Argentina’s debt restructuring “Groundhog Day”…or maybe not? Three key points

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Economy & Trade, Financial crisis, Securities, Health, Humanitarian emergencies, Latin America and the Caribbean, TerraViva United Nations

Opinion

WASHINGTON DC, April 29, 2020 (IPS) – On April 17, the administration of Alberto Ángel Fernández in Argentina officially unveiled its debt restructuring offer for $66 billion in foreign currency-denominated bonds. From this date, the offer is valid for 20 days, during which time difficult negotiations with bondholders are expected to take place. Based on early reactions from some creditor groups, one might well get the impression that the offer is “dead on arrival”.

Aldo Caliari

Those who watched Argentina’s latest debt restructuring will inevitably feel a sense of deja vu. In 2001, Argentina defaulted on approximately $80 billion in debt. Sovereign debt restructurings were concluded in 2005 and 2010, obtaining the cumulative support of more than 92% of creditors. The long legal battle fought by recalcitrant minority creditors to get paid the full amount of their loans plus interest has been dubbed by many the “trial of the century”. It did not end well for Argentina, which finally had to comply with the US court ruling in 2016 and pay around $10 billion.

Then, as now, Argentina argued that deep debt reductions were needed to restore the economy to a position of growth and debt sustainability that improves the chances of repayment in the future. . Then, as now, creditors would call Argentina’s behavior “unreasonable” and “one-sided,” accusing it of failing to engage in dialogue with creditors and lacking in good faith.

In any insolvency situation, it is perhaps inevitable that the opinions of the debtor and the creditors on the haircut that the creditors should take will differ. In the domestic context, the institution of bankruptcy was created precisely to provide a predictable, rules-based framework for addressing and resolving these differences. It is regrettable that, in the international context, a similar institution does not exist. This means that Argentina and its creditors are entering this process against, with some variations, the same “law of the jungle” institutional context that existed almost two decades ago.

In a market whose outcome is left to the sole strength of the parties, a certain number of initial postures seem difficult to avoid. It doesn’t help that the previous restructuring left scars on both the country and the creditor community. However, amid the deja vu, three important differences between the previous restructuring and the current restructuring should, arguably, merit particular attention.

First, Argentina’s assertion regarding the extent of the restructuring needed to put the economy back on the path to growth is, this time, supported by the International Monetary Fund. Last February, the IMF called Argentina’s debt unsustainable, estimating that restructuring needs would amount to $55 billion to $85 billion over the next ten years and that there is no place for foreign currency payments in the coming years.

Argentina has crafted an offer that remains conservatively at the lower end of these estimates while combining debt interest and principal reductions in a manner consistent with IMF projections. Furthermore, the managing director of the IMF recently declared that Argentina was acting in good faith. This is quite a different situation from that of the early 2000s, when the IMF characterized Argentina’s negotiations with creditors as not conducted in “good faith”.

Secondly, this offer takes place in the dramatic context of an economic crisis induced by Covid 19 with unprecedented characteristics such as the combination of a supply and demand shock and unprecedented falls in commodity prices. Forecasts for the world show the worst contraction since the Great Depression, at least 3 percentage points, next year.

Forecasts for the South America region are even bleaker, with indicators showing a 5.3% contraction is likely. This scenario equates to external and internal conditions radically different from those of the demand and commodity boom that Argentina and the region experienced in the early 2000s. nails to share what could be expected as a high growth story ahead. But current conditions suggest that restrictive measures could only deepen a vicious circle of lower spending and recession. In fact, if the IMF’s assessment of Argentina’s debt sustainability had been made a few months later, it probably should have recommended deeper haircuts.

Third, and perhaps most important, it is undeniable that saving lives and dealing with the health emergency should be a top priority for the Argentine government. This is not only the right thing to do for humanitarian reasons, but also because it is a necessary condition for limiting economic damage.

On this point, in terms of cases per capita and acceleration rate, Argentina’s performance in flattening the curve stands out compared to that of the region and under similar conditions. It actually ranks ahead of countries with far more resources. But it came at the cost of resolute action to shut down the economy, with the inevitable damage to income. It has also increased public expenditure to ensure that containment measures can be followed by all and mitigate the impacts on the most vulnerable. In turn, when the health crisis subsides, a rapid and robust recovery will only be possible to the extent that business and job losses have been avoided. It will also require significant stimulus spending.

Initial reactions from bondholders appear to be driven by long-held instincts developed in a different scenario. It will be in everyone’s interest if they can recognize that the current debt restructuring represents a radically different situation.

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