- Argentina was already on the brink of default for the sixth (or ninth) time before COVID-19 shut the economy down. Things have gotten worse.
- Like many countries, Argentina is taking multiple hits. Export prices have collapsed – soya bean prices are down to almost half what they once were. Government revenues are down about 15%. Expenses are up by a quarter.
- And there is little hope of any kind of quick recovery. Even if the pandemic is dealt with, the government is considering flushing the streets with cash and an already crippled economy is unlikely to recover.
BUENOS AIRES. It is often easy to overlook the fact that the COVID-19 pandemic has not happened in a bubble. The US economy was booming, so the outbreak put the breaks on that growth. Other economies were not so lucky.
Argentina, a country that could be the poster child for financial mismanagement, was already on the brink of financial catastrophe (again) before the outbreak. COVID-19 forced a shift in focus for the government from keeping the economy afloat to keeping people alive. That shift in focus has given the government some political cover to justify a default, but has also created the conditions for the country to dig itself deeper into an economic crisis that was already building up.
Argentina is once again in a technical default of its debts and is quickly using up any resources it might have to fight off COVID-19 while running out of goodwill among investors.
The Covid-19 pandemic has all but shut down the country’s economy – Argentina was quick to put in place strong stay-at-home orders to prevent the spread of the disease. At the same time, the government started spreading cash around – cash it technically does not have.
A plan proposed by the presidency would defer payments on specific bonds for as long as a decade but investors are not jumping for joy . With profligacy as the main policy of virtually all parties and governments for decades, economist Miguel Angel Boggiano labels this default as the sixth in 200 years. He is more generous than others, who count it as the ninth.
This bankruptcy is different. The pandemic is ravaging both the local and international economies and has weakened foreign demand for Argentine goods. The international price of soybeans, Argentina’s main export, is hovering around US$320 a ton, far lower than the US$488 a ton fetched in 2012. Despite heavy taxes, soya is simply is not generating enough revenue to support the latest round of state handouts – and neither are other exports.
The economy is facing a pair of negative effects that compound each other: Argentina is making less money but spending a lot more. On the one hand, fiscal revenues have fell 15% in the first quarter in real terms. On the other, expenses grew more than 25% in real terms in March 2020, compared to a year earlier. The problem is compounded by an expected contraction of the economy by 5.7% in 2020, according to the IMF – in other words, revenues are unlikely to grow in the medium term.
In the second half of March, the budget to ensure minimum nutrition for the population was reinforced with an extra 132% from the pre-coronavirus nominal figure, according to CEPA, an economic consultancy. Food security is a serious concern in Argentina, especially in the slums around the capital of Buenos Aires.
One extra piece of negative information is that President Alberto Fernández has openly spoken about simply printing cash to bolster economic activity. All discussion of flooding the country with new cash ignores predictions from the IMF’s that inflation would exceed 53% for this year.
Finance Minister Martin Guzman is trying to give the country some oxygen by putting off debt payments for at least three years. Bondholders are negotiating, and a final decision is pending but spreads have remained high at above 35%. The spread is the difference between the face-value cost of a bond and what it costs in the actual market. In other words, investors are pricing in yet another default.
“A government that defaults on its debts stops receiving investments,†said Federico Sturzenegger, a former central bank president, in a recent conference. He questioned the current policy of acquiescence to political power, a policy that leaves little room for economic growth and also makes the IMF’s 2021 growth estimate of 4.4% like a very long shot.
For now, Argentina is offering to service interest payments after November 2022 and to return capital on its debts four year later in 2026. The proposed scheme would represent a 62% reduction in interest payments and a 5% contraction in principal payments, according to MHR, an economic consultancy. These discounts would not be applicable to all debt, only to specific dollar-denominated bonds.
The deferment would give Argentina some breathing room and, perhaps, offer a way out of a very challenging outlook for the next few years, a challenging outlook that Covid-19 has made infinitely worse.