Time Bomb: This Is How the Credit Situation of Companies Deteriorated, Now Facing Reinforced Quarantine

IPROFESIONAL – The credit situation of companies and individuals has hatched in recent months. Even, many brands already had to close their blinds.

The economic crisis derived from the coronavirus pandemic and the harsh renegotiations of external debt with creditors hit the entire chain that has liabilities, due to the lack of possibilities to generate cash to meet its obligations.

Especially those who owe to foreign suppliers, and who also suffered the blow of the devaluation.

With a country risk of around 2,500 points, Argentina has dollar debt markets closed, where it is impossible to obtain financing at reasonable rates.

“Being in default and in the midst of a renegotiation process with the bondholders, the first question to address is whether there is a solvency or liquidity problem,” says Roberto Geretto, chief economist at Banco CMF.

Thus, this expert maintains that to glimpse a possible solvency problem, the usual analysis is to see certain ratios such as those of interest with respect to GDP, or debt / GDP, or reserves in relation to GDP.

In addition, fiscal variables must be considered, especially the primary and financial result.

Taking figures from the end of 2019, it can be seen how Argentina had a gross debt ratio based on GDP of 72%, which, a priori, may look high. However, ruling out public intra-sector debt, this percentage drops to 43% of GDP, an acceptable number by global standards, “summarizes Geretto.

Likewise, this economist clarifies that the increase in this relationship was affected by the real exchange rate, since its increase made it “gain weight with respect to GDP”, because a high percentage of Argentina’s debt is nominated in dollars.

As for the interest on the debt based on GDP, “last year they closed around 3.4% of GDP, which is not an unmanageable figure,” says Geretto.

On the fiscal variables side, the Treasury closed almost in primary equilibrium, while the financial deficit was 3.8% of GDP, “thanks to fiscal efforts made until 2019”.

Of course, now, with the pandemic and the subsequent quarantine, economic activity entered an ice age.

«Once a solvency problem has been ruled out, liquidity remains to be analyzed. Seeing only two variables that harm the country’s credit situation, such as the evolution of reserves and the low level of exports, «emphasizes Geretto.

In the first case, except for a specific month where IMF disbursements were credited, the Central Bank reserves “have been falling systematically.”

In fact, not even the stocks have been able to stop their fall. Thus, currently, the stock of gross reserves is around US $ 43 billion (less than 10% of GDP), while net reserves are around US $ 10 billion, summarizes Geretto a iProfessional.

“Today Argentina’s credit is scarce. As the Government absorbed all the internal credit years ago, which caused an increase in the interest rate, to finance its expenses, instead of trying to reduce it, it had to go into debt abroad,” says Natalia Motyl, economic analyst at Fundación Libertad y Progress.

And she clarifies that, however, “the Government also failed to take advantage of the time given by the debt to solve its structural problems. This led to a crisis of confidence that caused a rise in country risk, and we had a harder time sustaining this implosive model of indebtedness that always required more debt to pay previously made commitments. “

Thus, Motyl summarizes that the crisis in our country is one of “confidence”.

That is why “the credit situation is so stunted. The markets discount that the Argentine economic model, based on six decades of persistent fiscal deficit, is not sustainable”.