Argentina braces for verdict on restructuring $ 65 billion debt

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Updates from the economy of the Americas

Argentina will learn on Monday whether enough creditors have accepted its offer to restructure $ 65 billion in foreign debt, as Buenos Aires insisted the country’s ninth sovereign debt default would be the last.

If all goes according to the government’s plan, the deal should end the default process that began in May and avoid costly lawsuits with creditors. But some analysts and investors are wondering if Argentina has taken a step forward.

“Is there a reason to assume things will be different this time around?” Said Javier Milei, an Argentine economist who was one of the first to predict the country’s latest default.

President Alberto Fernández’s left-wing government has shown little sign of changing course in its attempts to revive an economy in terminal decline for most of the last century, he argued. Milei also warned that without a budget surplus and a return to economic growth, Argentina’s debt would remain unsustainable. The country was on track to a 10% deficit this year and only a brief rebound in growth was likely next year, he said.

The restructuring, which the government says will reduce the value of the country’s debt by $ 38 billion over the next decade, also covered only a fifth of Argentina’s $ 323 billion burden. The $ 130 billion owed to public sector institutions was a particular problem as it threatened to spur inflation, Milei added.

Some economists disagree with the grim prognosis, saying it depends a lot on how the government plans to pull the country out of recession. The IMF said it expected a GDP contraction of more than 10 percent this year in the middle of the coronavirus crisis.

“There is great uncertainty right now,” said Martin Castellano, Latin America economist at the Institute of International Finance. “What investors want to know most is how economic policy will deal with restructuring and the pandemic. This will have big implications for debt sustainability. “

Argentina has been plagued by defaults, devaluations and hyperinflation for decades. Its inflation rate of over 42 percent is among the highest in the world, and capital controls introduced last year to protect declining foreign exchange reserves have left the peso severely overvalued.

Investors and economists say that in order to escape the cycle of economic crisis and boost growth and investor confidence, the country must improve its productivity and exports in order to generate enough foreign exchange to service the external debt. The challenges include restoring confidence in the peso and stimulating domestic savings as well as strengthening institutions and governance.

A new IMF program, which the government formally requested on Wednesday, was a critical step, analysts said. Argentina has only one year before large interest payments on the $ 44 billion the fund has lent it since the 2018 currency crisis are due.

“Anything less than a full refinancing of Argentina’s repayments will suffice, but even that will not be enough. Argentina must bring its budget deficit under control so that its debt is one day sustainable ”, declared Mr. Castellano.

It’s unclear what conditions the IMF would set before agreeing to a new program, but analysts say the fund is likely to take a dim view of growing government intervention in the economy. Last week, internet, television and mobile phone prices were frozen until the end of the year by a presidential decree aimed at curbing inflation. The government also made a failed attempt to expropriate Vicentín, Argentina’s largest grain exporter.

Fernández now faces a difficult trade-off between phasing out ticket printing to finance the deficit or avoiding unpopular austerity measures and thus fuel inflation.

The short-term market outlook is not encouraging, analysts said. Many bondholders are likely to sell their debt in the coming weeks to cut losses, make short-term gains, or reduce their exposure to Argentina “regardless of whether these people think Argentina is likely. to default in the short term or not, ”according to a former government official.

“There will be tons of speculation about Argentina’s financial situation over the next few months,” the former official said, adding that investors were also likely to question the level of savings the government claims achieve in restructuring, as opposed to simply pushing deadlines further into the future.

Another former official called the interest payment savings claimed by the government for its 100-year bond “nonsense”, given Buenos Aires’ questionable assumptions about long-term events.

But some economists argue that Argentina’s debt is only one of the obstacles to restoring economic health.

“The problem is the Argentinian character, the peculiarities of the country,” said Marina dal Poggetto, executive director of EcoGo, an economic consultancy firm in Buenos Aires. “Argentina has a horrible record. If we continue on the same path as the last 50 years, nothing is sustainable. “


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