I cry for you Argentina!

Georges Ugeux
Sep 14, 2019 · 4 min read

For the eight time, Argentina is likely to fall into a debt crisis.

The expropriation of energy company YPF Repsol by former president Cristina Fernández Kirchner in 2012, seen by The Economist

Argentina is likely to default on its foreign debt and needs to restructure its $110 billion debt.

The first of Argentinian defaults came in 1827, just 11 years after its independence. The most recent default before the current one came in 2014. In between, there were six others of varying size and form.

This time Argentinian authorities succumbed to the same temptation that tripped up their predecessors. They built short-term foreign-currency debt to reduce their interest charges and the budget deficit. In other words, they borrowed from other countries to ensure they could pay back their previous loans and cover Argentina’s public expenses.

Debt implies repayment, some day

At a time when some “modern monetary theory” economists want to make us believe that public debt can be unlimited, the disequilibrium between assets and liabilities, as well as between revenues and debt repayment reminds us that excess leads to crisis.

The once high expectations in the government of Argentina’s president Mauricio Macri have fallen. The probable future president, Alberto Fernandez has a running mate: the voracious former president Cristina Fernández de Kirchner. The two go way back: Alberto Fernandez served as Chief of Staff under Fernández de Kirchner’s presidency.

This duo threatens to upend Argentina again, commented the Economist. This, combined with the news how Argentina’s public finance is in the red, the market collapsed with investors selling their Argentina peso assets and foreign currency financing at a virtual standstill. Argentina’s GDP dropped 2.6% and its inflation increased to 157%: there is no forgiveness.

Macri’s economics. Source: The Economist, link

In 2018 president Macri signed the largest bailout in the history of the International Monetary Fund (IMF), worth $56 billion. The goal of this loan program was to restore investor confidence by imposing tighter monetary and fiscal policies. Difficult as this is, like saw before in Greece, these austerity measures reduced economic output, and thereby weakened investor confidence even further. The IMF plan didn’t work as hoped.

The problem is more complex than the economics of failing governments: the looting of ruling families is characterizing Argentina, together with the expropriation of oil assets by a few lucky ones. All this takes place in a context that lacks transparency and political accountability. In short, the measures announced by the President have not been evenly applied: Argentina cannot cope with disciplined fiscal policy.

The crisis of confidence

Why would banks lend to a country that never respects its own commitments?

We cannot ignore that debt restructurings are a difficult exercise, since the owners represent a vast array of debt owners. As banks agreed on a restructuring for Argentina in 2016, hedge fund hawk brought the country to US courts.

With the 2016 restructuring, the Elliot hedge fund blackmailed the country. This is a lesson for the future. (The Elliott fund made $2 billion dollars on that settlement.)

New rules were eventually established to avoid the corruption by holders of less than 10% of a sovereign debt in restructuring. The International Capital Market Association edited new rules that are now widely applied and will make the restructuring less subject to the blackmail of a few bondholders.

Yes, despite new rules, the public sector, generally led by the IMF, carefully avoids having to take a haircut on the debt. It leaves it to the private sector. As we saw in Greece, the banks took a hit of € 200 billion. The IMF, and the European Central Bank did not suffer.

Having been involved in each of the three crises, I still wonder how, after the difficulties of the restructuring last year, banks would ever trust the country again in the near future. According to the Institute of International Finance, the debt to GDP of Argentina went from 56 to 82%. About 75% of the increase has a foreign exchange component. The peso has dropped making foreign debt more expensive and reducing the foreign exchange reserves to $50 billion.

As a result of the situation, the Argentine government imposed foreign exchange restriction for purchases of foreign currency to protect its reserve.

Can the IIF Principles become enforceable?

The Institute of International Finance’s “Principles for Stable Capital Flows and Fair Debt Restructuring” have been adopted on a voluntary basis by most countries… until they get in trouble. There are a dozen countries from Africa, Asia and Latin America who are currently in sovereign financial trouble.

A higher risk for public sector lenders could make them hesitate to provide the necessary financing, but it might also create a stronger discipline since they will have “a skin in the game”. The problem is that the $57 billion IMF loan is not going into the real economy, to the people. The loan is going to pay the debt that Argentina already owes to global bankers and investors, including the ‘vulture capitalist’ hedge funds, who were welcomed by president Macri in 2015 when he took office.

The debate is only starting; and should be about the democratic dimension of public finance: how it affects the country as a whole. Nothing prohibits public sector financial institutions to take their share of the losses rather than imposing the entire sacrifice to the private sector.

A zest of ethics might be welcome here!

Georges Ugeux

Written by

CEO at Galileo Global Advisors and Adjunct professor Columbia Law School.

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