If pre-existing conditions were destiny, Argentina would be on ventilators.
South America’s second-biggest economy is deep in recession, unemployment is spiking and more than half of children under 14 are poor. President Alberto Fernandez’s government is barely on speaking terms with creditors and careening again towards debt default. And all this was before coronavirus.
Yet so profound are Argentina’s self-made misfortunes that an imported contagion and the economic turmoil it has wrought have thrown out an unexpected lifeline. Whether Fernandez will grab it is unclear, but in many ways his presidency and Argentina’s fraught relations with the rest of the world are at stake.
Fernandez has won plaudits for his aggressive measures to contain Covid-19. On March 20, while Brazilian and Mexican authorities were still dithering, he ordered schools, shops and stadiums shut down nationwide and quickly rolled out emergency cash to the most vulnerable households. As a result, Argentina has largely contained the disease, which as of May 7 had claimed 273 lives, a fraction of the toll in Peru (1 627), Ecuador (1 654) and Brazil (9 146). If his Brazilian counterpart President Jair Bolsonaro scoffs at scientists, Fernandez reveres them; his administration has been branded "a government of epidemiologists."
Where are the economic healers?
What Argentina could use at the moment is a government of economic healers. Two months ago, Fernandez was pushing a stubborn line on terms for paying back $65 billion in debt: a hefty discount on principal, a pass on most interest payments and a three-year grace period during which Argentina paid nothing.
Yes, the country would deliver a primary surplus, just not until 2023. Economy Minister Martin Guzman said it was the best Argentina could do.
Creditors saw it as hubris. "If debt renegotiations are undertaken in the spirit of sharing the burden between creditors and borrowers, then the deal looked lopsided," said Alberto Ramos of Goldman Sachs.
"It’s the idea that ‘I’m not going to do anything and you have to adjust.’ This is essentially shopping with dad’s credit card."
None of this pointed to a happy ending with bondholders, with whom Argentina must strike a deal to "reprofile" the country’s debt by May 22 or fall into default, for the ninth time since independence.
Instead of moderating the government’s position, however, the onset of coronavirus appears to have encouraged Fernandez to dig in. On May 5, Argentina skipped a $2.1 billion payment to the Paris Club of government creditors, and it claims to have engaged the International Monetary Fund in "constructive relations" to rework its $44 billion IOU to the global lender of last resort. Better to tough out talks and risk lapsing into delinquency, Guzman said, than to sign an agreement "based on illusions and rosy scenarios."
Argentina a baseline for borrowers
Suddenly, Argentine intransigence looks like the new baseline for global borrowers grappling with the cascading fallout from the health emergency. An idea gaining traction among multilateral wonks and gold-plate economists is that creditors accede to a "standstill" on debt obligations, "pending clarity on the longer-term impact of the crisis," a study by the Peterson Institute for International Economics concluded.
The IMF has received requests for financial support from at least 80 of its 189 members, while the Group of 20 has agreed on a moratorium for the 76 poorest debtors. This week, Nobel laureates Joseph Stiglitz and Edmund Phelps and Harvard economist Carmen Reinhart released a manifesto endorsed by dozens of alpha economists in which they lauded Argentina for presenting private creditors with a "responsible offer" reflecting the country’s ability to pay. "Debt relief is the only way to combat the pandemic and set the economy on a sustainable path," they said.
Argentina, belatedly, has offered a glimpse of relief, as well. The country reportedly made an unannounced $320 million interest payment to the IMF this week. Late Wednesday, with the clock running out on the government’s latest offer to bondholders, Guzman signaled that Argentina was open to a more flexible debt workaround to avoid a default. "The essence is more sustainability," he told Bloomberg News.
The groundswell comes none too soon. Fernandez is in a race with penury. With the contagion looming, he recently extended the country’s rigorous lockdown measures until May 10 and is weighing "focused" shutdowns thereafter. Yet the government has scant resources to bankroll a prolonged economic paralysis. Tax revenues plunged 10% in April, the third straight month of losses. The IMF projects gross domestic product to shrink by 5.7%, and independent analysts foresee a sharper contraction. Locked out of the credit market, Argentina is raiding its international reserves, which fell another $189 million on Wednesday, and has turned to the Central Bank for revenue, stoking the money presses at an alarming pace.
Standing up to unrelenting money men is a cherished trope in Latin American politics, but one that Argentina and its international sponsors can no longer afford to indulge. "If the deal fails, Argentine will have a default, the pandemic, recession and probably a return to hyperinflation. That could lead to something unimaginable,” said Nicolas Saldias, of the Argentina project at the Wilson Center. And yet, he added, “without a clear way forward, any deal looks unsustainable."
The pandemic-borne commotion may be enough to bring Argentina and its claimants closer to a deal and forestall the unimaginable. But pandemics also end. Argentina’s path from there is far less clear.
Mac Margolis is a Bloomberg columnist. Views expressed are his own.