Argentina: Yet Another Generalized Default?

By Arturo C. Porzecanski*

Argentine Vice President Cristina Fernández de Kirchner and Argentine President Alberto Fernández during a working meeting with governors last week/ Casa Rosada/ Creative Commons

The Argentine government’s current attempt to force investors to accept a punishing debt-restructuring plan puts the country at risk of yet another sovereign default on foreign-law, foreign-currency debt. The attempt validates the massive loss of confidence that took place last August, when local and foreign investors ran for the exits in the wake of the unexpectedly strong performance of the Alberto Fernández-Cristina Fernández de Kirchner ticket in the country’s presidential primaries.

  • Confidence had already been set back in early 2018, after a series of disappointments with how then-President Mauricio Macri was running overly loose fiscal and monetary policies that encouraged excess government borrowing and facilitated capital flight. Macri’s decision to turn to the IMF for a huge bail-out loan in exchange for a modest fiscal and monetary belt-tightening shored up confidence, but the prospect of Peronism’s return to high office undermined investor confidence anew, causing a steep plunge in Argentina’s stocks, bonds, and the currency from which it has not recovered.

Fernández had a window of opportunity to provide confidence to local and foreign investors – following the example set by Brazil’s Lula da Silva back in mid-2002, when his pulling ahead in presidential polls sparked the beginning of a market rout in that country. However, all that Fernández has done is blame Macri for all that was going wrong, denying that mistrust of Peronism was also a factor in deepening the financial and economic crisis.

  • Absent any reassurance, investors have been reluctant to show up at auctions of new peso- and dollar-denominated treasury bills, preferring to cash out of positions whenever those obligations matured. Therefore, even before Fernández took charge in December, Macri was forced on one occasion to unilaterally postpone repayments of treasury bills falling due.
  • Fernández has institutionalized the practice of deferring by decree the majority of payments coming due each month, thus defaulting time and again on most peso and dollar obligations subject to Argentine law and jurisdiction. Until very recently, however, he and the Governor of the Province of Buenos Aires, Axel Kicillof, were honoring their obligations contracted under New York law and jurisdiction.

The coronavirus disrupted a less investor-unfriendly alternative devised by Fernández to avoid a repeat of the massive default, financial isolation, and bruising legal defeats (in New York courts) that his predecessors had suffered during 2002-2015. The idea was for federal and provincial governments to develop debt-restructuring proposals and present them to bondholders by mid-March, in order to obtain by mid-April creditor approval of a deferral of payments coming due during 2020-23.

  • To cushion the blow of the pandemic, the debt-restructuring plan, delayed to mid-April, included terms and conditions that were substantially worse for bondholders. Investors holding $66 billion of bonds are being asked to write off some principal and most interest payments throughout the decades-long life of new bonds to be issued in exchange for existing ones, in a proposal that would impose (net present-value) losses on bondholders averaging at least 60 percent. The Province of Buenos Aires has presented a similarly aggressive debt-restructuring plan.

A critical mass of investors has spoken out against the government’s proposal, including outright rejections by three groups of bondholders who could block any deals. To ratchet up the pressure, the federal government skipped a $503 million payment due on April 22, setting the clock running on what could easily turn into Argentina’s ninth sovereign default on foreign-law, foreign-currency debt.

  • One constructive way for Argentina to break the impasse with its private creditors would be to ask fewer concessions from them by deciding to seek new financing from, or else a rescheduling of debt service due to, the IMF. This would be achieved by requesting support under a longer-term Extended Fund Facility. Because Argentina’s program with the Fund was a short-term standby facility, under which $44 billion were disbursed, the whole amount plus interest is to be paid back in full between now and 2024. These scheduled payments to the IMF amount to more than 40 percent of total foreign-currency payments the government of Argentina is supposed to make during 2020-24.
  • If the Fernández administration were willing to work with the IMF on an economic program that would impose fiscal and monetary discipline to kick in once the coronavirus pandemic is over, the government would not need such large concessions from its private investors. In fact, such a partnership with the Fund would pave the way for a gradual return of investor confidence and the reopening of its domestic bond market for renewed financing on a voluntary basis.

