Can a new deal with bondholders save Argentina’s economy?


A recently announced deal with bondholders is an important first step as Argentine President Alberto Fernandez works to stabilize his country’s struggling economy. On Tuesday, August 4, 2020, the Argentine government announced that it had reached an agreement with creditors to define a repayment plan for $ 65 billion in sovereign debt held by foreigners. Bloomberg reported that the deal was worth just under 55 cents on the dollar.

The agreement recognizes a growing consensus that Argentina’s economy faces significant restrictions and needs a sustainable plan to pay off credit holders and catalyze new economic development. On June 1, the International Monetary Fund, a Washington DC-based multilateral lender that offered Argentina $ 56 billion in loans in 2018, issued a statement acknowledging, “there is only limited scope to increase payments to private creditors while meeting debt and debt service thresholds”.

Andres Borenstein, an economist from Buenos Aires, Argentina, told me, “Argentina’s problem is a liquidity problem, not a solvency problem. The government has decided that default is not a good option. The government wants an agreement.

But, even with good intentions, the way forward will be difficult. The debt deal is one of the many hurdles President Fernandez and his advisers face. The IMF estimates that Argentina may need debt relief of between $ 55 billion and $ 85 billion. Argentina’s future is still hampered by double-digit inflation, a weak peso, a shrinking macroeconomy, and outdated and complicated policies governing labor, currency and electricity markets. Argentina’s GDP is expected to contract by more than 12% in 2020.

Over the past few weeks, I have spoken to a number of economists, academics, political analysts and leaders about Argentina’s future.

Minister of Finance of Argentina, Martin guzman, an economist who studied with Joseph Stiglitz at Columbia University in New York, told me that in the short term, the agreement with the bondholders “must respect the constraints Argentina faces.”

The deal Guzman helped negotiate with bondholders is key to getting Argentina back on the road to recovery. But Argentina has yet to define a clear plan to catalyze meaningful and sustainable economic development over the next ten to twenty years. At present, the country remains hampered by popular but heavy subsidies in the electricity market and must find a way to create a new policy framework to encourage new investments in power generation to ease supply bottlenecks and ultimately lower prices for consumers. Argentina must also tackle labor market reforms. Argentina’s overall investment climate is negatively affected by persistent concerns about political stability and judicial fairness. Overall, the World Economic Forum ranks Argentina in the bottom third of countries in terms of overall competitiveness, ahead of Honduras and Nicaragua, but far behind Chile, Uruguay and Peru.

Despite the boasting a young and well-educated population, Argentina remains heavily dependent on commodity exports and lags behind other countries in the region by develop efficient business clusters in the knowledge economy.

Guzman remains optimistic that Argentina can emerge from the current debt crisis with a roadmap for future economic development in place. “We are working to stabilize the economy as a first step so that the State regains the capacity to implement the public policies necessary to promote the improvement of infrastructure and the development of the energy sector, and thus improve productivity and more generally the environment for the private sector, ”he told me.

Agreement with bondholders is a necessary step for Argentina, but it must be the first step in a longer process. Investors who do due diligence on potential projects in Argentina need to understand the larger panorama of political risks.

Benjamin Gédan, an Argentinian expert on Woodrow Wilson Center, a Washington DC-based think tank, told me, “In the short term, Argentina’s fate is out of its hands. Will China recover soon enough? Will energy prices go up? Will soybean prices increase? ”

Argentine President Fernandez faces the difficult task of guiding the country through the coronavirus crisis while setting in motion a package of forward-looking policy reforms that will help the country catalyze investment and development in new sectors and scale back the country’s long-standing dependence on primary agriculture. exports. Fernandez’s biggest challenge will be educate the public on the need to finally implement long-delayed reforms, improve the country’s regulatory structure and create a path for new investment and economic growth.

“It’s easy to be pessimistic about Argentina, but it’s a country that has a lot of advantages that make optimists believe that prosperity is just around the corner,” Gedan told me.

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