What would be the effects of a default on the Argentine economy

Photo Natalia Motyl
Natalia Motyl

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

Argentina has a tough debt renegotiation ahead of private creditors, amid a local drop in consumption and a complex global context due to the expansion of the coronavirus pandemic. Due to this recessive situation, no one rules out that the country may once again face a default in the payment of external debt.

In this regard, the question asked by many focuses on what would be the effects that a default would bring on the Argentine economy, which is already facing serious growth problems and numerous variables in the red.

According to some market calculations, Argentina has a total gross debt of almost US $ 312 billion with private organizations and other creditors, which is equivalent to 92% of the Gross Domestic Product (GDP).

Of this amount, the country owes around u $ s44,000 million to the International Monetary Fund (IMF), although from the Government it is considered that with this organism there will be no problem of stretching this payment for a few more years.

Likewise, the debt in medium and long-term government securities amounts to some US $ 194 billion, of which 80% is in foreign currency. The big problem that worries the market is the concentration of maturities in the short term, because during this year the country will have to pay capital commitments for $ 48,968 million and other $ 14,838 million for interest. .

The main problem to be able to renegotiate the debt and not fall into default would be with the private holders of these securities, who would have serious doubts that Argentina can meet the payment of these papers, in a domestic environment where there are no signs of growth that can be seen. seriously aggravated by the international context, punctually by the expansion of the coronavirus.

Even the president of the Central Bank (BCRA), Miguel Ángel Pesce, indicated days ago in an interview that the “default” of the sovereign debt is a possibility, to clarify later that he hopes that “it will not happen.”

“The point is that with default in the bond market under foreign law and all financing doors closed, the default on bills and bonds issued in dollars in the domestic market is also sung. They are $ 8.28 billion yu $ s9,200 million maturing under domestic law in 2020. Argentina will only be left with financing in pesos in the domestic market, “summarizes a report by the Economy & Regions.

Effects of default on the economy

Now, with serious probabilities that the Government will not be able to pay the debt, the question to be clarified is what would be the effects of a default on the Argentine economy.

In this sense, iProfesional consulted Natalia Motyl, an economist at the Fundación Libertad y Progreso, who stated: “If we default, the crisis of confidence that our country is suffering would worsen.”

According to him, this would happen at this time because both investors and families “are postponing their decisions in economic matters due to the high level of uncertainty that our country has.”

A confidence problem that is the result, first, of “having taken policies for the last 20 years against the market and in favor of political interests, and, later, for not having a future economic plan,” summarizes Motyl.

Argentina is handling a degree of uncertainty such that “a default would worsen the situation since it would be a public declaration that we are a country that is not capable of fulfilling the commitments it assumed,” the economist said.

And he completes his idea: “Unfortunately, Argentina has a history of not complying with its obligations. That puts a lot of pressure on future debt negotiations. Therefore, it requires a more urgent shock policy that solves the problem of background since gradualist policies do nothing but slow down the impact. ”

An XP Investments report says that if the offer to creditors involves a 40% drawdown on the Net Present Value (NPV) of the offer, then investors would agree to redeem.

On the other hand, if the Government wants to play more aggressively and present a proposal that contains a pruning of 60% (as the market now estimates), there will be a strong short circuit.

“If Argentina becomes greedy for the argument of generating an ephemeral reduction in the level of debt over GDP, then investors will fight, and quite possibly they will fight very hard,” said Alberto Bernal, the XP strategist.

More effects on the economy of a default

Another consequence of entering into a default is not being able to access the capital markets.

“We are already quite restricted in that sense since the stocks do not allow capital to leave easily, but neither does it allow them to enter. This is a barrier that prevents economic recovery, since in order to grow, Argentina needs, mainly, capital that does not it has and should attract them from the rest of the world, “says Motyl.

Therefore, by not being able to access the capital market, Argentina “will have to either raise more taxes, further destroying the country’s productive structure or issue money that nobody wants, which will end up accelerating inflation.”

Likewise, capital flight, a natural reaction to fleeing from an extremely vulnerable financial system, is estimated to cause setbacks on the foreign exchange market and reserves. “The informal exchange rate is firing, to keep the stocks, and the Central Bank selling reserves in an attempt to contain the official dollar,” Motyl completes.

In summary, experts estimate that all this situation will end in more inflation, flight from deposits, fall in reserves, among other negative aspects for the Argentine economy.

“Definitely, the worst case scenario and the one the government should avoid is a default,” concludes Motyl.

The political cost is also very high, so that governance “would be at risk.” So from the City it is recommended that all the chips should be put now to achieve a successful renegotiation, and for that it is argued that it is necessary to reveal the economic plan and carry out a series of structural reforms, to return our country to the path of economic growth.

“In this context, in which the demand for money is already falling and the dollar is already rising, and therefore inflation sooner rather than later will increase again, there will be more money supply that will produce an additional and greater fall in the demand for money,” delimits the report of Economy & Regions.

And he adds that the exchange rate imbalance will increase, as the MEP dollar, the liquidated dollar (CCL) and the blue dollar will rise.

“The exchange gap will jump and the current pseudo transitory stabilization will end. The interest rate, which is now artificially falling, will have to jump again; otherwise, the rise in the dollar will have no ceiling. It is easy to see. Official exchange rate policy must change” , complete Economy & Regions.

To add that this excess demand in the exchange market will translate into an “excess supply in the capital market, in the money market and also in the goods and services market and in the labor market.”

In conclusion, E&R economists argue that these excess supply, in each of the markets mentioned, “will mean an increase in the cost of capital (interest rate), more inflation, a greater recession, less (more) employment (unemployment) and lower purchasing power of wages, respectively. ”

And they warn that we are in the “best part of the year”, so it is interpreted that “this is the best that Guzmán’s economic plan could give. Then there will come a second stage of the year that is worse, much more difficult.”

In this regard, they maintain that, probably, “the economic plan will become even more radical with respect to the present.” With this they mean that there will be “more intervention and more controls”.

Likewise, from Economy & Regions they affirm that the macroeconomic variables at the end of 2020 will be worse than at the end of 2019.

Impact on the economy, according to Wall Street

The view that there is on the country from the outside is also important. For the investment bank XP Investments of Wall Street, there will be seven specific effects on the Argentine economy if a default is decreed:

1- A “hard” default; that is, a massive default on the bonds to be restructured.

2- Greater contraction in the demand for money, because investors will no longer want pesos and will demand safer assets.

3- A much longer and deeper recession than what is currently experienced.

4- Much higher levels of poverty due to the deterioration of the economic-financial situation.

5- Increase in the inflation rate as a result of the economic disaster.

6- A further widening of the exchange “gap” in Argentina.

7- Further downgrade of Argentina’s debt rating to “irrelevant” country status within the investor community, something that would affect YPF’s ability to find financing to develop Vaca Muerta’s potential.-

“We continue to think that Alberto Fernández wants to be remembered as an effective president, not one that sank Argentina even further. Again, the pragmatic path here is to achieve a rapid completion of the debt restructuring process; the ideological path implies horizons of much longer trading time, much lower growth rates and much higher difficulties for society, “detailed from XP Investments.