It is hard to approach the topic of Argentina’s debt restructuring without a sense of deep foreboding. The history is not kind: Buenos Aires has defaulted eight times since independence. The legacy that the Peronist president Alberto Fernández received from his predecessor Mauricio Macri is toxic: a deep recession, one of the world’s highest inflation rates and national debt approaching 90 per cent of GDP.
Mr Fernández has taken a novel approach. Most debtor nations facing restructuring put forward a detailed economic plan and commit to clear targets to win IMF and creditor support for the inevitable haircuts which follow. Argentina has decided to say almost nothing about its economic strategy and instead tell creditors to expect a “friendly” debt restructuring offer mid-next month with a couple of weeks to accept it — or face less friendly consequences.
Economy minister Martín Guzmán did offer a target during an address to congress last Thursday but it was one scarcely calculated to warm the hearts of bondholders. Argentina, he said, would not even try to cut its fiscal deficit this year but would instead attempt to reach a primary surplus of 1 per cent by 2026 — three years after Mr Fernández’s term ends.
There is an element of brinkmanship here. It is in the government’s interest to sound tough at this stage, hence Mr Guzmán’s emphatic vow in parliament not to allow foreign funds to dictate the agenda for macroeconomic policy.
More worrying is vice-president Cristina Fernández de Kirchner’s demand, issued while visiting Cuba last weekend, that the IMF accept a hefty haircut on its $44bn of loans to Argentina. Buenos Aires would not repay “even half a cent” of that borrowing until it had exited recession, she added.
Ms Fernández has form on debt: while president, she led the country into a technical default in 2014. Though now vice-president, she is no mere figurehead. Her allies control the government bloc in congress and dominate the formidable Peronist movement. Mr Fernández, supposedly more of a pragmatist, lost no time in endorsing his deputy’s anti-IMF rhetoric.
The fund does have tough questions to answer. It agreed to lend a record $57bn to Argentina to support an economic programme which failed after little more than a year. Most of the money had already been disbursed when Mr Macri left office, giving the IMF minimal leverage over the Fernández government.
Unsurprisingly, markets have reacted badly to the recent hardening of Argentina’s line. Secondary trading indicates that creditors could expect to lose at least half their money; a default is possible if talks collapse.
The Fernández administration could still backtrack, as the province of Buenos Aires did recently when creditors turned down its restructuring offer on a dollar bond.
But almost more alarming is the absence of a clear strategy for restoring prosperity to what should be one of the most vibrant economies in the world of emerging markets, blessed with abundant natural resources. Price and exchange controls, higher export taxes, abundant money-printing and increased welfare handouts do not add up to prosperity.
The Fernandez government cannot afford the luxury of leaving economic policy for later. Argentina urgently needs a credible and comprehensive plan for investment-led growth to reinvigorate the more competitive sectors of the economy, such as agribusiness. Without it, the country risks lurching back into the bad old habits of isolationism and default.
