Inklings of a Plan to Fix Argentina’s $311 Billion Debt Bomb Emerge
(Bloomberg) -- A month after Argentine President Alberto Fernandez took office, economists and investors still don’t know how he plans to dig his way out of a $311 billion debt hole and kick-start growth. They only know a when.
His government last week laid out an ambitious timeline for debt talks that it aims to wrap up by the end of March. While light on detail and deserving of skepticism, it offers at least an inkling of a plan from a president and economic team that have so far eschewed any sort of big picture road-map.
Martin Guzman, the 37-year-old scholar-turned-economy minister, will meet the International Monetary Fund Managing Director Kristalina Georgieva on Wednesday at the Vatican. He’s due to present his debt sustainability analysis to congress by mid-February, which will be followed by an offer to creditors in early March. Meanwhile, Fernandez is also in Europe this week to try to enlist the support of Germany, France and Spain.
“There are pieces missing in the economic puzzle,” said Marina Dal Poggetto, executive director at Buenos Aires-based consulting firm EcoGo. “You don’t know if these are disorganized measures or if it’s a program and this is just how policies will be managed.”
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To be sure, no one expected Fernandez’s governing style to be orthodox. The lifelong political operator swept to power late last year promising a clean break with predecessor Mauricio Macri after years of austerity and his free-market embrace. Even so, market watchers have been left scratching their heads as they pick through a patchwork of vague and, at times, contradictory policies. One such puzzler: the decision to ditch economic forecasts because, as Central bank chief Miguel Pesce says, they damage credibility.
“They do if you miss them -- it enhances credibility if you meet them,” said Alberto Ramos, head of Latin America research at Goldman Sachs. “How can you gain credibility if you don’t know what you’re aiming for?”
One of the few targets Fernandez has announced publicly is that self-imposed March 31 deadline. Argentina, a serial defaulter, is on the hook for $38.7 billion in interest and principal payments this year, according to estimates from consulting firm Alberdi Partners. Its $311 billion gross debt load includes a loan from the IMF, as well as foreign bonds and local-currency borrowings held by both public and private investors.
With a more pressing deadline, the Province of Buenos Aires -- which is also governed by Fernandez’s party -- just improved its offer for holders of bonds maturing in 2021, who were requested to delay a capital payment that came due Jan. 26.
This is another moment of reckoning for Argentina, which has a long history of fiscal crises and defaults. The economy and everyday Argentines still haven’t fully recovered from the 15-year saga and deep recessions that followed its record $95 billion default in 2001. Forecasts show the economy probably shrank 2.5% in 2019 and is on course to contract for a third straight year in 2020.
The last restructuring took more than a decade to resolve; Fernandez is giving himself a little less than 60 days to get it done this time around, earning skepticism from analysts at Citigroup, ING, Oxford Economics and elsewhere.
The IMF will be a key player in the discussions that come less than two years after it signed off on a record $56 billion bailout. The money came with plenty of strings attached, including painful spending cuts and other conditions that ultimately helped lead to Macri’s downfall. The Fund plans to send a technical mission to Buenos Aires this month after a first meeting with Guzman in New York last week. Fernandez’s and Guzman’s press officials declined to comment.
“The government may be playing its cards close to its chest for now, ready to go in with a detailed and considered plan that has already been developed,” Stuart Culverhouse, head of sovereign and fixed income research at Tellimer, wrote in a report Wednesday. “But we doubt it. Argentina has a history of overstating or exaggerating its position.”
The most recent hint that investors have when trying to figure out what Argentina could do comes from a 2019 presentation that Guzman made at a United Nations conference while he was an associate research scholar at Columbia University. The presentation on renegotiating the South American nation’s debt recommends that the government seek a two-year delay in payments, while not reducing capital or interest.
Guzman himself has since said not to read too much into the paper. “I wouldn’t take any of that as a reference of what we are going to do,” he told reporters after being appointed minister.
Resolving its debt problems will be a crucial step to reignite growth in a nation with chronic imbalances: this year’s expected contraction would be the sixth since 2012. The peso is down almost 70% against the dollar since the start of 2018, by far the worst performing emerging market currency. Inflation is running at 54%, and a third of the population lives in poverty.
Fernandez, who was given sweeping emergency powers shortly after taking office, wants to change how pension increases are calculated to end a cycle that Eurasia Group and others says only fuels inflation. But again the big question is: How? He also said that economic growth is a top priority, all while boosting taxes on exports, wealthy Argentines and dollar purchases.
The measures “could temporarily improve the government’s balance sheet,” said Pablo Guidotti, a former deputy economy minister in the 1990s. “But all the tax hike measures are very problematic, especially for what should be a top policy objective: generate economic growth.”
Pesce, meanwhile, said he aims to bring down inflation and encourage savings in pesos to strengthen the feeble currency. But at the same time, he simultaneously cut interest rates by 15 percentage points and promised to respect the Treasury’s “indispensable” financing needs by continuing to print money. So-called social pacts, in which businesses, unions and the government negotiate price and salary increases, are another pillar of Pesce’s plan.
Policies such as social pacts have a long and dubious history in Latin America, putting even more pressure on Fernandez to avoid a hard default. But before he can do that, he’ll need a plan.
“What is the nation’s debt strategy?” asked Marcos Buscaglia, chief economist at Alberdi Partners. “I don’t know.”
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