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Argentina on the edge of financial crisis – again As an emerging…
Argentina on the edge of financial crisis – again
As an emerging market, Argentina in the 1990s enjoyed economic growth, but much of the development
was funded by over-indulgence in borrowing in international capital markets. The country accumulated
sovereign debt liabilities on a colossal scale, issuing over a hundred types of bonds in numerous
currencies and in numerous jurisdictions. Many were issued to institutional investors, and many were
issued to private investors, including ordinary Argentinians. The IMF became involved, attempting to
structure rescue packages, but these had little success. Unable to meet repayments, Argentina defaulted
on nearly $100 billion in sovereign debt in 2001, and the currency was devalued. Agreements with 93%
of the bondholders were achieved in 2005 and 2010, by which they would receive about 30% of the face
value, in a restructuring ‘haircut’. This could have led to a resolution of the country’s debt problems.
However, a number of ‘holdout’ creditors, amounting to about 7% of the total, were outside these
agreements. These holdout creditors were hedge funds, led by NML Capital (owned by Elliott
Management), which had bought Argentine bonds following the country’s financial crisis. These
creditors, referred to as ‘vulture’ funds, mounted numerous legal battles for full payment. These battles
extended over the following 12 years, but the holdouts were confident in the strength of their legal
case. They obtained numerous awards of damages in the US civil courts, although these were not paid
by Argentina’s government.
For millions of Argentinians, the consequences were disastrous: their savings were wiped out, poverty
levels soared, and unemployment was in the range of 20%. The crisis was both economic and social. It
also became political. For twelve years, from 2003 to 2015, the country was ruled by presidents from
the leftist populist Peronist party, which is descended from the post-Second World War era of extreme
nationalism. Under the presidency of the late Nestor Kirchner, from 2003 to 2007, and then under
Cristina Fernandez de Kirchner, from 2007 to 2015, Argentina’s public finances were in a precarious
state, while the demands from bondholders to be repaid dragged on.
The political tide turned with the election in 2015 of a new centre-right president, Mauricio Macri, who
promised to settle with the holdout creditors and to restore confidence in the economy. An agreement
with four leading holdout hedge funds was reached, worth a total of $4.65 billion. The price was high,
but the country could then access international capital markets. Still, he faced an uphill task in the
changing global financial climate. The US dollar was strong, and rising US interest rates were in the
pipeline, spelling difficulties for emerging markets. Argentina’s currency, the peso, was falling perilously,
and inflation was climbing. The country was in recession. The agriculture sector had been hard hit in
2018 by the worst drought in decades, while the cost of energy imports was rising. The beleaguered
Argentine population was still suffering from 20% unemployment, and one-third of the population was
in poverty. In 2018, Mr Macri went back to the
IMF to request standby funding of $50 billion, which was soon raised to $56 billion. The president’s
strategy of returning to the IMF had the immediate effect of sending people onto the streets to protest.
Many Argentinians remained convinced that the IMF was the ultimate cause of their woes in 2001,
which many felt left them in a situation similar to being a ‘colony’. Years of austerity measures were
blamed on the IMF. With a presidential election looming in late 2019, Mr Macri needed, first of all, to
stabilize the currency. The backing from the IMF would help in the eyes of global investors. The IMF hasappreciated that a gradual approach to reducing the budget deficit is called for. While reducing public
spending is unpopular, especially in an election year, he was concerned that he must maintain the
confidence of investors by reducing the budget deficit. Investors, for their part, were likely to be worried
that if he cannot promote economic recovery, the voters would turn again to a populist government.
While former president, Cristina Fernandezde Kirchner, remained popular among the Peronist
supporters, many saw Mr Macri as the best hope for responsible financial governance. When the
election took place in October 2019, the Peronist candidate, Mr Fernández, won 48% of the votes, to Mr
Macri’s 40%. The victory saw the return of Ms Fernández de Kirchner as Vice President. Argentinians
have hoped for a new stability and a better future, but the economic woes that had taken their toll on
society ultimately led to the political downfall of Mr Macri.
Questions
To what extent did Argentina’s government mismanage its sovereign debt?
What has been Mr Macri’s policy in attempting to steer an economic recovery?
What has been the role of the IMF in its most recent intervention in Argentina?
Why are international investors crucial in Argentina’s recover