April 28, 2020

*Dr. Arturo C. Porzecanski is a Distinguished Economist in Residence at American University and a member of the faculty of the International Economic Relations Program at its School of International Service.

Argentina: End of the “Right Turn”?

By Santiago Anria and Gabriel Vommaro*

From right to left, Cristina Fernandez de Kirchner and Alberto Fernandez, and other ministers

From right to left, Cristina Fernández de Kirchner, Alberto Fernández, and other ministers / Wikipedia / Creative Commons / https://es.wikipedia.org/wiki/Archivo:Ministros_de_Cristina.jpg

The inauguration of Argentine President Alberto Fernández and Vice President Cristina Fernández de Kirchner last week confirms that the pronouncements of the death of Latin America’s “left turn” were premature — and that, rather than turning in any clear direction, political winds in the region appear to be blowing in all sorts of directions, with the only discernible underlying pattern being anti-incumbent votes following periods of economic crisis or economic downturns.

  • Obituaries for the “left turn,” which started in 1998 with the election of Hugo Chávez in Venezuela, have been appearing for years, particularly since the election of former President Mauricio Macri in 2015 and other right-leaning politicians in the region. Macri was widely seen as a bellwether of a broader “right turn” in the region — a turn that spread to Brazil, Chile, and elsewhere. For the very first time since the country’s democratic transition, a right-wing political party, in alliance with other parties, gained national power via democratic elections. To avoid the fate of other non-Peronist presidents, none of whom were able to finish their terms of office, Macri built a national coalition with broad societal bases of support.
  • The victory of left-Peronism in October, however, was formidable. The team of Fernández and Fernández obtained 48.1 percent of the votes, well above the 40.3 percent of the incumbent Macri. With two antagonistic camps capturing almost 90 percent of the vote, the elections were probably the most polarized since Argentina entered its democratic transition in 1983.

Rather than represent systemic shifts to either the right or left, the Fernández-Fernández victory is further evidence that Latin American electoral politics follow a routine alternation-of-power explained by retrospective, anti-incumbency voting driven by broad societal discontent — a sharp repudiation of incumbents that couldn’t deliver growth, adequate social services, and security. The left-right axis in Argentina is marked by high levels of polarization, with two major rival coalitions — Peronists and non-Peronists — structuring the electoral supply and disputing the center.

  • The defeat of Macri and his Cambiemos coalition revealed the center-right’s failure to carry out its desired free-market reforms aimed at dismantling the statist economic model based on the domestic market, wide social protections, and state intervention in the economy. Macri’s coalition lacked the unity to achieve pension reform and other difficult measures. Instead, Macri resorted to a “gradualism” that did not work in policy terms or politically. Similarly, his conciliatory approach to foreign creditors did not result in the expected capital inflows and economic growth. That fiscal gradualism was financed with a high rate of external indebtedness that made the Argentine economy even more fragile and ended in a massive financial crisis, after which the Macri government changed its approach towards greater economic orthodoxy.
  • The legacies of the previous Kirchnerist governments, including constraints on the government’s ability to cut spending, were also severe obstacles. Trade unions and social movements retained a high mobilization capacity and blocked attempts to remove state protections, effectively blocking labor reform and other Macri priorities. Once the government lost access to international credit and asked the IMF for a bailout — the largest in IMF history — it began to lose the support of social sectors that had been important to its rise, including business and large segments of the middle-class.

Center-left Peronism may also be unable to escape the left-right alternation. Widely discredited a few years ago and seen as a retreating force, especially due to corruption allegations and mismanagement, it kept strong connections with its societal core not only through the memory of the good old days of redistributive policies associated with the commodity boom, but also because there was no major shift in the political orientation of its main leader, Cristina Fernández. She broke with the conventional wisdom of Peronism that would have anticipated more leadership pragmatism and ideological eclecticism. As in the past, it has made promises that may eventually undermine its popular support.

