Salvador “History does not repeat itself, but it rhymes” – Argentina is currently experiencing the bitter truth of this mistakenly attributed quote to Mark Twain. As five years ago, it is about loans that Argentina cannot – or does not want to repay.
The economist Axel Kicillof is again at the center of the action. The left-wing star economist of Argentina is driving the creditors ahead with his self-confident demeanor – now as governor, five years ago as economics minister of the government of Cristina Kirchner. No doubt: the now 48-year-old with the blue eyes and strong sideburns visibly enjoys playing poker with the banks, funds and investors again.
Kicillof has been governor of the province of Buenos Aires for six weeks, holding one of the most important government offices in Argentine politics. A third of the Argentinians live in the province around the capital, where around 60 percent of the country’s industry is based. Here Kicillof has won a clear election. From this position of strength, he spoke for the first time last week on debt.
As of last Sunday, interest payments on the province’s dollar bonds of $ 250 million have been due. He would like to postpone the date to May 1, Kiciloff told creditors last week.
Then Argentina’s debt negotiations would probably already be in place and the province’s debt issue would be easier to solve. But he could not convince the necessary 75 percent of the creditors of his proposal.
Even though Kicillof has now extended the deadline to the end of January, it is unlikely that creditors will get involved in the deal. Why should they? According to an analysis by the Argentinean financial service provider Invecq, the province’s budget was balanced after a strict austerity program by Kicillof’s predecessor in late 2019.
“It is difficult to demand goodwill from creditors if you do not do it yourself as a debtor,” says economist Fausto Spotorno. Kicillof justifies that he shows his goodwill with the extension of the deadline. What he wants or can pay after May 1st – he says nothing about that.
But now the clock is ticking: until February 5, the governor can still instruct the payment without triggering a default, i.e. another payment default for the national debt. Because the province has already failed to redeem some bonds in peso, the rating agencies Fitch and Standard & Poor’s have already downgraded the seal of approval for the province of Buenos Aires to “selective default”, ie partial payment default.
The Argentine government of Alberto Fernández is putting Kicillof’s going it alone under pressure. When the president took office on December 10 after a clear victory against his liberal economic predecessor Mauricio Macri, it was clear that the debt issue would determine his policy for the next few months, possibly years, of his tenure. His predecessor Macri incurred around $ 100 billion in his tenure. Argentina is in chalk with the International Monetary Fund (IMF) alone with $ 44 billion.
The fund saved Argentina from an impending payment crisis in mid-2018 with the largest loan in its history. The investors had suddenly classified Argentina as a wobbly candidate because of its high budget deficit and had withdrawn their funds. The Argentinians themselves exchanged their pesos for dollars. Argentina, which was on the way to growing again under Macri at that time, crashed and could only be saved with the loan from Washington.
But how Alberto Fernández wants to solve the debt problem is still completely open. In the election campaign, he said that the economy had to grow before Argentina could pay its debts. “We want to pay,” Fernández emphasizes, “but later.”
But even that is not easy: the Pampaland economy has been stagnating or shrinking for nine years now. Inflation is 55 percent. The peso has lost about two thirds of its value against the dollar in a year. This is painful because most of the foreign debt is in the US currency.
With the economy shrinking and dollar debt in pesos increasing, Argentina’s debt has increased to 93 percent of its economic output (GDP). If you only look at the dollar debt abroad, the debt is only around 50 percent of GDP, the influential commentator Joaquín Solá estimates – so it is not alarmingly high.
Despite this appeasement, investors are not particularly convinced of Argentina’s solvency or willingness to pay: most of Argentina’s bonds are worth less than half their nominal amount in secondary markets. The risk premiums on Argentine loans are 20 percentage points above the interest that investors charge for US bonds.
Nevertheless, the situation is not hopeless: Alberto Fernández has continued Macri’s fiscal consolidation course, which the latter had agreed with the IMF. Where Macri cut spending, Fernández has now increased revenues: Argentina’s agricultural exports – especially soy, corn and wheat – are taxed at up to 30 percent.
The prices for electricity, gas, transport and pensions are frozen. The government could thus reduce the budget deficit by around one percent. The investment bank JP Morgan therefore expects Argentina to have a balanced primary budget shortly.
The state revenue without new loans would then be higher than the expenditure minus the loan interest. A positive primary budget is the key indicator for creditors as to whether Argentina will remain solvent. “It is surprising and positive that Alberto Fernández has continued the consolidation course in the budget,” says Daniel Artana, chief economist at the Fiel economic research institute. “The key now is that he presents a credible plan that will maintain the primary surplus.”
But that’s exactly the problem. The new economics minister, Martín Guzmán, is a debt negotiation expert who has studied in the United States for a long time – including with the renowned economist Joseph Stiglitz. He now supported his pupil by calling for a clear haircut on interest and principal payments in Argentina for debt restructuring in Argentina: “Anything else would be fantasy.”
So far, Guzmán has not indicated how he intends to restructure the debt. Time is running out. The first major interest payments from the republic are due in March, and further high repayments will follow in May. By March 31, the government said it had negotiated debt rescheduling to avoid becoming bankrupt again.
Freeze for one year
In Buenos Aires, estimates are plausible that Argentina wants to negotiate a one-year payment freeze, a 20 percent discount on the debt and a reduction in interest rates by half. In the world of low interest rates on the world financial markets, the ten percent interest that creditors receive on the bonds of the Province of Buenos Aires each year seems very high. The government therefore hopes that it will be able to cut interest rates by 50 percent, Solá estimates.
But now, with his demands from the province, Kicillof is thwarting the negotiations that Gúzman is conducting with private and public creditors such as the IMF. If the province stops the payments, it will be more difficult for Argentina as a whole to avoid a default, according to Invecq.
There may also be a political conflict behind Kicillof’s move: the governor is considered the closest confidante of Cristina Kirchner, who has now been elected vice president. It bases its power above all on “La Campora”, the leftist Peronist youth organization, which her son leads, but in which Kicillof also has a political home. An aggressive course against creditors is popular not only with the leftist young peronists, but with many Argentinians. Just as Kicillof did five years ago.
Then he robbed the North American hedge fund of the last nerve with his cat and mouse game. His main opponents were hard-nosed investors like Paul Singer and his hedge fund Elliott. Singer had sued Argentina for the highest instance of the US judiciary.
In previous years, the investor had bought Argentinean debt cheaply on the capital market, for which he wanted to be 100 percent compensated – unlike most creditors, who agreed to Argentina’s first debt restructuring 15 years ago and ultimately accepted discounts of up to 70 percent. Singer and Co. were insulted in Argentina as a vulture fund.
While the 2014 World Cup was held in Brazil, Kicillof and his young team were constantly jetting between New York and Buenos Aires. The minister then left open until the very last moment whether he would pay the debts. When Argentina finally did not pay and finally slipped into a severe economic crisis in isolation from the financial markets – it did not take long before Kicillof and his then boss, President Kirchner, were voted out.
Singer and other funds were fully compensated by the economic liberal successor Mauricio Macri only a few months after taking office – even Argentina had to pay the high legal fees. But Kicillof did no harm than Christina Kirchner. Both have been re-elected and are ready for a new round of battle with the creditors.
More: Alberto Fernández needs to boost Argentina’s economy and negotiate the country’s debt. He has three months – otherwise chaos threatens again.