(Bloomberg Opinion) -- It’s the sovereign-debt version of “Groundhog Day”: For the ninth time in its history and the second time in six years, Argentina has stopped servicing its debts. On May 22, the government failed to make interest payments on $65 billion owed to foreign bondholders. The country and its creditors are discussing a deal to restructure the loans, with a deadline set for today. It’s in both sides’ interests to compromise and make these talks succeed.
The people of Argentina have the biggest stake of all. Even before the Covid-19 crisis bore down on Latin America, the country’s unemployment rate had surged. Inflation is at its highest in nearly three decades. An outcome that leaves the country with unsustainable debts or (in the case of a disorderly default) closes its access to international finance would crush living standards that are already under assault.
Given Argentina’s history of delinquency, it’s understandable that bondholders are reluctant to restructure its debt once more. The creditors are right, as well, that Argentina’s mess is largely of its own making, the product of decades of scandal-ridden governance and profligate social spending.
After the country’s previous default, the government of former President Mauricio Macri convinced private investors and the International Monetary Fund he could put the country on the path to solvency. Macri’s failure to deliver culminated in his defeat last fall to Alberto Fernández, an ally of Macri’s leftist predecessor, Cristina Fernández de Kirchner. Since his election, Fernandez has made it clear that the country has no intention of sticking to the original terms of its loans.
The truth is, the government couldn’t do this even if it wanted to. Back in March, the IMF said that substantial debt relief was unavoidable: “Any restructuring will need to recognize that there is virtually no scope for foreign-exchange debt service payments to private creditors over the near-to-medium term,” its economists concluded. On June 1, discussing Argentina’s revised offer to creditors, the IMF said it should be enough to restore sustainability and there was “only limited scope” to improve it any further.
The gap between the two sides has apparently narrowed. One way to close it further might be to link upfront debt relief with higher debt-service payments later, when the country’s economic prospects improve. The government should also promise to curb its subsidies and lower its taxes on exports (essential for long-term growth) as soon as conditions allow.
Argentina’s creditors should have thought twice about lending so much to a country with such a bad fiscal record. And the country’s voters should have thought twice about electing the politicians who’ve let them down. Maybe next time, creditors and voters alike will be wiser. It’s too late now to correct past errors — but not too late for a deal that gives creditors a tolerable outcome, without inflicting even more suffering on Argentina’s people.
Editorials are written by the Bloomberg Opinion editorial board.
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