  • The Fernández-Fernández formula will look and govern differently than it did during the Kirchnerist governments. It will be a broader center-left coalition formed by the Peronists and backed by a wide array of progressive parties and movements. But in addition to facing a hostile regional and global environment, Fernández will face many domestic challenges in a society that accumulated so many pressing demands during the ongoing Argentine economic crisis. Fernández inherits extraordinarily high levels of debt, soaring inflation, and rapidly rising unemployment and poverty levels. The “honeymoon” period, as some of his allies openly say, will be short, and Macri’s Cambiemos is likely going to provide strong opposition. The new government will unlikely escape the routine alternation-of-power dynamics explained by anti-incumbency voting in contexts of deep economic crises after the end of the “commodity boom,” strong inflationary pressures, and broad societal discontent. Polarization and mood swings are likely to remain persistent features of Argentine politics.

 December 17, 2019

*Santiago Anria is Assistant Professor of Political Science and Latin American Studies at Dickinson College. He is the author of When Movements Become Parties: The Bolivian MAS in Comparative Perspective (Cambridge University Press, 2018). Gabriel Vommaro is Full Professor of Political Sociology at the National University of San Martín and Researcher at CONICET. His most recent book is La Larga Marcha de Cambiemos (Siglo XXI Editores, 2017).

Latin American Integration: No New Ideas

By Carlos Malamud*

Heads of state stand for a picture at the 14th ALBA Summit held in Caracas in 2017

Heads of state at the 14th ALBA Summit held in Caracas in 2017/ EneasMx/ Wikimedia Commons

Several proposals claiming to promote regional integration in Latin America, particularly South America, have received attention in recent months, but proponents’ continued reliance on the same political-ideological alignments as always leaves little hope of bridging the deep splits in the region. Coming in the wake of completion of the EU-Mercosur trade agreement, after arduous and complicated negotiations, the proposals appeared to be good news. But that has not been the case.

  • The new push follows the creation of PROSUR by right-leaning governments in March and, more recently, efforts to relaunch UNASUR by left-leaning groups such as the Grupo de Puebla (Progresivamente) – each claiming commitment to unify the region behind their political visions. Two of the main advocates, Chilean President Sebastián Piñera on the right and Argentine Presidential Candidate Alberto Fernández on the left, have taken the easy path of convoking like-minded supporters while rejecting opponents.
  • These groups appear to have learned nothing from the first decade of the 21st century, when Venezuelan President Hugo Chávez pushed his Bolivarian project. The three efforts emblematic of the period – ALBA, CELAC, and UNASUR – all eventually failed. The rise of neoliberal governments in various countries since then has produced an even more complex situation. The new governments have continued emphasizing ideological conformity, reducing prospects for unity. Last December, a “Conservative Summit of the Americas” inspired by Brazilian President Jair Bolsonaro and his son met in Foz de Iguazú to rally the most extreme elements of the region’s right, conditioning participation on total agreement with its tenets.

There are exceptions.  The Pacific Alliance – a trade accord launched by Chile, Colombia, Peru, and Mexico eight years ago – has remained inclusive despite changes of government in each country. MERCOSUR, with its solid foundation and intense commercial exchanges, has also resisted ideological temptation in its way, although dismissive insults between President Bolsonaro and Argentine candidate Fernández do not bode well (even if both know that they need each other in the long run). But the fear is that extreme ideologies will, once again, trump national interests.

The intense electoral cycle of the past three years, and the pending elections in Argentina, Bolivia, and Uruguay, further complicate the situation. As the “turn to the right” has not turned out as predicted, the results of these three races this month will make regional relations even more unstable. The lack of a new vision for promoting Latin American regional integration is aggravated by the growing sense among both extremes of the political spectrum that they have to dig trenches.

  • The need for a new vision is obvious as the growing attacks on multilateralism and the escalation of the U.S.-China trade war are going to force practically all international actors to take sides. Latin America will suffer potentially grave consequences if its governments and political leaders don’t grasp that inclusion, not exclusion, is the only way to advance unity and integration. Acceptance of differences, dialogue, and negotiation are what’s needed now, as is a creative imagination that can accept reality as it is, with all its problems and imbalances. The question is whether the existing leaders will be able to overcome this sad state of affairs.

October 1, 2019

*Carlos Malamud is Senior Analyst for Latin America at the Elcano Royal Institute, and Professor of Latin American History at the Universidad Nacional de Educación a Distancia (UNED), Madrid. A version of this article originally was published in the Elcano Blog.