Nov 2020
Argentina and the sovereign debt cycle
Latin America's third-largest economy, its third default in two decades, and what it tells us about the limits of IMF intervention.
The study of sovereign debt in the global economy has only become more salient as countries bear the brunt of the pandemic. While economies across the globe contract and governments struggle to find alternative sources of financing, many are also using Covid-19 as an opportunity to refinance pre-existing debt. Sovereign debt is undoubtedly a complex topic — it is important to consider not only the history and recent events that create it, but also the roles of the various players involved.
Argentina, Latin America's third-largest economy, faced its third sovereign default in two decades. Each default only laid the foundation for the next. Debt rose sharply under President Mauricio Macri, who took on billions in foreign debt — but only in an attempt to address a large budget deficit inherited from his predecessor. The country saw another crippling cycle of economic contraction, skyrocketing inflation, and a hard currency squeeze. In May 2020, the government officially defaulted after failing to make a $500 million interest payment on foreign debt.
The economic crisis is a product of both long-standing issues and recent developments. Since independence in 1816, Argentina has defaulted on external debt nine times. It joined the IMF in 1956 and has entered twenty-one programs since then. Some joke that the government, creditors, and the IMF may be exchanging spreadsheets forever.
When President Macri was elected in 2015, he brought a series of reforms: cutting export taxes, lifting currency controls, and resolving debt disputes. Argentina regained access to international capital markets — a momentous occasion after being locked out for fifteen years. Most bondholders had settled for thirty cents on the dollar after the 2001 default; those repaid in the 2016 settlement saw enormous gains. But rising borrowing costs and an overvalued peso only exacerbated Argentina's current account deficit.
By late 2017, the situation was precarious. When the US Federal Reserve began increasing interest rates, investor interest in Argentine bonds dropped. A drought hurt commodity yields. As investors sold Argentine assets, the peso depreciated and the real value of debt increased. President Macri sought an IMF bailout — and received it. With IMF intervention, the budget deficit dropped from 5.3% in 2018 to an estimated 2.5% in 2019. Argentina's economy contracted anyway.
It was no surprise when Macri lost the next election to Alberto Fernandez, who inherited a huge debt load, dwindling foreign-currency reserves, and accelerating capital flight. His administration increased tax revenues and froze utility prices, but debt renegotiations saw little progress. A weakening economy was only worsened by Covid-19 — though the pandemic at least provided a natural argument for postponing repayment.
By 2020, Argentina signed a deal with creditors to restructure $65 billion in foreign debt — involving lower interest rates and extended maturities lasting nearly a decade. Significant concern remained about the government's economic response: printing money to cover a budget gap while tightening restrictions on hard currency purchases. Economists noted that President Fernandez had devised short-term responses to long-term problems. Argentina's cycle, it seemed, was far from over.