Argentina's new debt deal is a significant accomplishment, but its economic recovery still depends on President Alberto Fernandez's ability to balance his populist credentials against the need to appease the International Monetary Fund (IMF) and provide a healthy environment for investment by implementing structural reforms.
What Happened
The deteriorating global and local economic conditions due to COVID-19 paved the way for a breakthrough in deadlocked negotiations between Argentina and its creditors by adding an impetus for debt reduction. Unlike previous rounds of talks that ended in long and acrimonious disputes, negotiations this time yielded a concrete agreement to significantly restructure roughly $65 billion in Argentine sovereign debt. For Argentina, the pandemic's impact on domestic business activity, tourism rates and aggregate domestic demand has only exacerbated the need to bring its financial house in order. And its creditors may have been more willing to compromise in light of the current harsh economic reality.
- Argentina's economy, already in a two-year-long recession before the onset of the COVID-19 pandemic, is now projected to shrink by an additional 10 to 12.5 percent in 2020. Argentina's government deficit is also estimated to reach over 8 percent of GDP by the end of the year.
- On May 22, Argentina formally entered its ninth sovereign debt default after failing to make a $503 million interest payment on Eurobonds. The default was an apparent realization of the fears the financial and business communities had upon Fernadez's election as president in October.
What's Next
While the restructuring agreement is an important step, securing long-term economic growth will require spending cuts at both the federal and regional levels, which could come at the cost of the Fernandez administration's political capital. The next step for the Fernandez administration is reaching an agreement with the IMF, which will need to include some unpopular budget discipline measures. The Argentine government will also need to provide a long-term economic growth program to grant private investors peace-of-mind that Buenos Aires is taking action to avoid yet another default, which the Fernandez administration has so far been unwilling to do.
- Most of Argentina's current deficit is being financed through monetary expansion by the country's central bank, which will keep inflationary pressures for the foreseeable future.
- The regional debt that several Argentine provinces have racked up over the years also represents a large portion of the country's total debt. This means that easing Argentina's debt load will require heavy lifting from the federal government in Buenos Aires, as well well as the provincial governments that have issued more than $15 billion in foreign currency debt since 2015.
- In response to the COVID-19 pandemic, Buenos Aires has set up several economic relief programs to mitigate the impact on Argentine households. The Fernandez administration has also sought to maintain subsidies for public companies in different sectors, including airlines. These measures, however, have accelerated Argentina's public deficit growth and will likely continue to do so, as the government will be reticent to reduce such spending in the midst of the COVID-19 crisis.
