Argentina Needs to Fix Its Debt Problem

Macri_y_Obama_en_Casa_Rosada_(cropped)Argentine President Mauricio Macri has a tough year ahead of him, marked by a weak economic outlook and a strong political opposition. Economically, his liberal economic plan seeks improve macroeconomic indicators by addressing external and fiscal imbalances and reducing inflation. In his first month in office, President Macri eliminated or reduced taxes on commodity exports and abolished exchange controls. The most popular measure he has enacted thus far has been the lifting of the controversial “cepo cambiario,” or ban on dollar purchases. This move gave him the political capital to later cut electricity subsidies in order to reduce Argentina’s high fiscal deficit, raising the price of electricity. Cutting the subsidies also increased the amount of money that goes to the province of Buenos Aires through the system of revenue sharing, to the great displeasure of other provinces. The first months of 2016 in Argentina were marked by a sharp peso devaluation that boosted an already high inflation rate, accompanied by a rise in domestic interest rates.

Most recently, Macri’s government has re-engaged negotiations with holdout creditors over the repayment of Argentina’s debt. After the 2001 crisis, when Argentina defaulted on its debt, it was able to restructure most of its debt with foreign creditors, who accepted the new offer with a significant haircut. However, a minority — the bigger ‘vulture funds,’ including Italian bondholders and American funds Elliot and Aurelius — refused Argentina’s offer and sued the country in a New York Court. New York District Court Judge Thomas Griesa ruled in their favor, and the consequence of that verdict was Argentina was no longer allowed to pay the rest of its creditors since the money needed to be used to compensate the holdout creditors. The Supreme Court refused to look at the appeal, and Argentina entered into a technical default.

The result, or lack there of, of the negotiations with the ‘vulture funds’ over Argentina’s debt is a very important legacy of the previous anti-American, populist and protectionist administration of Nestor and Cristina Kirchner. Preventing foreign influences from dictating the terms of Argentina’s payments was portrayed by “Kirchneristas” and their supporters as a symbol of national sovereignty. As Macri seeks to consolidate his authority in Argentina and distinguish himself from the previous governments, he is trying very hard to dismantle this Kirchnerist legacy. Macri’s administration hopes to open Argentina up to the world, both politically and economically, by principally aligning itself with the United States and finding a resolution to American holdout demands.

There are also very important short-term interests at stake: if Argentina were able to successfully repay holdout creditors, it would regain access to foreign lending. The impending Argentine default resolution must also be understood in the context of the end of the commodities boom and its effects on Latin America. The Kirchnerist governments, and other left-wing populist governments in the region, were able to ride a wave of favorable commodity prices during the 2000s and build their support on the redistributive policies funded by the boom. Now that the boom is over and prices are coming down dramatically, many of these governments are being voted out of power in favor of more centrist ones like Macri’s. His government hopes to implement liberal economic programs, which will include policies of adjustment in order to stabilize the economy, but will likely lead to short-term recessionary effects.

By re-engaging in negotiations with the holdouts, Macri wants to portray Argentina is a desirable country for investment and re-integrate Argentina into the global economy. A victory over the holdouts would also provide him the necessary political capital to carry out the more painful elements of his economic program. He still needs congressional approval for the deal, as well for Judge Thomas Griesa to lift the injunction banning Argentina from making payments to the holders of restructured debt. A deal would also remove doubts about the government’s ability to finance the still huge fiscal gap, as well as and attract new investment for the sectors it hopes to develop, such as infrastructure and energy.

 

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