Groundhog Day beckons for sovereign bond investors in Argentina

Next steps for its creditors and the IMF

Buried in a footnote of a US court ruling on Argentine debt, a federal judge wryly thanked the country for its many contributions to sovereign debt law. A famous sovereign debt lawyer once quipped that there was a country south of the equator with two favourite pastimes. First, watching its national football team; second, negotiating with creditors and the International Monetary Fund.

There are three different views of Argentina. First, as the land of the economic curse; second, the perennial country of the future; or a country unable to find the political consensus to run coherent macroeconomic policies and take responsibility unto itself.

Mauricio Macri came to power after over 12 years of Kirchnerism, which itself became the dominant ideology following a massive collapse. The movement was named after late President Néstor Kirchner and his wife Cristina Fernández de Kirchner, who replaced him as president and is now vice-president under Alberto Fernández. Kirchnerism built up massive imbalances, masked them behind a wall of controls and distortions that sapped the economy, all while making Argentina a global pariah.

Macri sought to liberalise the economy to unleash growth. He moved quickly to normalise relations with international holdout creditors, paying a steep price. With a slim political majority, and fearful of sending the economy into headlong recession, he pursued a gradual fiscal path, consolidating little, despite knowing that Argentina needed a culture of fiscal discipline.

Given its calamitous economic history, the country has a small domestic capital market and limited savings. Macri’s team filled gaps, borrowing heavily abroad in foreign currency. If the peso collapsed, the debt would soar.

Heavy borrowing wasn’t an issue in Macri’s early years. Frothy global markets liked him. Argentina incredibly issued a 100-year bond, which was snapped up in 2017 by ever wise market participants who tell us that they exercise due diligence and are fully willing to take responsibility for assuming risks commensurate with rewards.

But global financial conditions tightened in the spring of 2018. The Federal Reserve was lifting short-term rates. Turkey’s policies began to rattle markets. Argentina faced a drought. Its high debt attracted attention and the country began losing market access. Macri called the IMF.

The Fund backed a large programme in June 2018, providing for accelerated but still gradual fiscal consolidation. It judged Argentina as illiquid, not insolvent, and did not call for debt restructuring. With gradual consolidation and no debt action, exceptional IMF financing was needed.

Fiscal policy tightened. But months later, global markets were further unsettled. Investors in Argentina became unnerved, and the country’s debt soared as the peso fell.

The IMF stepped in again, and Buenos Aires ratcheted up fiscal consolidation. It was heading quickly toward primary balance. A rules-based, disciplined monetary policy was introduced, though it failed to stop inflation due to imperfect execution and inertia. The currency remained under pressure. Argentina plunged into recession.

In 2019 it became clear Macri would lose power and the Peronists would return. Given the legacy of Kirchnerism, markets panicked and tanked, stoking another negative feedback loop of exchange rate depreciation, higher inflation and rising debt relative to GDP. Capital controls were needed to staunch outflows.

On the plus side, given the deep recession and President Alberto Fernández’s starting point, there is scope for a rebound. Fiscal policy was tightened considerably under Macri, such that primary surpluses could be well within grasp. Fernández has shown a willingness to raise revenues to finance social spending for the vulnerable. Inflation pressures are high, but given Peronist ties to labour, they are in a good position to break the back of inertia. The exchange rate is undervalued. Capital controls are limiting outflows.

However, there appears to be a lack of a coherent medium-term plan. Argentina’s debt is unsustainable.

Mark Sobel is US Chairman of OMFIF.

This is the first half of a two part article on Argentina and the IMF. The second half will be published tomorrow.

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