer should be accepted. This is not a time for penny pinching, and the reputational costs of causing unnecessary economic hardship are not worth whatever small concessions might still be squeezed out of the country.
LONDON – Last month, Argentina technically defaulted on its debt, following a 30-day grace period for the latest interest payments. Needless to say, sovereign defaults can have enormous economic and social costs. Whether Argentina will be spared the worst of them now depends critically on the negotiations that are still ongoing between the country’s government and its private-sector creditors.
Not all countries were equally prepared to confront the COVID-19 crisis. Argentina, for its part, had a significant debt-sustainability problem long before the pandemic arrived. Even the International Monetary Fund has said as much, affirming in February that, “The primary surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible.”
That statement was issued before COVID-19 had become a pandemic and triggered a global recession. Conditions since then have exacerbated Argentina’s longstanding problems, especially as it has become increasingly clear that the recession will be deeper, and the recovery more protracted, than initially expected.
Making matters worse, throughout the debt-restructuring negotiations – which Argentina initiated to bring its debt to a more sustainable level – creditors have dug in their heels and acted as if there was no pandemic. Argentina’s default is the predictable result of that obstructionism.
Whether the country’s private-sector creditors are deploying a negotiating tactic or simply being pigheaded, one can only hope that they will soon come to their senses. An outright default is in nobody’s interest. The assumption that Argentina could pay more if it was pressured to do so is unreasonable (to put it charitably), especially in the context of a looming global recession.
Argentina’s export revenues and GDP have sharply declined as a result of the COVID-19 crisis. Yet, instead of recognizing this hard economic reality, which comes on top of the IMF-imposed constraints Argentina already faces, the country’s creditors have taken the low road. Rather than looking for solutions, they have launched a campaign of disparagement, needlessly drawing attention to the fact that this would be Argentina’s ninth default – as if today’s conditions are anything like those of the past. The COVID-19 crisis, they argue, is just another convenient excuse for Argentina not to repay, implying that Argentina’s government was not negotiating in good faith.
SPRING SALE: Save 40% on all new Digital or Digital Plus subscriptions
Subscribe now to gain greater access to Project Syndicate – including every commentary and our entire On Point suite of subscriber-exclusive content – starting at just $49.99.
Subscribe Now
But Argentina based its restructuring offer on the IMF’s own debt-sustainability analysis, and had essentially agreed to keep its payment obligations at the highest levels that could still be considered feasible. The point was to make the debt more sustainable, in order to reduce the roll-over and default risk on the restructured bonds, thereby lowering the interest-rate premium investors should demand as compensation for risk. Under the latest proposal, Argentina’s payments would be rescheduled to allow it to ride out the COVID-19 crisis. By pushing back payments, its economy would have a better chance of recovering, making it more likely that the debt would actually be repaid.
But, apparently, that strategy wasn’t good enough for Argentina’s private-sector creditors. Some of the main bondholders, particularly BlackRock, the world’s largest asset manager, have refused to countenance such debt relief, which they consider too generous. But in assessing the cost of the relief that is being requested, Argentina’s creditors are using a discount rate of 10%, which is simply too high in the current context.
After all, interest rates have declined sharply around the world, owing partly to the enormous economic relief efforts in the United States, Europe, and China, where central banks are expanding their balance sheets on a massive scale. Some advanced economies are even borrowing at negative interest rates; and emerging-market interest rates have declined to around 5% for BBB-rated debt, and to 8% for B-rated debt.
Under a lower discount rate – closer to 5% – the creditors’ counter-proposal looks egregiously tight-fisted and well beyond what is sustainable. They are effectively allowing only a negligible reduction in the present discounted value of Argentina’s debt. But Argentina’s own offer, using a 5% discount rate at the limit of what is sustainable, actually translates into a level of relief that the creditors themselves have said they would consider.
Argentina’s offer should be accepted. This is not a time for penny pinching, and the reputational costs of causing unnecessary economic hardship are not worth whatever small concessions might still be squeezed out of the country.