Argentina debt deal: A key first step on a long, bumpy road to recovery

Argentina has cleared a major initial hurdle on its road to economic recovery, but much work remains to be done.

The country and its largest creditors struck a deal after months of negotiations, a development that emerged shortly after confirmation that the government had scrapped controversial plans to take the reins of soy giant Vicentin. 

The deal with three main creditor groups to restructure US$65bn of sovereign bonds, combined with apparently waning expropriation risk, should pay economic dividends.

The government had told debtors it needed breathing space, time for its wheezing economy to gather strength. Economy minister Martín Guzmán was a key architect of the deal.

“We resolved an impossible debt during the greatest economic crisis on record and amid a pandemic,” President Alberto Fernández (pictured) said. “Now we have the horizon clear.”

Argentina’s Merval stock index made solid gains following the government’s announcement. 

“This agreement should help to bolster investor, business and possibly consumer confidence in Argentina in the near term,” British research firm Capital Economics said.

Nevertheless, authorities, who are wooing investors amid wider efforts to boost production and strengthen exports and, in turn, replenish foreign reserves, have a long uphill battle ahead.

“Sorting out the debt was the necessary first condition to return to growth,” Matías Rajnerman, chief economist at local consulting firm Ecolatina, said in tweet. “A very good step in the right direction. However, we don’t expect the country's economy to revive tomorrow and everyone's celebrating: before that there's still some way to go.”

Stakeholders have until August 24 to formalize the agreement. 

Argentina is tanking. Already weak prior to the COVID-19 crisis, the economy is expected to contract around 10% this year. Amid greater spending pressure and weakened revenue flows, the government has been printing money.

“Regarding Argentina's deal, it helps but not a lot,” said Walter Bazán-Palomino, a research affiliate at the Center for International Policy Studies (CIPS) at Fordham University in the US, and an assistant professor at the Department of Finance at Universidad del Pacífico in Peru.

He told BNamericas: “New investors and bondholders know that Argentina will eventually be able to return to financial markets when needed. The COVID-19 crisis has exacerbated Argentina's fiscal needs and resources. A steep drop in exports and fiscal revenues was expected and is happening. There's no question that monetizing its debt is the ultimate solution. 

“Finally, the fiscal deficit is difficult to predict because, among other things, it depends on the lockdown period and the fiscal package support. I don’t see how the primary budget balance (fiscal balance excluding interest payments) will go back to a sustainable path.”

This was echoed by Capital Economics: “Despite these positives, we’re sceptical that today’s restructuring deal provides enough relief to make Argentina’s debt sustainable over the longer term. The agreement only includes small nominal haircuts of 3% on most dollar bonds, which would barely make a dent in Argentina’s large debt stock. And the country’s debt dynamics are dire.”

Federal government debt reached US$323bn at the end of April 2020, and 42.7% of this debt (US$138bn) was in US dollars. Any weakening of the peso, currently bolstered by capital controls, would increase the dollar-denominated-debt/total-debt ratio.

Debt talks with the IMF will likely follow, and the multilateral may demand a forex correction as part of any agreement. Argentina needs to pay back US$44bn to the fund.