046 – Historically Argentina has been a country with a high level of debt, but since the early 2000’s it has intensified and it has been a never ending story and repeating the same mistakes; but why does one of the largest countries in South America always give a lot to talk about when it comes to debt?
Thank you for reading this post, don’t forget to subscribe!
It should be recalled that by the end of the 1990’s Argentina was undergoing a capital flight and inflationary pressures were becoming stronger and stronger, therefore, a measure taken by the Argentine government to avoid a massive capital flight was the implementation of the cash withdrawal restriction, or the “corralito”. This measure was implemented to set a maximum withdrawal limit of US$250 per person, in order to avoid a collapse of the Argentinean banking system.
Although it was a measure that momentarily contained the capital flight, it did not prevent the announcement in December 2001 of the default or non-payment of the debt for a value of $144 billion dollars, which represented close to 150% of the GDP; it was a milestone in the history of the country and the world, since it represented the largest default announced by a government.
The first approach to the negotiation of the defaulted debt took place in September 2003, but it was not until late 2004 and early 2005 that the Argentine government issued an offer to restructure the defaulted debt, establishing that the amount “eligible” for restructuring would be US$ 81.8 billion, which represented a write-off of 63% of the face value of the defaulted bonds. This proposal was accepted by 76.15%.
However, after the announcement of the liquidation of the swap, 23.85% of the creditors that did not accept the conditions established by the government, began to issue complaints to seize property and/or non-tangible assets of the nation abroad, since the defaulted bonds did not have a collective action clause, and therefore the creditors were entitled to demand the recognition of 100% of the debt.
These creditors were called “vulture funds” by the Argentine government, and the denunciations continued until early 2014, since once “Kirchnerism” left power and Mauricio Macri became President of Argentina, an agreement was reached with the international creditors through the issuance of bonds for a nominal value of US$ 16,500 million, of which US$ 9,300 million were destined to the payment of the “vulture funds”, while the remaining amount was destined to the Argentine Central Bank.
In this order of ideas, the Argentinean default presented a very difficult situation to face, but it left in evidence that debt restructuring should be a fundamental axis in the country’s public finances, because it was evidenced that for the year 2003 and 2004 Argentina had an average GDP of $145 billion dollars, while by the end of 2017 it presented a GDP close to $600 billion dollars, which evidences a sustained growth due to the dynamization of the economy in the post-default stage. The following chart shows the behavior of the main macroeconomic indicators during the period between 2005 and 2019:
Now, although Macri brings to an end a debt restructuring that took 11 years to be completed, he begins a new era in Argentina that commits the same mistakes that led to the debt default in 2001. First, various types of financing were obtained with international entities such as the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB), in order to promote international investment and a revitalization of the economy.
Secondly, the economic policies applied at that time were very aggressive, which unleashed a series of macroeconomic imbalances in the country and inflation showed an upward trend, as did the appreciation of the US dollar against the Argentine peso.
This situation has been prolonged during the administration of Alberto Fernandez, in which it has been evidenced that the accumulated inflation from December 2019 to May 2023 is 225.3%, the Argentine debt went from $323 million dollars to $638 million dollars, which shows a growth of 97.52% in a period of 4 years and the national currency presented a depreciation of 294% since December 2019.
It is important to note that this situation does not only occur in Argentina, but also in most of Latin America, because most of the continent’s economies are based on primary products, i.e. raw materials, which makes them much more susceptible to changes in demand from the rest of the world, climate change, or even technological innovation by the world’s major powers.
In addition, it is worth noting that the economic measures taken by Argentina in times of crisis are oriented towards a single specific objective and not towards the stabilization and growth of the economy in general. For these reasons, Argentina is currently seeking to renegotiate its debt, since several rating agencies rate Argentina’s debt as “CCC”, which indicates that it is very likely that in the short term there will be a default in the payment of the debt, again…